Controlling Nurse Labor Costs

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

Controlling labor costs is essential for a strong bottom line and, increasingly, healthcare finance leaders are looking to reduce personnel costs, particularly for the nursing staff. By taking a new approach to nurse overtime, the use of supplemental labor, and retention efforts, organizations can save money without sacrificing jobs.

Though there may be excess cost in your nursing line item, it doesn't always rest within the wage, says Mary Nash, PhD, RN, chief nurse executive for the 932-licensed-bed Ohio State University Medical Center in Columbus, OH. The total cost of a full-time registered nurse averages $98,000 per year, or approximately $45 per hour, according to the 2011 U.S. Hospital Nurse Labor Cost Study produced by KPMG Healthcare & Pharmaceutical Institute. But base wages account for only about 57% of the total before factoring in premium pay and benefits.  

"We know that cutting nurses at hospitals reduces patient volumes, and volumes are already flattening for other reasons," says Linda H. Aiken, PhD, FAAN, FRCN, RN, the Claire M. Fagin Leadership Professor of Nursing and director for the Center for Health Outcomes and Policy Research at the University of Pennsylvania in Philadelphia. Aiken is considered by many in healthcare to be a pioneer in the nursing and healthcare research for the statistical data she collected linking nurse-to-patient ratios and patient safety. "I don't think I've ever seen a staff nurse that isn't busy. You see nurses being used inefficiently everywhere, however, and that's costly," Aiken says.

Reduce overtime
One area to control costs is overtime, says Nash, a 38-year nursing veteran who was charged with the task of reducing overall nursing costs. After some data analysis, it became clear that the excess use of overtime was inflating costs beyond the budgeted registered nurse average pay rate.

Getting the right staff at the right time was critical to controlling payroll costs, she explains.

"If it's not managed with precision, you end up spending more money than is necessary, and you wear out your staff. There are always staff willing to work overtime, and they build that into their lifestyle, so the economic balance is what has to be the goal," she says.

At OSUMC, there are also union requirements that the hospital had to consider, such as giving the overtime to senior nurses first. Although the organization couldn't change the union contract regarding overtime, it could reduce the necessity for overtime. This required the implementation of the staffing and scheduling system. Prior to adding this tool, it was not always apparent how to assess patient demand and pay issues. In addition to this system, Nash also added a staffing pool to supplement staffing needs and found immediate labor savings.

"Once we had the tool in place, the administrative nursing supervisor could look at it every four hours and say, 'We have an increase in volume,' and move staff to where the need is greatest," she says.

Staffing to patient need is paramount if a facility wants to reduce costs, says Pamela Hunt, MSN, RN, vice president of patient services and chief nursing executive at the Indiana Heart Hospital, part of Community Health Network in Indianapolis. But many hospitals lack that flexibility, and still use more rigid shifts for nurse staff.
"If there are no cath lab procedures in the evening, then don't have staff come in. If you have five operating rooms, but no cases scheduled for one of the rooms, then the OR should have a crew that can flex their hours and come in at the time of the next procedure, not at a specific shift time. The key to productivity is flexing to volume," Hunt says.

Effective use of supplemental labor
Many healthcare leaders routinely budget for traveling or per diem nurses, but much of that may be unnecessary, says Hunt. Although there are reasons to use supplemental nurse labor, daily census demands shouldn't be one of them, she says. Supplemental labor is expensive, she adds, so these nurses should be used to address seasonal volume increases, medical leaves, or to fill in during large training initiatives such as ICD-10.

"I do believe there is a place for supplemental nurses; it's how you use them. If there are usually four nurses on a shift and you need to use one to replace a member of the unit or add one to address an exceptionally high census, then they work well because you have enough of your core nurses there who know the workload and who know the organization to be able to support this external staff member," she says.

Hunt explains that hospitals and health systems that rely on supplemental nurses may be overlooking a greater issue—miscalculated productivity that is masking a full-time staff shortage.

Hunt says nurse managers will staff according to a core number to meet the average daily census. "What some nurse leaders are experiencing is that they feel short-staffed, though the productivity level looks to be at 100%," she says. However, the productivity level fails to account for the quantity of overtime nurses may have to work to accommodate patient volume that is your average daily census, or the use of supplemental nurses. Using overtime and agency nurses comes at a premium rate to the hospital and drives up cost, she explains.

