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Four Ways to Cut Your Labor Costs, Not Your Staff

Four Ways to Cut Your Labor Costs, Not Your Staff

Median hospital operating margins were negative in the first quarter of 2022. Kaufman Hall called it a perfect storm of converging threats: skyrocketing labor costs; decreasing patient volume; lower revenues. Hospital labor costs alone were 37% higher in the first quarter of 2022 than they were in 2019.

For many industries, the answer to reducing operating costs is to cut headcount. But in healthcare, the mandate to cut costs without negatively impacting patient care makes finding savings much harder. Luckily, there are numerous ways hospitals can significantly reduce their labor expenses without cutting staff. In this three-part series we’ll walk you through the culture change that’s required to turn your organization into an all-hands, labor savings machine that will identify and implement policies to save money both now and in the future. In Part 1, we’ll walk through four specific strategies that hospitals can use to identify savings right now.

This is the first of a three-part series on The Culture Change that Sustainably Reduces Hospital Labor Costs. Scroll to the end for links to all three parts.

1. Pay attention to those clock-in/clock-out times.

Auditing isn’t fun, but it is an important step in any strategic cost management initiative. However, instead of relying solely on your standard productivity reports, layer on insights from your timesheets and activity logs. A little sleuthing here may uncover official (or unofficial) policies that could be costing you money.

For example, one of our clients allotted an extra 20 minutes to each employee at the end of every shift to finish paperwork, transport materials, and tie up any loose ends they may not have been able to get to earlier in the shift. A closer look at work patterns and activity logs revealed that most staff members had more than enough time during their shifts to complete these tasks. While 20 extra minutes may not seem like it could amount to anything substantial, when it’s multiplied across your workforce, those clock-out differentials can aggregate into the equivalent of one or more full-time employees (FTEs). This discovery gave our client options. For example, they could: 1) eliminate the policy and pocket the savings; or 2) eliminate the policy and hire a new FTE. This second option had the full support of their staff, who were overworked and pleading for additional resources from a leadership team who hadn’t been able to find the funds to hire another FTE.

2. Staff according to need, not according to budget.

When it’s time to look at ways to optimize your hospital operating margins, the general rule of thumb—“use it or you lose it”—in regard to your staffing budget should not be followed. Instead, plan your staffing based on need. To do this, compare your patient volumes to your staffing levels. If your patient volumes are down 10%, adjust your staffing targets down 10% as well.

For example, one of our clients had a budget for 50 full-time employees. They had 42 employees on staff and were using an agency to staff them to full headcount levels while their HR team worked to permanently fill the open positions. We don’t need to tell you that agency-supplied staff is expensive. As of this writing, the median hourly rate of contract nurses is more than 3x higher than employed nurses. Backfilling those eight open positions with contract nurses resulted in labor overages of 15% for this team. Meanwhile, we saw that patient volume was actually down 10% from the previous year. Adjusting for decreased patient volumes, they really only needed 45 headcount, not 50, which meant they only needed to contract three nurses, not eight. This was a huge annual savings for this team.

3. Watch for daily/weekly deviations in patient volume.

Similar to the above step, your patient volumes vary throughout the day and week. Your staffing levels should be adjusted to meet those volumes.

For example, another one of our clients was an outpatient surgical center and began accepting patients at 7 a.m. every day. Each morning they were fully staffed at a ratio of four nurses to every one bed, despite the fact that patient volume was under 50% for the first 90 minutes of every day. By observing patient flow patterns throughout the day and week, we discovered that our client had the potential to save a significant amount of staffing hours and money with a few simple changes to their scheduling. Now instead of being staffed at 100% for the entire day, every day, our client aligns its staffing schedule to expected patient volumes throughout the day and week. Like another one of the examples above, this doesn’t feel like it would make a meaningful impact, but for this hospital it amounted to a significant savings over the course of the year.

4. Pay attention to patient/staff ratios.

Overflows in certain hospital units aren’t uncommon. It’s also not uncommon for nurse leaders to make the call to send an overflow of patients to another unit that has more beds and resources to help. This is a great way for patients to get care when they need it and not have to experience the stress of an understaffed or at-capacity hospital ward. However, what continues to fly under the radar is just how expensive this solution can be over time.

One of our clients frequently experienced an overflow in their medical surgery ward and got into the habit of sending med-surg patients to the intensive care unit, where there were often more nurses and more beds available. However, in med-surg each nurse could be assigned to up to five patients at a time while in the ICU, they could only tend to two at a time. That meant if 10 med-surg patients were sent to the ICU, there would be five nurses caring for those patients instead of the two that were required. That’s a really expensive solution! Our client was aware this was a problem, but they had no clear sense of exactly how expensive it was, and no one was accountable to watch for (and avoid) these types of waste traps. The behavior continued with no move by anyone to modify it. We taught our client to monitor intake patterns, surgery schedules, and staffing levels, and to empower their staff to make adjustments where they saw they were needed. Our client’s team now ensures that departments are staffed to appropriate levels, and they cross departments to ensure patients are getting appropriate care while keeping operating costs to a minimum.

The bottom line

As hospital leaders, you constantly find yourself in a tight spot between wanting to provide quality care and maintain/increase hospital operating margins. It’s a tough position to be in, but we hope that these four strategies show you that it is possible for every team to find savings above and beyond any of the traditional cost-saving strategies they’re already employing.

Benchmarks are an important tool in your work to identify cost savings opportunities, but many organizations who rely on benchmark studies have felt betrayed by the promise of cost savings that never actually materialize.

In Part 2 of this series, we will dive into the challenges of traditional benchmark studies, and why they often let us down. 

In Part 3 we'll walk through the culture change that will help your organization realize material labor cost savings and do it sustainably over time.


3-Part Series on Strategic Cost Management

The Culture Change That Sustainably Reduces Hospital Operating Costs

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