Issue #16: The Top 4 Drivers of Hospital Labor Budget Misses
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THE TOP 4 DRIVERS OF HOSPITAL LABOR BUDGET MISSES
Proven best practices for back-to-budget action planning
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.
While monthly performance tracking to budgeted goals is critical to the success of any business, hospitals tend to have more complex drivers of budget variance than other industries. Because workforce constitutes 50-60% of hospital spend and is widely considered the most controllable expense, labor is often the focus of budget variance conversations.
Top Tip: Before creating your back-to-budget plan, ensure you have thoroughly reviewed performance and accurately diagnosed unfavorable drivers to ensure action plans actually drive improvement!
Thanks to the complexity of hospital operations and finances, there are many ways to address labor budget variance other than simply using less resources. There are proven best practices to address each driver of labor budget variance, so ensure root cause identification comes before action plan creation.
4 Drivers of Hospital Budget Labor Miss
1) MISSED PRODUCTIVITY TARGETS The key to success in hospital and health system budget performance is successfully cascading high level expectations to a granular level of accountability. On the labor front, hospital FTE budgets are simply a roll-up of department productivity targets.
The productivity index and missed target FTE metrics demonstrate departmental performance to labor standards and are great metrics for quickly highlighting actionable opportunity.
Top Tip: The productivity index % metric is only useful at the department level. Hospital-wide productivity index percentages hide department missed targets opportunities, as they “wash out” in the averages!
Action plans for departmental productivity performance should be timely and action oriented. High performing organizations review productivity by department daily and update missed target action plans with the same frequency. Ideally, department leaders should review shift-level performance, course correcting where needed, and hospital leaders should monitor department performance, ensuring adherence to action plan requirements.
2) LENGTH OF STAY VARIANCE The total cost of care is heavily influenced by the patient’s LOS, and for case rate payors - such as Medicare - hospitals are paid the same for patient services regardless of patient stay length. This makes LOS very highly correlated with profit (or lack thereof).
The dominant expense for avoidable patient days is labor via nursing unit care, effectively making extended LOS a labor management opportunity in hospitals and systems with case rate payors. However, this is more a purely financial opportunity rather than a missed flexing opportunity, as we must provide care to patients, regardless of the days they stay, or the revenue generated to fund their care.
Top Tip: When holding department leaders accountable to flexing, NEVER use per admission metrics (such as MHAA). While very financially relevant, by asking staff to extend ratios when LOS is extended, rather than working with physicians and Case Management to reduce LOS, you will lose credibility with your team!
We know that labor hours and dollars should always be reported on a per stat basis so that we can compare utilization to volume. That said, it is important to differentiate between stats as we consider action planning. Per APD metrics highlight flexing opportunity while per AA measures total financial impact of inefficiencies. Particularly for hospitals with a large proportion of case rate payors, per AA metrics most accurately describe flexing and LOS management opportunities and per APD metrics most accurately describe flexing alone.
Action planning for LOS improvement is more challenging than other labor variance drivers due to the abundance of variables that contribute to performance. High performing organizations audit interdisciplinary meetings for both attendance and content, ensuring the group is focused on barriers to discharge.
3) RATE VARIANCE When financial statements indicate favorability against budgeted FTEs (hours) but not salaries (dollars), this indicates a rate variance. Especially post-COVID, hospitals are often flexing to volume appropriately, but still missing their labor budget due to increased contract labor rates and higher contract and overtime utilization. In this situation, ensure identified improvement initiatives remain focused on reducing premium pay, rather than a staffing reduction.
Premium pay management tactics tend to be more strategic in nature and typically take longer to drive course correction than scheduling and missed target productivity initiatives. In layman’s terms, it takes a long time to get into trouble with premium pay and it takes a long time to get out of it. The good news is there are many approaches to premium pay that are considered industry best practices, both in prevention and course correction. These include thoughtfully setting FTE hire targets for each department, optimizing scheduling practices, and closely monitoring avoidable contract labor.
4) THE ACUITY FACTOR For the purpose of labor management, acuity is typically measured in two ways: case mix index (CMI – the average of all patient DRG cost weights) and salaries spent per revenue earned. CMI is frequently used to demonstrate acuity under the assumption that “sicker patients require more care,” however it does not correlate perfectly. As an example, surgical DRGs have some of the highest cost weights, but many have low lengths of stay and lower labor requirements. For this reason, CMI adjusted metrics are limited in usefulness.
Salary expense per revenue earned is typically a much more telling indicator, as our charges typically correlate more closely with time in higher acuity areas – such as the OR and the ICU.
Particularly at the department level, volume intensity impact must be analyzed before drawing conclusions. Departments with higher patient ratios or higher labor cost per volume can drive labor intensity impact on a budget variance while the department is favorable to their productivity target.
Top Tip: Compare patient days by type!
For example, if we budgeted an even spread of patient days between ICU, step down, and med surg, but experienced 50% ICU days, 30% step down days, and 20% med surg days last month, all departments could exceed their productivity targets and we would still use more FTEs that we budgeted due to the ratio differences between ICU and med surg (1:2 vs. 1:5)
It is important to consult multiple indicators prior to drawing conclusions about labor performance based on acuity. Particularly individual department volume comparisons to budget can quickly identify FTE impact due to labor intensity.
FINALIZING YOUR BACK TO BUDGET PLAN Invest the time required to ensure your back to budget plan aligns with the cause of the budget miss. Create clear actions with owners and dates. Be sure to follow up and monitor performance to identify what actions are most impactful over time. Remember – length of stay and premium pay strategies generally take more effort and are longer to realize than asking for productivity improvements. However, when executed well, these strategies will pay off exponentially in the long run, both financially and culturally.
