Labor Efficiency Emerges as Cost Containment Measure

This article appears in the October 2012 issue of HealthLeaders magazine.

For many healthcare leaders, it's a case of easier said than done.

"Hospitals are real good at identifying expenses and cutting them," says William Cors, MD, MMM, FACPE, chief medical quality officer at the 185-staffed-bed Pocono Medical Center of East Stroudsburg, Pa. "But if they are so good at it, why doesn't it ever solve the problem?"

There are three principal levers that business leaders can pull to reduce costs, and respondents to the 2012 HealthLeaders Media Cost Containment Survey use all of them. First, one can reduce the amount spent for items. Second, one can issue and enforce a spending target by edict. Third, one can operate more efficiently. Of the three, operating more efficiently may be the most challenging to implement, but may offer the best opportunity for sustainable gains.

It's a classic:  Supply-chain efficiencies

Nearly one-third (30%) of leaders saw their greatest cost savings in the prior fiscal year from supply-chain efficiencies, and virtually the same percentage expect supply-chain efficiencies to be their biggest contributor to savings in the current year. The savings can be substantial: One-fifth (21%) of respondents reported supply-chain savings in excess of 10%.

Although negotiating with suppliers is hardly new, purchasers have been newly empowered by industry shifts toward value-based purchasing and the certainty of reduced reimbursement. These fundamental shifts prompt healthcare organizations to examine cost factors with new resolve. In addition, changes in reimbursement are prompting a trend toward consolidation, and the resulting larger organizations have more leverage when consolidating their purchases.

Nickolas A. Vitale, executive vice president and chief financial officer of Beaumont Health System—a three-hospital system based in Royal Oak, Mich., with revenue of $2.1 billion—has seen substantial supply-chain savings by implementing a single systemwide pharmacy formulary; previously the three Beaumont hospitals had ordered pharmaceuticals independently. Savings in 2010 were in excess of $1 million. "In 2011," Vitale says, "we were able to negotiate an additional $3.4 million per year by going to a common formulary and bidding it out as a system."

Labor costs and labor efficiency

In most hospitals, labor is the largest single expense, but labor is not an attractive target for cost cutting, at least via layoffs or reductions in force. Few groups on the clinical team correlate to patient volume as closely as nurses, so administrators are loath to trim nurse positions. Nearly one-fifth (18%) of respondents expect to eliminate administrative staff at the VP-level and up in the next fiscal year, and more than half (51%) expect to reduce the numbers of other nonclinical personnel, but only 11% will be reducing nursing FTEs.

Thomas Selden, FACHE, president and CEO of Southwest General Health Center in Middleburg Heights, Ohio—a 354-bed organization with 2011 total revenue of $285 million—looks at just about every cost-saving effort as a nurse-saving effort: "I do that calculation in my head: How many nursing jobs can I save if we save on some process?" 

Labor reductions and efficient use of labor are related, of course. The proportion of respondents who expect that their top cost-containment savings for the current fiscal year will come from labor reductions—21%—is exactly the same as the number who expect top savings from labor efficiency. "Those two really go hand in hand," says Vitale. "You can't really capture reductions until you are using the labor you have more efficiently."

Administration: Friend or foe?

Budgets come from administration. Patient care comes from the clinical staff. Traditionally, the groups are not inclined to work closely, so in some organizations, closeness becomes someone's job. At Pocono Medical Center, that is part of Cors' responsibilities.

"We have the traditional finance-driven budget process and then we have a clinical-driven examination of how we are actually providing care," Cors says. "Part of my job is to bridge the chasm between the finance department, which isn't even in the hospital—it's four blocks away—and the clinicians, who come to work through the hospital's side door by the medical staff lounge." Mentioned by 19%, survey respondents say physician-hospital relationships represent the biggest barrier to achieving sustainable cost reductions, which is second only to government mandates (27%).

Fundamental healthcare industry changes such as new regulations, the shift to value-based purchasing, declining reimbursements, and merger and acquisition activity are challenging working relationships. Says Cors, "With these changes, people are scared, they are uncertain. We can see the nature of conflict going off the scale on physician-hospital relationships. Hospitals that successfully navigate physician-hospital relationships will do well, and the hospitals that do not will not." A principal tactic used by Cors and Pocono in pursuit of efficiency is care coordination. "We are taking a service line approach, bringing together disparate elements that might touch the same surgical patients during their stay. By coordinating better, we will be looking at some significant changes in our work process and therefore our costs."

Process variation and process efficiency

"On a year-after-year basis," says Selden, "I find the efficient use of labor to be the No. 1 contributor to cost containment. Expense reductions via purchasing and supply-chain efficiencies are opportunistic." Speaking about the dependence on the labor force to deliver the organization's core service, he says, "The number of people who come to work every day to deliver care, that's bedrock. But if you are not controlling it, you have lost control of the whole operation." Among the principal tools Selden and Southwest General are using to pursue efficiency are benchmarking, identification of variances, and process engineering.

Near-term, the industry shift to value-based purchasing is affecting reimbursement rates, which causes administrators to approach cost containment with new vigor. Long-term, healthcare organizations increasingly will add clinical labor efficiency to classic accounting tactics such as budget edicts and purchasing efficiencies. Making efficiency work will require new work methods, new work collaborators, and new systems for monitoring and reporting. It will require some precision to make sure that the required infrastructure investments do not gobble up all of the potential savings.  


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This article appears in the October 2012 issue of HealthLeaders magazine.