Skip to main content

Gain Control of Labor Costs While Saving Jobs

 |  By HealthLeaders Media Staff  
   June 15, 2009

Long viewed as one of the few safe sectors, healthcare is now feeling the pain of the financial crisis. Although hospitals generally are required to keep more cash on hand than other businesses, they are also suffering from an inability to access capital and remain solvent. The economic downturn has forced hospital and health system executives to make painful staffing cuts in recent months, and expectations are that things will get worse before they get better.

Understandably, many senior leaders are inclined to act aggressively to stop the bloodletting, but they must recognize that today's difficult decisions will have implications far beyond the immediate financial crisis. In order for organizations to emerge with their relationships and brands intact, they will need to be thoughtful and creative in the way they approach cost-cutting now and in the months ahead.

The research
According to research conducted in the fourth quarter of 2008 by the Institute of Healthcare Executives and Suppliers, 71% of hospital and hospital system CEOs surveyed have cut their 2009 capital budgets. Forty-seven percent cut budgets by 20% or greater. Nearly 10% indicated that they were "delaying major capital projects, i.e. construction projects, until later in 2009" or have "frozen all capital expenditures for first and second quarters to only critical items." Still another 11.5% haven't cut yet, but say they are "very likely to cut if current economic trends continue."

In terms of patient volumes for hospitals/systems, the numbers are misleading: 73% have seen a drop, but on average slippage is at a modest 2.1%. The problem with this number is that it is widely considered to be a reflection of a reduction of good-payer patients –people with insurance who will forego seeing a doctor for minor conditions in a downturn. Conversely, many organizations see an increase in emergency room—and other bad debt—patients in downturns. IHES survey respondents reinforced this conclusion, observing that "bad debt and charity care is increasing sharply."

Although the drop in patient volumes appears on the surface to be modest, the bad debt and charity care instances offset the number of good payer patients, creating falsely conservative patient volume data and a far greater expense ratio for hospitals. In other words, a bad payer mix that increases cost of care, lowers reimbursement and requires staff to work harder and thinner.

According to findings from Longbow Research, the numbers are actually worse. Hospital inpatient admissions are declining even more sharply than experts anticipated—more than 49% of hospitals reported declines in inpatient admissions in the fourth quarter, compared to almost 48% reporting increases in the third quarter. CEOs explained to IHES that they are addressing these financial concerns through hiring freezes, staff reductions, and not filling their open positions. Nearly one-third (32%) reported having reduced staff. However, almost 10% of respondents claim to be "establishing lean process improvement and strict budget adherence by managers."

The solution
So the question is not if, but how deeply, hospitals will have to cut this year, and just how much can be accomplished through process improvement, better fiscal responsibility and more progressive staff management?

Labor costs account for more than 60% of total healthcare expenses, so it is the most obvious place to focus your efforts. Unfortunately, it's also one of the most challenging areas to tackle. Many healthcare systems aren't equipped to efficiently manage expenses and productivity. Ironically, this can result in increasing labor expenses in the face of staff reductions and other efforts to save money.

In fact, labor expenses often add up unexpectedly, with overtime, extra shift bonuses, on-call and call-in bonuses, and other expenses necessary for safely staffing healthcare facilities. These are typically bundled into the pay system and go untracked and unevaluated. However, there are many ways to identify and address additional labor costs. It is critical to know how much your actual labor spending is and where it is coming from. Once you begin tracking these expenses, you can begin to benchmark—and then improve—efficiencies.

Following are several steps for gaining control of your organization's labor costs, while preserving as many jobs as possible. Once you have reviewed this list, talk to the key leaders in your organization. You need their buy-in to effectively evaluate and improve the use of resources.

Review payroll: Call payroll and review the average income of staff to find the outliers (people who are making significantly more than the norm because they are being paid overtime). Look at your current bonus programs and ask yourself if you still need them; is the design meeting your current needs? Most bonus programs are typically built around shortages when hospitals are desperate. In all likelihood your organization is no longer in this situation. Re-evaluate bonus triggers, you may even find you don't need them at all.

Track expenses: Create the right systems to track expenses. Every payroll system is a bit different, but here's an idea that may work for you. When employees receive on-call bonuses, the pay should be coded differently from other bonuses or even standard overtime pay. By tracking these pay codes, you may find that you actually save money by scheduling one additional person to work versus putting two people on call. Because many healthcare workers dislike being on call, scheduling an additional person can solve two issues—it reduces bonus expenses and improves employee morale.

Staff proactively: Review your total talent management needs and determine the best way to staff strategically. Then schedule and staff accordingly. Create your own flexible internal workforce by building support around your core regular staff to handle demand as volumes increase and turnover occurs. This is much more cost effective because you are not pushing core staff into overtime.

Asses your internal pool: To quickly assess whether an internal pool is working, organizations can start by looking at agency utilization. Internal pools should be staffed to support high-usage areas rather than to fill in for routine, easy-to-fill shifts that regular staff can work. Another quick assessment relates to the requirements of the internal pool staff. When the program was designed, did it include specific criteria and minimum expectations that staff should work in exchange for the higher pay rate? These commitments typically relate to the number of shifts, hours, and weekend responsibilities.

Are those commitments and requirements being audited to ensure the organization is getting its ROI? Most healthcare systems don't have automated tracking systems in place to track staff commitments to the actual worked hours. Consider working with a partner who can purchase the technology on your behalf to ensure you are getting the most from your internal pool and saving money.

Review overtime policies: Appropriate rationale and levels of approval for overtime use should be in place. Consider two different standards for overtime usage based on clinical and non-clinical (non revenue-producing) areas. There are times when it makes sense to approve overtime in a clinical area to keep beds open and generate more revenue. Build a pre-approval process so that overtime is being approved before it is worked—and consistently follow that process so staff understands the expectations for receiving approval.

Shift fixed to variable expenses: When you are hiring your own staff your expenses don't go down just because your recruiting needs do. By switching to an outsourced talent management organization, your recruiting expenses become variable based on how many people you hire. BUT make sure you find the right partner who will reflect the variable charge approach and charge you primarily by requisition. You also want to work with someone who offers consulting services that include an assessment of your organization and a plan based on specific recommendations.

Proceed with caution: With the economy being what it is, you probably won't balance the budget without making some staff cuts, but don't overdo it. Many organizations are taking a slash-and-burn approach, at their own peril. Remember these decisions must not be taken lightly. The demand for nurses will bounce back and sooner than you probably think. So have systems in place to provide great customer service to candidates that you may not need today, but will have to rely on in the future. How you treat a healthcare worker during a hiring downturn will leave a lasting impact on them for the future.

These are uncertain times, and historic metrics don't necessarily apply, but implementing the techniques above as part of a disciplined approach to managing labor costs helped one Midwestern healthcare system achieve savings of $14 million over an 18-month period.

Imagine what that could mean for your organization's ability to ride out the downturn and emerge ready for growth in the recovery.


Jill Schwieters is the executive vice president of Pinstripe, Inc., and the founder of Pinstripe Healthcare. Dave Harper is a healthcare financial consultant and member of the Pinstripe Healthcare advisory board. They can be reached at 262.754.5359 or info@pinstripetalent.com.
For information on how you can contribute to HealthLeaders Media online, please read our Editorial Guidelines.

Tagged Under:


Get the latest on healthcare leadership in your inbox.