Save millions with better labor management

Labor and benefit costs still often comprise 60 percent of our operating budgets in healthcare. Although we should look for every opportunity to lower cost and enhance revenue in all non-labor areas, the labor and benefit segment is too large to ignore. Kevin L. Shrake

This process should be a dynamic productivity management solution that is embedded into the organizational culture and not just a periodic "slash and burn" budget initiative to achieve a set of numbers.

Consistent collaboration, process improvement and accountability to a process using readily available metrics and tools leads to sustainability when managing labor costs. The old adage of "what gets measured, gets managed; what gets checked, gets done; and what gets rewarded, gets repeated" is very pertinent.


Problem: There are tremendous opportunities in nearly every healthcare organization to more efficiently manage labor. The reasons for this include managing through emotion rather than metrics, lack of good tools for the managers, inconsistent commitment to process improvement and taking the philosophy that "we are different." to name a few. Many organizations have to result to periodic mandatory reductions in workforce (layoffs) to meet their financial goals. This is a devastating approach for morale and also can destroy the confidence of the community served.

Solution: Best-of-class organizations share many of the same characteristics in regards to their process of labor management. They use a three-part program of establishing customized benchmarking targets, which guide process improvement initiatives, followed by continuous monitoring to assure sustainability. Having a process, rather than an event, is a key differentiating factor of successful programs.

To improve performance, there also has to be a commitment from the C-suite to provide education to managers, assign accountabilities and to continuously manage the process. Top facilities not only create benchmarks with similar organizations, they also compare themselves to peers with high-quality standards that are financially sound.

They also establish ongoing process improvement initiatives that allow them to effectively manage to a set of metrics rather than simply cutting and hoping no one is harmed. This can include establishing procedures for position control management to assure that every single position that is approved has been closely scrutinized instead of automatically filled. Continuous monitoring creates the sustainability of successful programs and helps guard against adding positions back in gradually that have been eliminated--sometimes know as "FTE creep."

Results: Most recently, a 900-bed, full-service, nonprofit healthcare system with four distinct campuses in the Midwest reported positive results after engaging an expert consultant to implement the three-part process described above. The full-time employee per adjusted occupied bed rate for the entire system was reduced from 7.03 to 6.5, and the personnel expense as a percent of operating expense was reduced from 49.74 percent to 47.82 percent.

The executive leadership at this organization was striving to achieve an $8 million impact but the labor management solutions implemented produced an average annualized savings of $11 million, exceeding expectations by $3 million.

Take-home Thought: The following is a list of best practice labor management characteristics that can be used to gauge the status of your organization.

  • Benchmarks are established for every hospital department and compared to regional, state and customized peers.
  • Historical trending is part of the routine analysis of metrics.
  • Bi-weekly reports, as well as daily indicators, are available to managers that allow them to proactively manage the labor needs of their areas.
  • Ongoing education is provided to managers on how to effectively manage productivity. (This is a skill that has to be learned just like clinical personnel learning to draw blood or safely deliver a medication.)
  • Best practice standards are continually implemented across the organization.
  • There is a position control committee that meets on a routine basis.
  • There is a specific process of accountability with defined expectations to take action.
  • There is a commitment from administration to continuously manage the process to avoid drastic measures such as layoffs.
  • Any consultants used should provide a return-on-investment guarantee so financial incentives are aligned.

General Indicators of Opportunity:

  • Full-time equivalents per adjusted occupied bed (FTEs/AOB) should be less than 4.2.
  • Salary and benefit costs as a percentage of total operating expense should be less than 45 percent.

Kevin L. Shrake ([email protected]) is a 35 year veteran of healthcare, a Fellow in the American College of Healthcare Executives and a former hospital CEO. He currently serves as the Executive Vice President/Chief Operating Officer of MDR™, based in Fresno, Calif.