Reducing Labor Expenses by Benchmarking, Process Improvement: How Frederick Memorial Saved $5.1 Million

Frederick (Maryland) Memorial Healthcare System lost $1 million in just one month during the fall 2008 — a loss that was unheard of for the system and due largely to a volume drop on the heels of the financial market crash taking place at that time. The hospital began to focus on improving its expense management in order to realize the performance improvements necessary for the system to continue to prosper. Michelle Mahan, Frederick's new CFO, set her sights on reducing labor expenses — the largest expense for the hospital.

Establish benchmarks

Instead of using previous budgets as the guide for determining each department's staffing allowances, the hospital wanted to implement a data-driven approach to labor management. The hospital decided to achieve this by benchmarking department staffing against peer institutions. Without benchmarks, emotion can play a large role in staffing and budgeting, which can reduce efficiency, says Ms. Mahan. "When you have departments arguing they are more acute or have special circumstances, it can be difficult to know how to appropriately staff each unit," she says. "Establishing benchmarks takes the emotion out and makes the budget process more transparent."

Frederick used Premier's LaborConnect software to identify these peer organizations, based on bed size, institution type and other characteristics, and create benchmarks. The hospital could then pull the average hours per unit of service by department for the hospitals in its peer group and compare its performance to those hospitals. "If the average hours of care for a pediatric patient was 12 hours and we were at 14, we knew this was an area we needed to adjust," says Ms. Mahan.

Hospital leadership then developed a "productivity policy" which required all clinical departments to fall in the 50th percentile of hours per unit of service when compared to the same department at peer institutions, meaning that Frederick's goal was to fall in the middle of the pack, says Ms. Mahan. Non-clinical departments were benchmarked at the 33rd percentile.  

Frederick's leadership decided that departments greatly exceeding their benchmark would be given a reasonable amount of time to reach the 50th percentile requirement, so that no employees would be laid off to meet the new targets. The hospital then defined the processes for hiring to include information on departmental benchmark performance and did not rehire some positions as turnover occurred.

Meet the standards
To help each department meet its staffing benchmark, the hospital established a labor management team, and any interested unit director could participate. This process improvement team identified and explored various ways the hospital could increase its staffing efficiencies. A Premier consultant was also assigned to work with various departments onsite to implement staffing best practices and assist them in achieving the benchmarks.

Here are three of the improvements Frederick made to help meet its benchmarks.

1. Moving the time clock. Many members of the labor management team complained about Frederick's placement of the time clock — where employee's "clock in" — near the parking garage instead of in the actual departments. "It could be maybe 10 or 15 more minutes before staff arrived in their department, which was adding up to nearly a half an hour of unproductive time per employee each day," says Ms. Mahan. "We added additional clocks and placed them in designated locations throughout the hospital, which cut a lot of unnecessary overtime."

2. Placing patients in units based on staffing levels.
"How patients are placed in units makes a huge difference in efficiencies," says Ms. Mahan. "If one unit is staffed using a 1:5 nurse-to-patient ratio and you add a sixth patient, you have a very inefficient staffing level. The new nurse has very low production." Nurse managers for each department now closely monitor staffing ratios and hold a daily patient management meeting where they compare staffing levels and discuss where it is most efficient to place new patients, says Ms. Mahan.

3. Removing shift differentials from paid time off. Frederick, like many hospitals, pays a "shift differential," or additional compensation to staff working the evening and overnight shifts, in order to attract employees to these harder-to-fill positions. The hospital's labor management team noticed, however, that the hospital was including this premium in paid time off. After eliminating the premium, the hospital realized a significant savings in its labor costs.

The payoff

Meeting the standards turned out to be fairly simple once best practices were identified and put into place. Just six months into 2009, 90 percent of the hospital's departments were meeting its staffing goals, and the hospital estimated this created a $5.1 million savings for 2009 as compared to what it would have spent if its staffing continued on the same trajectory, says Ms. Mahan.

To maintain these levels, department managers monitor and report on their performance each pay period, and the hospital updates its peer group and recalculates new benchmarks annually.

Learn more about Frederick Memorial Healthcare System.

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