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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Hospitals define premium pay as any rate of pay above the base employed rate. Premium pay can include shift bonuses, weekend differentials, overtime, contract labor, and more.
Premium pay is of vital importance when staffing 24/7 patient care operations. By design, it acts as a financial incentive where needed to support balanced shifts and ensures we have the right staff, in the right place, at the right time, to provide optimal patient care.
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However, as labor spend constitutes more than 50% of all expenses, poorly managed premium pay can become a problem large enough to put a hospital out of business.
While incentives play a critical role in staffing hospitals, some premium pay use scenarios could and should be avoided. Top performing organizations clearly delineate and measure each premium pay type to support close management of avoidable labor expense.
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Top Tip: Approach this problem with a scalpel, not a hammer.
Most who hear the phrase “premium pay” immediately think of contract labor and most consider that a “dirty word.” However, when appropriately used, contract labor is significantly more cost effective than other premium staffing resources. Before villainizing a critical resource, first familiarize yourself with appropriate and inappropriate utilization of contract labor.
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Premium Pay Management
While premium pay has always been a key success factor for hospitals, the post-COVID environment has elevated its importance to a top focus area in most organizations. Whether struggling with the availability of temporary staff or the hourly rate and total cost, most healthcare veterans acknowledge we are in brand new territory. The industry is seeing more and more atypically desperate measures – some hospitals are even closing units to avoid exacerbating negative margins. Managing premium pay is easy to say, but incredibly complex in practice. With a surprisingly long list of variables, it is important to start simply.
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Contract Nurse Agencies Are Making Big Money in the Age of COVID-19. Are They 'Exploiting' the Pandemic?
A lot of that is due to COVID-19, which transformed health care facilities, including Thomas Health’s hospital system in Charleston, West Virginia, where Kahn works, into triage centers and forced nurses to take on an extraordinary amount of personal risk and heartache. It’s no mystery why some 18% of health care workers quit their jobs between Feb 2020 and Sept 2021, according to a Morning Consult poll. Read More >>
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Hospitals are bolstering wages. Is it sustainable?
As the workforce shortages worsened and the pandemic caused widespread burnout, many hospitals and health systems saw their labor expenses significantly rise as they were forced to pay more to attract and retain workers.
Hospitals and health systems ramped up wages, provided hiring bonuses and offered new benefits to ensure they could staff beds. However, it left us with one question: Are these rising labor expenses sustainable? Read More >>
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Categorizing Premium Spend Scenarios for Measurement & Management
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High performing organizations categorize their premium spend by use scenario, review department performance regularly, and create targeted action plans to address spend in avoidable use categories.
To accomplish this, it is important to begin by identifying what is considered appropriate and inappropriate uses for each type of premium pay:
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Appropriate Premium Pay Utilization: Outsourced Departments
& Flexing Up for Volume
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Outsourcing a department or specific type of work is considered an appropriate use of premium pay. When making the determination to outsource, hospitals should perform a cost-benefit analysis to determine the true financial impact, along with the advantages of performing the function through outsourcing versus in-house.
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Another cost-effective use of premium pay is to flex up for seasonal increased volumes. Departments that hire FTEs for their peak annual volumes ultimately waste significant resources during lower volume months of the year, as detailed in Issue #11: Are You Using Contract Labor Effectively?
While operational considerations are critical, it is generally more cost-effective to hire for lower monthly volumes and plan to flex up using temporary resources such as PRNs, overtime, and contract labor. This allows departments to flex down the temporary staff in the lower volume months.
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Avoidable Premium #1:
Missing Productivity Target
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Unfavorable productivity performance is indicative of inefficiencies and painful to the bottom line. However missing productivity while using premium dollars at the same time adds insult to injury. To make matters more frustrating, premium resources are usually very easy to flex off (send home), which means if we trust that our targets are fair, this category of premium spend usually indicates a management problem.
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We recommend managing this type of productivity miss with customized reporting that easily identifies departments using contract labor and missing productivity targets. The more granular the reporting, the better accuracy in identifying which shifts were over-scheduled due to contract labor or overtime.
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When unmanaged, particularly when volumes are variable, this single problem can balloon and drive a large financial budget miss.
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Avoidable Premium #2:
Chronic Vacancies
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Nurse vacancies are a truly tough problem that every hospital in the US is facing, and contract labor is a great option for unprepared departments. That said, filling chronic vacancies with contract labor can creep up on individual departments over months and years, ultimately ballooning for organizations, which means it is important to leverage creative strategies.
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Simply cancelling contract labor that is filling vacancies is not an option unless we close units, or it is unsafe. Unfortunately, this category is not as straightforward as premium used in departments missing productivity target. However, there are long term tactics that can be leveraged such as hire ahead and other downtime reduction strategies. Learn more in Issue #9: Hiring Ahead of Turnover
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Top Tip: Develop automated reports that quickly highlight top opportunities. Review all premium pay, categorize by solution type, and develop action plans to reduce spend in areas of our control.
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Even after identifying avoidable premium spend, it can be overwhelming to manage – in part because there are so many types, only a few of which we discuss here. The best way to approach this is not with a hammer, but with a scalpel!
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