Given that labor is the highest variable hospital cost, precise staffing levels continue to underpin an organization’s operational efficiency. Salaries and benefit dollars typically account for well over 50% of total operating costs in most hospitals and health systems.
Hospital Corporation of America’s (HCA) large collection of hospitals serves as a proving ground for identifying and developing best practices. In the same way that HCA has a model for analytics to manage its supply chain across its network of hospitals, the same is true for workforce management. In addition, because of its size, HCA can deploy a centralized float pool of nurses instead of hiring nurses for different facilities.
“HCA and Community Health have been ahead of the curve for some time in some aspects such as economies of scale and standardization,” said Mitchell Morris, MD, vice chair and global leader of the health care sector at Deloitte. “Big systems [like HCA] want economies of scale to be big enough to achieve market dominance and get good contracting rates.”
Traditional workforce models have typically relied on setting core labor targets based on yearly census levels. However, with operating margins being squeezed, reducing contract labor and refining labor and productivity targets have become a higher priority.
HCA’s core staffing strategy balances the use of full-time with flexible staffing to address the ebb and flow of demand within departments and across its enterprise. The model meets minimal core demand with an annual full-time staff level based on the average of three lowest census periods by department. A dashboard view offers insight into peak staffing needs based on projections and actual number of patients from a historical standpoint. Because of their shrewd use of predictive analytics and data transparency, HCA has managed to keep more expensive ‘contract labor’ in check.
SPEED (AND SIZE) MATTERS
HCA reportedly checks its labor analytics every two hours, staffs based upon demand as determined by acuity and productivity targets per four hour shifts, and holds management accountable over a tighter time frame (two pay periods or four weeks). HCA’s finance leaders are committed to making sure the information they glean from their repositories of data is consistently supported, reported and acted on.
HCA’s virtual real-time labor metrics and analytics with decision supports enable directors and front-line managers to adjust their assumptions based on the most current business realities, more accurately forecast staffing needs based on predictive analytics, quickly identify and fix emerging problems, and make rapid adjustments that bring labor expenditures in line with actual volumes and overall staffing goals.
Hospitals and healthcare systems equipped to calculate total overtime and contract labor costs, track actual versus budgeted labor costs, and adjust their strategy based upon a 2 hour 24/7 gap analyses have a tremendous competitive advantage.
Generally, a labor ratio (total labor costs/net operating revenue) under 55% is considered better than about half of hospitals, while very successful, well-managed hospitals have ratios near or below 45%. It should be pointed out that every percentage improvement in this essential operating ratio goes straight to the ‘bottom line’.
According to their SEC 10-Q filing in the third quarter of 2014, HCA reported the following financial information (in billions), giving them a Labor Ratio of approximately 45.8%:
Total Labor Costs $4,211
Total Net Operating Revenue $9,220
Labor Ratio 45.8%
In the second half of last year, HCA surprised analysts with a reported increase in labor costs, which jumped as a percentage of revenue in the third quarter, to 46.9% from 45.4% the prior quarter and 45.8% a year earlier. This jump reflected adjustments made because of further impacts of the Affordable Care Act and the rise in newly insured volume.
HCA’s consistent results offer further proof that there are significant opportunities to improve hospital labor cost components and the bottom line when organizations make labor management a top priority and when the hospital data management and decision-support tools and infrastructure are in place to apply this understanding.
According to Chuck Alsdorf, director of healthcare finance policy, operational initiatives, Healthcare Financial Management Association, there has been a steady movement toward predictive analytics for staffing, particularly at large health systems.
“Instead of having a flexible staffing model where you staff to a minimum based on an average daily census, now they’re getting to the point where they have 60-70% confidence that this is what the census is going to be for this unit for this day,” Alsdorf said.
However, Alsdorf said, predictive analytics is a difficult implementation since “it requires not only getting the technology and the modeling right, it’s getting the culture right. The benefit of having the size [of an HCA] is “you can find a good cultural environment to go in and put these things in, test them, get a ‘best practice’ established and then roll it out.”
