Labor expenses comprise about 50 percent of total operating costs for most hospitals, so overspending on labor can have a significant impact on profitability.
In an industry where the average margin is just 2-3 percent, even the smallest reduction in overspending can be a big boon to the bottom line. In fact, with a thorough analysis into the root causes of overspending among hourly workers in particular, and measured steps to mitigate the problem, hospital systems could see a significant savings. For example, on a 1 billion dollar annual payroll, savings could be as high as $5-$7.5 million annually.
Why Hourly, but Not Salaried Employees?
First, it’s sheer volume. In most organizations, there are more hourly than salaried workers, which means the risk and impact of overspending is greater.
Second, unlike salaried employees, hourly workers tend to have a more complex pay structure. There is often overtime pay involved—which could vary based on hours worked over 8 per day or 40 per week. Premiums for on-call or shift differentials and other duties outside of the normal workday also come into play, and often those premium structures haven’t been evaluated or updated in a decade or more. The needs of the business have likely changed and this alone represents ample opportunity for potential improvement.
Benefits Beyond Saving Money
In addition to cost reduction and profitability benefits, reducing labor costs can have a direct impact on the quality of patient care. For example, there is a marked correlation between overuse of overtime and employee satisfaction and engagement—understandably, employees tend to lose their enthusiasm for the job when they’re being forced to work over frequently, even if they’re paid fairly. This obviously impacts the quality of their patient interactions, which in turn can leave patients with a negative experience, planting the seeds for reputation damage with lower patient or physician satisfaction scores.
Of course, employee satisfaction and engagement also play a critical role in talent retention, so reducing non-essential labor spending can help to reduce turnover, maintain cohesive teams and leverage the institutional experience and knowledge of tenured employees.
Identifying the Top Causes
Aside from overtime issues, the three most common causes of labor overspend in most hospitals are:
1. Cancelled meal breaks. Employees who fail to take meal breaks contribute significantly to labor costs. Of course, if there’s a critical situation in the ER and vital personnel are required, skipping lunch isn’t an issue. However, eating lunch while doing paperwork, or an employee who takes a pager and feels obligated to return even if not called in create nonessential spending. While not all of these behaviors are inappropriate or nefarious, they still cost money.
2. On-call or call back over use. Many organizations operate with a 5-to1 or higher call back utilization, which means employees get called back once for every 5 times they’re on call. For maximum efficiency, this should be more in the range of 2 or 3-to-1. Aside from trauma, the cause of this over utilization could be that a certain charge nurse just wants a specific individual on call or that they have just not managed the schedule well. This high utilization ratio is expensive insurance.
3. Missed punches or generous rounding rules. For organizations doing well, the average missed punch rate is around 3-4 percent. Anything over that rate could pose an overspending problem. At the same time, generous rounding rules—allowing employees to be counted as on-time if they’re up to 7 or 10 minutes late, for example—can also drive up costs. On the other end, incremental overtime (punching out just a few minutes after quitting time) also adds minutes or hours to labor spending.
Key Steps to Mitigating Overspend
When analyzing labor spending, most organizations uncover data and proof points that point to issues they already have long suspected. In order to get a handle on the situation, here are three key steps that can help reduce excess spending and contribute to a more efficient, profitable organization.
1) Shift the paradigm of time and payroll analysis. Most organizations look at time capture, scheduling and payroll spending on a weekly basis and only compare week-to-week and actual vs. budget. Instead, look at payroll spending on a daily basis and with a more critical, deliberate examination. For example, some clients choose five key metrics for five minutes every day that each manager is charged with monitoring. Compare these type of metrics and spending drivers for your organization will become clear.
2) Have a goal in mind. Many organizations start to analyze labor spending with a general goal, “to reduce overspending.” But this is far too vague and hard to measure. Start by identifying specific goals around cost reduction and operational efficiency and measure periodic progress against those goals.
3) Revisit workforce governance. Beyond just managing pay policies, strategically reducing overspend requires full alignment of all the stakeholders involved in the workforce management cycle. Effective management requires a structure that focuses on policy and process to create a culture of intent, not just quick-fix remediation.
Maintaining Spending Efficiency
Once the initial analysis and remediation opportunities are identified, it’s critical to establish a long-term plan for maintaining labor spending efficiency. Start with reviewing and refining the basic processes around the intake of time and how employees engage with the schedule. Examine mobility and virtual work capabilities and make sure you’re leveraging those opportunities for maximum benefit.
Verify that your pay policies are current and appropriate for the market you serve—not just benchmark pay rates, but the actual policy itself. And finally, make sure auditing and controls around labor spending are managed with the same strategy across every player in the organization, from finance and HR to clinical and operational leaders.
Labor Spend Efficiency Prepares Your Organization for the Future
As technology innovations, automation, artificial intelligence and robotic assistants rapidly permeate the healthcare industry, the workforce of the future will look quite different for healthcare providers. This will require different, more technical skillsets, which naturally demands premium compensation. In order to prepare for this inevitability, organizations should focus on uncovering new sources of funding by reducing overhead costs and optimizing operational efficiencies.
Reducing labor overspend is an excellent way to generate this desperately-needed funding mechanism, generating .5 to .75 percent savings in payroll annually. While this may not sound like much, in most organizations it translates to significant annual savings that can be invested directly into other organizational initiatives like retention and recruiting, performance-based bonus pools or employee benefits all in the effort to gain a significant competitive advantage in the market.
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