I had a hospital-employed physician ask me for a raise because he had an offer from a Florida hospital that would have paid him several thousand dollars more than his current salary with us in Central Ohio. The problem is that an equal salary in Florida buys you considerably less than in Ohio. When determining salaries for your hospital’s doctors and nurses, you have to consider your state’s specific cost of living. And there is a huge variation between different states.
Salary reports, such as the annual AAMC Faculty Salary Report, break down average physician salaries by geographic region in the country. To some degree, this accounts for differences in the cost of living in one region of the country versus another. But even within a single region, there can be significant differences in the cost of living from one state to another. In order to offer competitive salaries, hospitals must be aware of the cost of living in their state compared to other states. And hospitals must use that information to educate physicians and nurses during contract negotiations.
One of the best sources for state-specific cost of living data comes from the Missouri Economic Research and Information Center. They derive a cost of living index for each state by averaging the indices of cities and metropolitan areas that participate in the Council for Community & Economic Research (C2ER) survey. Individual indices of six groups of costs are considered: grocery, housing, utilities, transportation, health, and miscellaneous. From these six, a composite cost of living index is determined with 100 being the U.S. average. States with an index above 100 have a higher than average cost of living and states with an index below 100 have a lower cost of living. As an example, a state with a cost of living index of 125 indicates that the cost of living in that state is 25% higher than the national average. Importantly, this data is derived from cities and metropolitan areas and not rural areas – in general, the cost of living is lower in rural areas than nearby urban areas, primarily due to lower housing costs in rural areas. The C2ER maintains individual metropolitan area cost of living data available for purchase if you want data that is more granular than an entire state. This can be particularly useful if a cardiologist at your hospital in Indianapolis gets a job offer from a hospital in Philadelphia and you need to create a counter offer in order to keep him/her. The cost of living index for the fifty states, Puerto Rico, and the District of Columbia are show in the table below:
With a composite cost of living index of 186.9, the most expensive state is Hawaii due to a very expensive housing index (310.0) as well as high indices for all of the other groups of costs. At the other end of the spectrum is West Virginia with a composite cost of living index of 84.1, due primarily to very low housing cost index (59.9).
So, when the physician asked our hospital to match his salary offer from Florida, I could show him that the cost of living in Florida (index = 102.8) is 8.6% higher than the cost of living in Ohio (index = 94.2). That means that the same salary would buy him better housing, more groceries, more utilities, more healthcare, and more gasoline in Ohio than it would in Florida.
Becker’s Hospital Review recently published an analysis of registered nurse cost of living-adjusted hourly wages by state. They found that the average total annual R.N. salary is $93,390. The hourly cost of living-adjusted wage in most states is $43.65 per hour. But the state with the second highest total annual R.N. salary was Hawaii at $123,720 that paradoxically had the lowest cost of living-adjusted hourly wage at $31.82/hour. This is because Hawaii’s cost of living is so extremely high compared to the rest of the states. By contrast, in West Virginia, the average total annual salary for an R.N. is $80,650 but the cost of living-adjusted hourly wage is $46.10. The implication is that the annual salary in Hawaii is 50% higher than in West Virginia but that salary buys the nurse 50% less stuff than the salary of a nurse in West Virginia.
The reality is that most nurses in Hawaii are willing to accept a much lower cost of living-adjusted hourly wage than in any other state in the nation because of the non-monetary benefits of living in Hawaii (i.e., living in paradise). But when it comes to comparing states with similar non-monetary attractiveness, knowing the cost of living index is essential in salary contract negotiations. For example, Pennsylvania has an index of 95.1 compared to its bordering neighbor Maryland with an index of 115.3. A hospital in Pennsylvania can pay its doctors and nurses lower salaries than a hospital in Maryland but the purchasing power of those salaries will be equal to (or greater than) the purchasing power of the higher salaries in Maryland. Conversely, if a hospital in Maryland sets the salaries for its doctors equal to the salaries at a hospital in Pennsylvania, then the Pennsylvania hospital can recruit doctors from the Maryland hospital by showing them that thae same salary has 20% more purchasing power in Pennsylvania.
Obviously, there is more than just the local cost of living in salary determination. Productivity expectations, the robustness of the electronic medical record, collegiality of the medical staff, local recreational opportunities, the quality of local schools, the crime rate, etc. all affect how much a hospital has to pay a doctor or nurse. But cost of living is an important factor and using that information strategically can help a hospital’s recruitment efforts. This is especially true for hospital-based physicians such as hospitalists, anesthesiologists, radiologists, emergency medicine physicians, and critical care physicians. Unlike outpatient physicians who need to build a patient practice or develop a referral network, hospital-based physicians are very mobile and can more easily re-locate to a different city or state and still have a full schedule of patients on the first day of practice at a new hospital. Know your region’s cost of living index before you negotiate a contract with your hospitalist group or the nursing union.
April 6, 2025
