Where Can Hospitals Find Labor Cost Savings?

Two experts discuss how hospitals can drive down labor costs through performance improvements.

In a Sept. 25 webinar hosted by Becker's Hospital Review, two experts from Objective Health, a McKinsey Solution, discussed how hospitals can drive down their labor costs through performance improvements.

Noting that labor is usually the single-largest expense you all incur on an ongoing basis, Connie Cibrone, senior director with Objective Health, began the presentation with a poll for the audience.

How much higher were operating expenses per adjusted admission in 2012 compared with 4 years prior?

• 3 percent higher — 5 percent of webinar respondents
• 5 percent higher — 36 percent of webinar respondents
• 10 percent higher — 42 percent of webinar respondents
• 17 percent higher — 17 percent of webinar respondents

Ms. Cibrone said these results match up with the larger general trend for hospitals' operating expenses, which have grown about 10 percent annually since 2008. The pace of that growth continues to grow, while net revenue per adjusted admission has been flat since 2008 and actually gone down compared with operating expenses.

"What we wanted to do was analyze overall operating expenses and see what is driving that growth. When we broke down that data, we found that the salary, wage and benefit [spend] category is actually accelerating faster than other items in the operating expense category," said Ms. Cibrone. "It's growing at about 3 percent per year compared to 2 percent for other items in that category."

Salaries, wages and benefits actually represent 55 percent of total operating expenses in hospitals, meaning more than half of overall spend has been growing at a faster pace than other categories.

With labor being hospitals' largest expense, Ms. Cibrone then broke down which departments accrue the largest portion of total salary, wage and benefit spend. Physicians currently fall at the bottom of the spectrum, but Ms. Cibrone said that category has and continues to grow as more hospitals employ physicians.

• Clinical — 32 percent
• Nursing — 30 percent
• Non-clinical — 24 percent
• Physicians — 14 percent

Identifying savings opportunities in hospital labor spending
Satish Cheema, expert with Objective Health, then conducted the second half of the webinar by discussing the methodology he and his team uses to identify savings opportunities via performance improvements in hospitals' labor spending. Mr. Cheema began with another poll.

To tackle salary, wage and benefit spend, how many of you have tried the following? (Respondents could pick as many that applied.)

• Set productivity standards for all departments — 78 percent
• Redefine nursing skill mix to increase use of individuals — 66 percent
• Address premium-pay policies — 58 percent
• Redefine labor contracts —  50 percent
• Freeze wage increases — 41 percent

"This is typically what we see in many organizations we work with," said Mr.  Cheema. "But when we think about SWB spend, we need to address the three components that drive the overall labor spend in hospitals."

The three components are:

Labor spend policies. Base compensation rates relative to the market that increase over time; premium pay rates and eligibility requirements; rates for daily and contractual labor; and benefits eligibility and plan design, including the use of system facilities.
Workforce practices. Hiring the appropriate volume of staff with the skills expected to meet demand; scheduling staff appropriately for shifts based on patient acuity and expected flows; and flexing staff as appropriate with changes in census.
Structural forces. These underline the other two categories and include cost of living adjustments across markets; capacity of the hospital to address the fixed component of staffing; and the presence of unionization.  

Mr. Cheema's team then uses a three-step approach to diagnose and prioritize salary, wage and benefit savings opportunities, with each step involving further actions and key questions.

1. Segregate the labor. For an easier analysis, segregate labor into different groups relative to the core competencies of the organization.

• Collect financial and head count data.
• Break labor costs down by function, using organization charts to place full-time equivalents into easily recognizable "job functions" such as nursing and security.
• Develop logical pools of labor, further bucketing department-level segmentation into two to five pools, often things like core versus non-core or clinical versus support.

2. Conduct critical, killer analyses. The purpose is to identify the primary opportunities and where the largest opportunities lie if you look at all areas of salaries, wages and benefits in an organization. Four critical analyses can be conducted on labor segments to identify savings opportunities, according to Mr. Cheema.

• Top-down analysis — labor costs and growth relative to other internal financial levers.
• Benchmarking analysis — benchmarking of functions/sub-functions to historical internal top-quartile performance.
• Labor mix analysis — analysis of growth of regular time vs. overtime vs. temporary labor, along with benchmarking compared with other institutions.
• Unexplained growth analysis — analysis of growth after "uncontrollable" adjustments, such as market wage changes.

3. Evaluate labor management systems. Determine if the organization has the people, processes and systems to manage labor in a sustained way. "Evaluate what systems are there to manage labor productivity and spend policies in an efficient and sustainable way," said Mr. Cheema. Here are some questions hospitals leaders can consider:

• What are the cost-of-living adjustments across markets?
• What is the capacity to address fixed components of staffing?
• What is the current presence of unionization?
• How do base compensation rates compare to the market?
• How do overtime rates compare to the market?
• Who is eligible for premium pay?
• Are the right people with the appropriate skill mix employed in the right areas to meet expected patient demand?
• Is the hospital scheduling staff appropriately for the shifts based on patient acuity and expected flows?
• Is the hospital flexing staff as appropriate with changes in census, within and across units?

Download the webinar presentation.

More Articles on Labor Costs:
8 Ways to Cut Labor Costs in Your Hospital
Cutting Labor Costs Without Layoffs: The Benefits of Digitizing Labor Management
6 Tips to Reach the Benchmark for Hospital Staffing & Labor Costs

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