Jill Schwieters
David Harper

As healthcare organizations face shrinking revenues and rising expenses, one cost-saving solution could lie in addressing your facility's labor costs.

At a Glance
The following steps can help you address your organization's labor costs:

  • Ask critical questions
  • Create pay codes to track different additional labor expenses
  • Look for patterns in staffing
  • Understand your recruitment and turnover costs
  • Redefine bonuses
  • Review your overtime policies
  • Communicate

Labor costs account for more than 60 percent of total healthcare expenses. Increasing turnover, rising vacancy rates, and temporary agency utilization all contribute to increasing labor expenses-partly because many healthcare systems don't efficiently manage these expenses and productivity.

Often, labor expenses add up unexpectedly, with overtime, extra shift bonuses, on-call and call-in bonuses, and other expenses necessary for safely staffing healthcare facilities. Unfortunately, these are typically bundled into the pay system and often go untracked and unevaluated. In many ways, they simply become part of the organizational culture.

However, there are many ways to identify and address additional labor costs; the key is to use processes that work for your organization. It is critical to know how much your actual labor spend is and where it is coming from. Once you begin tracking these expenses, you can begin to benchmark-and then improve-productivity.

To gain control of your organization's labor costs, it is essential to work with key leaders in the organization. Because they are accountable for managing labor resources, it is important to have their collaboration in evaluating and improving the use of these resources.

With the facility's key leaders identified, the process to reduce labor costs and manage those resources more effectively can begin. Consider forming a task force devoted to labor utilization and productivity.

Step 1: Ask Critical Questions

The task force should ask the following questions, which are essential in completing a picture of your facility's labor utilization:

  • How have staffing and scheduling affected your budget? It is important to determine how much additional money your organization is spending each year because of poor staffing and scheduling practices.
  • Are appropriate systems in place to manage and predict your staffing levels? For example, if it is flu season, plan ahead and "staff smart" by anticipating sick calls. If you have more workers than you need, you can send some home without having to worry about calling in overtime workers.
  • How are you managing productivity day to day and week to week? Are you managing your core labor costs as well as your additional labor costs? You need to have a system in place to track both these costs effectively.
  • Do your policies support good stewardship of resources, or are they inadvertently increasing your labor costs? When is the last time you looked critically at your costs? If you established temporary bonus programs last year during a critical shortage, is it the right program for you today? How did it work? Now is the time to revisit those programs. Also, you need to be tracking these programs monthly to monitor their effectiveness at meeting the organization's staffing needs at a reasonable cost.

Step 2: Create Pay Codes to Track Additional Labor Expenses

The next step is to create the right systems to track expenses without undue administrative burden. Every payroll system is a bit different, but here are a few ideas that may work for you:

  • When employees receive on-call bonuses, the pay should be coded differently from other bonuses or even standard overtime pay.
  • By tracking these pay codes, you may find that you save money by scheduling one additional person to work versus putting two people on call. Because many healthcare workers dislike being on call, scheduling an additional person can solve two issues-it reduces bonus expenses and improves employee morale.

Step 3: Look for Patterns in Staffing

Flu season is only one of many opportunities to "staff smart"; the same applies to holiday weekends (when more injuries are likely to occur), inclement weather periods, and any other seasonal peaks for which you can predict additional staffing needs. Better internal tracking also will minimize temporary agency deployment and utilization, which can significantly increase your labor costs. Having tracking systems in place can assist in making staffing patterns more predictable.

Create an internal pool of talent to anticipate volume fluctuations and sick-day calls; these workers can fill in for any absences without resulting in extra costs. If your organization has such an internal pool of staff, when was the last time you evaluated its effectiveness? Although many organizations have internal pools, their additional labor costs and temporary staffing costs remain high, which may point to a lack of effectiveness.

To quickly assess whether an internal pool is working, organizations can start by looking at agency utilization and asking where, when, and why agencies are being used. Internal pools should be staffed to support high-usage areas rather than to fill in for routine, easy-to-fill shifts that regular staff can work.

Another quick assessment relates to the requirements of the internal pool staff. When the program was designed, did it include specific criteria and minimum expectations that staff should work in exchange for the higher pay rate? These commitments typically relate to the number of shifts, hours, and weekend responsibilities. Are those commitments and requirements being audited to ensure the organization is getting its ROI? Most healthcare systems don't track their commitments to the actual worked hours.

Step 4: Understand Your Recruitment and Turnover Costs

Having an efficient staffing system sends the message that you respect your employees' lives outside work; this plays a significant role in retention and recruitment. Poor staffing systems contribute to employee turnover, which is exacerbated by the high costs of replacing workers-not just from a "cost per hire" and "cost of turnover" standpoint, but also from knowledge loss and retraining. New employee orientation and training, as well as time to productivity, are huge expenses in health care. If your organization pays recruitment bonuses, that also can add up.

Step 5: Redefine Bonuses

Extra shift bonuses are an expensive way to address your facility's vacancy rate. Look for a solution that affords your staffing office a chance to plan staffing around patient volumes rather than being held hostage by the staff for extra shift bonuses. Determine under what circumstances your organization will pay those bonuses, and then manage the bonus programs against these criteria for when bonuses are applicable.

