Employee Leasing Arrangements
To better meet growing staffing needs, many hospitals and health systems are exploring flexible employee leasing arrangements. For many organizations, leasing employees can be a practical and cost-effective alternative to standard employment engagements. While employee lease arrangements can vary in structure, the common motivation for entering into an employee lease arrangement is to limit exposure to risks inherent in direct employment. Some additional motivations include the ability to rapidly scale up a service line, increased quality of care to patients, and access to specialized procedures/services.
HealthCare Appraisers has significant experience evaluating employee leasing arrangements. The determination of fair market value (“FMV”) for employee leases is heavily dependant on the resources provided and risks assumed by the lessor, which we have identified as a means to standardize the valuation of employee lease arrangements, reducing exposure to regulatory risk.
Employee Leasing Arrangement Pitfalls and Nuances
There are a number factors in leased employee arrangements that impact the FMV of compensation for leased staff, the profit margin earned by the lessor, and the overall reasonableness of the arrangement, including, but not limited to, the following:
Responsibilities of the Lessor
Employee leasing companies may be responsible for a variety of employment functions such as recruitment, credentialing and training of qualified staff, payroll administration and compensation for paid time off. Lessors that assume a larger share of these responsibilities are entitled to greater compensation amounts than those who shift the burden to the lessee.
Short-term arrangements may correspond with greater compensation to the lessor than long-term arrangements due to the risk (i.e., potential staff down-time) associated with maintaining a workforce that is utilized on a part-time or temporary basis.
Quantity of Leased Full-Time Equivalents (“FTE”)
Economies of scale are achievable when a large number of FTEs are leased. While providing additional staff incurs incremental costs, a large portion of fixed costs can be spread amongst increasing numbers of FTEs provided, thus reducing the cost of providing staff on a per FTE basis.
The cost to provide an employee whose annual compensation is $45,000 or $250,000 does not vary significantly, as the lessor’s costs for the services it provides on behalf of each employee is generally only marginally higher for the employee with greater compensation. For example, while the recruitment process and training for employees with greater compensation may be more intensive, other functions borne by the lessor (e.g., payroll administration) will be comparable in cost.
Some additional considerations include the following:
- Proposed compensation structure (g., per-procedure/per-block, hourly, daily, monthly, etc.).
- Market demand and relative scarcity of the leased
- Selection of appropriate staff benchmark compensation data and employee leasing profit margins.
- Whether the employee lease is part of a larger arrangements (g., a comprehensive management services arrangement) whereby a portion of the cost of the staff is embedded in the fee for management services and economies of scale can be realized within the context of the various services provided.
Employee Leasing Arrangement Experts
HealthCare Appraisers utilizes a holistic approach to valuing employee leasing arrangements. Every appraisal considers all relevant factors to reach a defensible and robust conclusion of value. Moreover, our appraisals are based on an internally developed scoring algorithm. In tandem with nearly 100 FMV experts across the country, our algorithm enables us to deliver objective, timely, and cost-effective valuation conclusions. Our valuation process for employee leasing arrangements includes:
1) In-depth review of the unique factors of the employee leasing arrangement;
2) Selection of appropriate benchmarks with consideration to the above factors;
3) Comprehensive, customized assessment of the arrangement.Our valuations are tailored to the specifics of the transaction. We pride ourselves on our deep expertise and ability to perform independent, objective assessments. If you are seeking counsel on the FMV of an employee leasing agreement, please click below speak with a HealthCare Appraisers team member.