A healthcare organization must operate like a finely tuned machine. Machines operate as the result of their parts, with each part demanding individual attention and care. Unlike machines, however, these organizations must compensate employees for their services. How do healthcare organizations determine appropriate compensation for these services? Fair market value.
Determining FMV can be difficult. Faced with a broad spectrum of services, healthcare organizations use two approaches–the market approach and the cost approach.
The market approach analyzes existing market data. In the market approach, an organization will access databases of transactions between other organizations and their employees. These databases map the range of compensation for a particular service. Most organizations consider FMV as anywhere between the 25th and 75th percentile of this range.
If an organization wants to determine FMV compensation for an obscure service, they could use the cost approach. The cost approach requires the construction of a financial model that will identify the value of a service within its organization. When applying the cost approach, it is important to use the market approach as a reference point.
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