Step 6: Review Your Overtime Policies

Appropriate rationale and levels of approval for overtime use should be in place. Consider two different standards for overtime usage based on clinical and nonclinical (nonrevenue-producing) areas. There are times when it makes sense to approve overtime in a clinical area to keep beds open and generate more revenue. Build a pre-approval process so that overtime is being approved before it is worked-and consistently follow that process so staff understand the expectations for receiving approval.

Step 7: Communicate

Once you've tracked your facility's labor costs and have data to support that information, you can educate employees as to why you need to conserve resources. This can be discussed in terms of providing high-quality patient care while balancing staffing costs and employee satisfaction. As you change policies and introduce new programs, you should give your staff time to adjust to the changes and "buy in" to the new system.

Putting Labor Cost-Saving Ideas into Practice

Developing a disciplined approach to managing labor costs helped one Midwestern healthcare system achieve savings of $14 million over an 18-month period. The system, which comprises five acute care facilities, three long-term care and subacute facilities, a full-service laboratory, a home health agency, and an employed physician medical group, organized a team of multidisciplinary leaders into a labor productivity and utilization task force to define, manage, and monitor labor costs.

The team implemented many of the recommendations discussed here. It started by evaluating all pay programs and determining whether to maintain or eliminate them. The team put tracking mechanisms in place to capture regular and additional labor costs and reported them monthly to the system's senior executives. By evaluating policies and putting procedures in place, the task force was able to consistently apply and enforce the bonus program and overtime utilization.

The team also worked to understand and predict staffing needs across the system. Rather than lay off staff, the task force redeployed staff from one area to another. To avoid having a full staff when a unit's patient volume decreased, it also had each unit determine its minimum staffing requirements based on nurse-to-patient ratios.

The task force worked in tandem with organizational development to create communication tools and training programs for staff and leaders. These tools emphasized the importance of exhibiting good stewardship, being passionate about resource allocations, and working to reduce costs while continually improving the level of service and quality of care. These communications were key to getting managers to understand that the health system's financial viability depended in large part on addressing labor costs.

Jill Schwieters is executive vice president, Pinstripe Healthcare Group, Brookfield, Wis. (JSchwieters@pinstripetalent.com).

David Harper, CPA, is an independent consultant, Laconia, N.H.

Sample Labor Utilization and Productivity Team Charter

A charter provides guidance and prioritizes the work of a team or group. Following is a sample charter for the Labor Utilization and Productivity Team at ABC Healthcare System.


The multidisciplinary Labor Utilization and Productivity Team at ABC Healthcare System will assess, identify, and prioritize areas with the most opportunity for improvement, make recommendations to the steering committee, and provide direction and oversight to the site-based utilization and productivity teams to implement the systemwide labor utilization/productivity initiatives.


The ABC Healthcare System is facing many financial challenges-for example, funding constraints and reductions from payers, more competition in the marketplace, pressure from business coalitions to drive down costs, and the need for capital investment. Labor costs are the single largest component in the budget; therefore, labor costs must be controlled and reduced where possible for the organization to remain financially viable.

Relationship to Mission and Vision:

Our value of stewardship calls for us to use our resources of personnel, time, and money in a way that supports our mission of providing excellent and compassionate health care. Our value of excellence calls for us to improve processes to meet our vision of becoming the hospital of choice in our community. Our value of development calls for us to educate and develop individuals to use the tools and resources to best meet the needs of our organization.

Scope (Areas of Primary Focus):
  • Overtime data
  • External agency utilization
  • Compensation policies and practices
  • Related policies and procedures
  • Bonus programs
  • Education and training for leadership
  • Education and training for staff
  • Fixed FTE assessment
Expected Outcomes:

Decrease in labor expenses per unit of service and/or increase in productivity that will be accomplished via:

  • Evaluation of compensation policies and practices against industry standards and best practice models within their systems and networks (initial emphasis: overtime, bonus/call)
  • Evaluation and recommendations related to external agency utilization and request process
  • Evaluation and recommendations related to department, site, and systemwide contingency staffing models
  • Identification of labor productivity resources to act as internal coaches/consultants to departments that are falling outside industry standards
  • Education and communication of labor utilization policies and practices to leadership
  • Systemwide coordination and implementation of job elimination, reduction in force, and redeployment of staff
  • Evaluation and recommendations related to master staffing, scheduling practices, staffing office functions, and industry standards and best practices within their systems and networks
  • Development and management of an ongoing position control management process
  • Development, education, and implementation of labor productivity tools to track progress against industry benchmarks
  • Evaluation, revision, and implementation of policies to support labor utilization initiatives
Related Initiatives:

These items relate to other chartered teams that are working concurrently to improve organizational performance:

  • Steering team work
  • Other operational excellence work teams
  • Site-based margin recovery work
  • Budget processes
  • Decision support initiatives

System's leadership, all employees, patients and families, the community served by ABC Healthcare System.


Consulting support to bring consistent staffing and scheduling expertise to ABC Healthcare System.


Immediate initiation of work toward a systematic and sustainable approach to creating greater efficiencies within the organization's or executive leadership's timeframe.

Team Composition:

Multidisciplinary team

Publication Date: Sunday, April 01, 2007

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