How to Start Trimming Labor Costs

If you haven't looked at your payroll lately, you might be surprised to learn that you are likely leaking money in your labor budget. Using data from your time management system and making a couple of strategic strikes based on the info, could yield some hard savings in your labor costs.

"Last year physician recruiting was the top priority for everyone. That added a ton of labor cost to hospital budgets," explained Robin LaBonte, CFO, at the 79-bed, York (ME) Hospital, who I interviewed earlier this year for the 2011 HealthLeaders Media Industry Survey. "Everyone wants to be positioned well, but no one knows what's really going to happen [with healthcare reform]. Most CFOs are conservative, so they focus on costs [in order] to position the organization well."

And when it comes to costs, the largest expense in a hospital budget is labor (40%-60% according to the same survey). So, financial leaders need to find ways to trim. Payroll leaks are the unintentional overspending on labor through lost productivity or unnecessary overtime—and they are good place to look for little losses that add up.

Where should you begin? Working hand-in-glove with human resource leaders can help financial leaders get this area in order. Bernie Becker, chief human resources officer at the Topeka, KS-based Stormont-Vail HealthCare says there's a lot to learn from time management data. He found that on-call and overtime costs at his 405-staffed-bed hospital were continually rising.

With on-call pay coming in from a medical center, 27 physician and clinician offices, and outpatient surgery centers, it was dizzying to track, much less to find a cause for the problem.  Becker turned to his time management data to explain the cost increases. The data showed scheduling and overtime problems.

"Whether there [are]  higher volume[s], heavier procedures, or unexpected absences, we are trying to get control over when we are paying that premium pay," Becker said.

He says Stormont-Vail HealthCare had stopped using packaged scheduling software about 10 years ago in favor of its departments having non-fixed shifts (mainly inpatient nursing) and a "homegrown" spreadsheet that is updated daily or shift-by-shift to accommodate changes in patient volumes and acuity. But it wasn't addressing staffing shortfalls quickly enough when demand rose. Moreover, managers were calling in staff to call work without the benefit of knowing which team members at lower wage levels might have been available.

Plus, when it came to tracking call coverage, Stormont-Vail was using an approach that many hospitals and health systems still use today. Becker says the system managed employee time retroactively, reviewing entries every two weeks.

"Looking back at the employee data doesn't help us look and work with the daily patient census," he notes. "When you look at the end of a two-week pay period and see all the hours of call pay, it's too late to analyze why it happened or how to fix it for the future. That can drive the cost per patient per hour in a particular unit through the roof."

Becker says ideally hospitals need to "manage proactively on a shift-by-shift basis, not retroactively."

To remedy the scheduling and call coverage problem, Stormont-Vail still did not add technology, instead it worked with staff. First, managers were made aware of the wages of team member for on-call scheduling. That allowed managers to make more cost-effective decisions.

Second, an employee was hired to track the patient census in realtime and to determine how the teams should address it. An added benefit: Through the payroll system the census employee can figure out the skill mix of the staff clocked in at each facility to help make decisions as to where staff should go to meet demand.

While using the data from the time management system provided Stormont-Vail with insights on how to correct scheduling and call pay overages, it can also reveal when employees are taking unfair advantage of the time management system.

At Saint Luke's Health System in Kansas City, MO, Tammy Leslie, senior director of compensation and benefits and Casey Knasel, director of payroll and human resource information systems, needed to get a handle on how the employees at the 11 hospital system were using time management.

They asked their current time management provider, Kronos, a leading global workforce management solutions provider, to do an optimization analysis. As with Stormont-Vail, Saint Luke's system analysis revealed a fundamental, and costly, scheduling issue. Managers scheduling the on-call or stand-by staff weren't able to discern when demand was rising nor could they determine which employees had the lowest hourly wage to call those individuals in to work. Knasel says the problem was that the hospital had failed to provide realtime patient census information and tie it to staff wage information.

In addition to the scheduling issues, the Kronos analysis of Saint Luke's uncovered a smaller issue, time entry misuse. They found the clocks closest to the points of entry were getting the most traffic because employees were clocking in and then taking their time to arrive at their workstation.

Employees could take extra five to 10 minutes to change clothes, get coffee or do other non-work related activities, all costing the hospital unnecessarily. The few extra minutes in some instances even bumped an employee's time from regular pay to overtime pay, though the individual wasn't engaged in work. By simply relocating time clocks closer to the employees' actual workstations, the hospital could shave several minutes per day off of nonproductive time.

The study also found that St. Luke's had a large number of manually entered time cards. Upon closer scrutiny, Knasel estimates that at least 7% of their employees may be overusing the manual timesheet option.

"The frequency of the manual editing of time cards tells us that either we are having some issues with people not understanding or it may be an opportunity where when someone is five minutes late they write it down in a log rather than clock in. That tells us we are probably overpaying people," says Knasel.

Though tracking an extra five minutes of employee time may seem knit picky, Knasel says the time adds up. For instance, if each person at a 200-employee hospital takes an extra 10 minutes on the clock daily (that's nearly an hour extra in their check each week. Not factoring in that it may cost additional in overtime pay, annualize that for employees using a low, $15 an hour wage and the cost is $780 a year per employee. If all 200 employees overcharge the hospital by 10 minutes a day, the hospital loses $156,000 annually. That figure is likely significantly higher when the variance in hourly wages is factored.

From a strategy standpoint, Leslie says, management ought to be aware of these seemingly small issues and must address them in action and in written policy. Writing them off as insignificant is a mistake.