"What it comes down to is nurses are highly skilled at care, but they haven't been taught the language of finance. Many nurse managers don't have the level of understanding needed to watch for this type of disconnect," says Hunt.

For instance, Hunt points to a unit she recently worked with in which the nurse manager's unit was demonstrating 100% productivity. This unit had 12.5 FTEs on the roster, but routinely required 16.4 FTE to meet the target number of worked hours. By comparing the actual number of FTEs to the number needed as exhibited by the productivity target, the case to increase the number of staff on the roster becomes apparent. This plan will decrease the use of overtime and higher-dollar temporary labor.

"In the short-term, there will be extra cost to hire additional staff due to orientation costs; but in the long-run, it will be labor at an hourly rate, not a premium one. Plus, it provides a safer environment for the patients because the unit has a stable team," she explains.

In addition to ensuring each unit has enough full-time nurses to meet the daily patient demand, Nash's Ohio facility found another way to bypass supplemental labor when the need called for more nurses. The organization created a nurse labor pool by making a network of part-time staff, full-time staff, and cross-trained nurses.

"There are good reasons to use supplemental staffing, but it's also expensive. By establishing this pool when we have a staffing shortage, we can get the right nurse, at the right time, at the right price," Nash says.

With the ongoing nursing shortage, Polly Davenport, RN, FACHE, CEO at Ochsner Medical Center-North Shore, a 165-bed acute care hospital on the north shore of Lake Pontchartrain in Slidell, LA, says using an in-house nursing pool can keep tenured, more experienced nurses with invaluable skill sets from leaving the facility altogether.

"Although these seasoned nurses want to slow down and retire, you don't want to lose these experienced nurses; they have knowledge that the newer nurses can benefit from," she says.

Many organizations will pay more to in-house pool nurses because of the experience and expertise they bring, says Davenport. These nurses are usually willing to cover multiple clinical areas in the hospital.

"They are typically very flexible individuals, flexible in the hours they work and the locations in the hospital they will cover. There is a price differential; agency nurses … do cost more than in-house pool, but you're paying the RN rate plus the agency who has their own costs to cover," she says.

Stop turnover
"It's a big cost factor," says Aiken. "If an organization could reduce nurse turnover by just 3% it would save a million dollars in costs."  For example, she says, if a 500-bed hospital reduces nurse turnover from 13% to 10%, it could save up to a million dollars because it costs approximately the annual salary of the lost nurse to find a permanent replacement, taking into account recruitment costs, supplemental staffing to fill the vacancy temporarily, and overtime to the other nurse to cover the position. 

Additionally, Nash notes it's important to calculate the cost of the nursing search and the subsequent training the nurse will need as part of the cost. During the transition, a hospital may need to resort to using agency nurses.

"If you lose a nurse, you're talking huge premiums. And, interestingly, we know where there is turnover in our organization. But we know how to recruit, we're good at it, and we're lucky to have a great college of nursing associated with our medical center," says Nash. "What we find is professional nurses are looking for more than a job; they're looking for ongoing learning, extensive in-service meetings, nursing grand rounds and they want to be treated well."

Davenport says it's better to focus on retention than on replacement of nursing staff. "Turnover is costly; but it's also disruptive—physicians and the rest of the team like to know who they are working with, too," she says. 

Davenport says at Ochsner Medical Center-North Shore, the staff reviews nurse turnover monthly to understand what may be causing unexpected departures—striving to get at the cause of the separation.

"We stay informed and are forward-thinking about what it takes to keep the RN working for us. A better opportunity may simply mean the nurse chooses to move to an 8-to-5 shift clinic position with no weekends or holidays. Hospital work is challenging for an individual's family life, so we do our best to set the expectation that we are a 24-hour operation because that is what our patients need from us," she says.

"We've found historically, if you have a nursing unit with high turnover, you're going to have dissatisfied physicians. As CEO, it's essential to me to have a satisfied physician group as well as a strong team of nurses. That combination contributes to the quality of care delivered," says Davenport. "What makes a successful, engaged physician is having a strong nurse workforce—that means retaining the nurses you've already trained."

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