Our team of Healthcare Industrial Engineers created this newsletter to share the industry’s best practices with leaders who can apply operational efficiencies in their daily work.
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Department productivity drives hospital FTE performance to budget. High performing organizations proactively and thoughtfully cascade realistic FTE budgets to department productivity goals. After working with many hospitals and health systems over the years, our team has identified the top 5 labor budgeting practices that drive favorable FTE performance. These tactics significantly minimize budget risk by ensuring all risks can be mitigated through department action plans.
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Budget Checklist
When finalizing the annual budget, be sure to review these top 5 items to ensure that unfavorable labor performance to budget is minimized throughout the year.
Controllable factors that can be addressed through action plans should be the primary drivers of budget variance when this checklist is implemented during the budget process.
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Top 5 Labor Budget Reminders
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1) ALIGN BUDGET SYSTEM AND PRODUCTIVITY SYSTEM TARGETS
While this sounds obvious, productivity target misalignment between systems is very common. Numerous factors can cause differences between a hospital’s budget and productivity systems, but the most common is lack of alignment between the finance and the labor management leaders’ budget processes.
For example, FTEs often require adjustment during the annual budget process to meet a hospital’s total expense or earnings goals. In response, the finance team may update total FTEs in the budget system without following up with the labor team to ensure departments have a plan to meet the new FTE target. This creates significant risk, as department leaders gauge favorable performance in the productivity system, not the budget system. This creates the future possibility that all department leaders could meet their productivity goals, but this misalignment could cause the hospital to miss budgeted FTEs.
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2) ENSURE THE BUDGET ACCURATELY ESTIMATES NON-PRODUCTIVE FTEs
Hospitals commonly, although inappropriately, budget a flat non-productive percent across all months for all departments to save time. Even if the overall number averages to the budgeted value over the course of the year, this practice creates variances that disguise actual monthly labor performance.
It is best practice to budget non-productive FTEs according to department history by month to account for seasonal impact as well as staff seniority. For example, if a unit historically experiences peak volume in winter and typically experiences higher paid time off utilization due to Thanksgiving and Christmas holidays, a flat NP% means that underbudgeted nonproductive FTEs will likely drive an artificial budget miss in November and December. Similarly, this practice can drive artificially favorable performance in January and February. This practice can also cause operational problems due to insufficient planning for peak staffing coverage.
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3) THOUGHTFULLY ANTICIPATE ORIENTATION FTEs
Many hospitals experienced increased nursing turnover in 2021, likely due to the COVID 19 pandemic. In this case, if orientation FTEs are budgeted to prior year run rate, departments will likely miss the labor budget due to excess orientation FTEs. Orientation FTEs are commonly underestimated and drive hospital budget misses throughout the year that are rarely manageable, as the orientation expense is required to reduce existing premium pay.
Update orientation FTE projections using vacancy and fill rate data by department. Be realistic about the experience level of candidates and corresponding weeks required for orientation.
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4) ADHERE TO THE "50% FLEX"
As a general rule, hospital census changes should also drive an increase in FTE utilization, but only to about half of the percent volume increase. This rule applies to cumulative FTE impact and assumes that about 50% of hospital staff is fixed (either a fixed department or a fixed component of a variable department). Larger hospitals may have greater than a 50% flex and smaller hospitals may have slightly less.
For example, if adjusted patient days are anticipated to increase by 10%, we expect that FTEs will increase by roughly 5%.
The 50% flex rule is a guardrail to use as a “reasonableness check” for FTE changes from run rate or from budget. Falling outside of the 50% flex does not necessarily guarantee there is a problem, but it indicates that a more in-depth review of FTE drivers is required. Leaders should question FTE growth in any area that is not supported by a volume increase.
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5) ALIGN POSITION CONTROL WITH THE LABOR BUDGET
When the labor budget is final, update department position control accordingly to ensure any budget changes that would impact hiring are reflected. This practice your position control plan supports favorable budget performance.
Most departments should use historical volumes and their budgeted productivity target to estimate the FTEs required in their position control plans. When significant volume variance from history is budgeted, careful consideration should be given to volume assumptions that drive FTE adds. For example, if a new service is opening that increases department volumes, carefully evaluate the increased volume assumptions when planning for hiring needs. Over-hiring can drive unfavorable productivity performance and overly conservative under-hiring can inadvertently drive avoidable premium pay.
While there are far more tips for the annual budget process, these top 5 reduce significant risk when assembling the annual budget.
Remember: budget orientation FTEs, sitter FTEs, and non-productive FTE % no lower than run rate, budget department productivity targets no higher than run rate (unless an exception is approved), and require exceptions to all guidelines - including the 50% flex. And above all else, never budget negative FTEs (not even vacancy plugs)!
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We hope this brief series helps to ensure your labor management plans support your organization’s financial goals!
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