5 Keys to Improving Hospital Labor Productivity

The shift to value-based payments was a hot topic at the 2015 HFMA ANI conference. Reimbursement rates, now tied to clinical outcomes and patient satisfaction, are driving hospitals and healthcare systems to seek new approaches for improving labor productivity, working more efficiently and placing greater emphasis on cost reduction.

One particular presentation, Using Labor Productivity and Labor Management Best Practices To Improve the Bottom Line conducted by Steven Berger, Chairman of Health Insights and Gary Gasbarra, Vice President of Finance at the University of Chicago Medical Center, was insightful and intriguing.

Benchmarking Hospital Labor Productivity Through Compensation Ratios

During the presentation, Mr. Berger shared two interesting data points regarding labor costs and productivity. Salaries and benefits typically represent 50 percent of a hospital’s expenses. Berger recommended hospitals use a compensation ratio benchmark of 55 percent, calculated by adding up salaries and benefits (including those for contract labor) and dividing the total by net revenue. A compensation ratio that exceeds 55 percent should be investigated.

The 55 percent ratio offers the advantage over the traditional productivity measure of dividing the number of full-time equivalents (FTEs) by occupied bed, by using financial metrics that reflect the outpatient revenue.

With the increase in outpatient treatments and other changes to the traditional model, it can be difficult to define what a hospital is or where the occupied beds are. The financial metrics reduce the number of variables and remove the concern over uncertainty over whether beds are truly “occupied.”

The next question becomes what actions should hospitals and healthcare organizations take to ensure their ratios are aligned with these figures? Monitor and analyze productivity more effectively.

Understanding Hospital Productivity Monitoring

Productivity is the relationship between the quantity of output and the quantity of input used to generate that output. It is basically a measure of the effectiveness and efficiency of the organization in generating output with the resources available. It is defined at the ratio of output to input:


For example, if a hospital has determined that six nursing hours are required per patient day, and there are 100 patient days in the time period, then 600 nursing hours are required.

The actual hours worked were 575 so the unit is below the ratio. Many reporting systems create an index to show the relationship between the two and in this case the result is positive, as the ratio is less than one. Below is an example of a trend graph showing productivity results for a given week. There will be variation, but the overall goal is to manage to the required hours.

a. Hospital Labor Productivity

However, low numbers don’t always signal positive results. If there is a large gap between the required and actual hours worked quality could be negatively impacted. Improper staffing levels can cause undue stress on staff, leading to dissatisfaction, burnout, and turnover. With the average cost to replace a bedside RN costing between $36,900 and $57,300, it is critical for healthcare organizations to understand productivity and its impact on patient satisfaction and the bottom line.

Measuring Hospital Productivity Through Skill Mix and Dollars

Another important area health systems should be monitoring is skill mix and dollars for premium pay. Organizations should monitor the overtime percentage very closely and have a set standard that will not allow the ratio to exceed a certain percent (such as five percent). If the number eclipses the threshold, organizations should investigate the cause and take steps to address the issue.

Productivity measures also apply to outside labor. A hospital or healthcare organization will sometimes need to hire external resources to augment staff in order to deliver superior care to patients. This strategy is a stopgap measure. Temporary workers, who won’t be as familiar as the internal staff regarding specific hospital systems and workflows, can have a negative impact on productivity and quality.

The days of setting staffing levels and failing to revisit them over the course of time are gone. Today’s focus on reducing the number of admissions and shortening the length of stay has an obvious impact on staffing decisions, especially since fewer admissions and shorter hospital stays mean less revenue and less room for error.

Improving Labor Productivity

Getting overtime and labor productivity under control isn’t an easy task, but it’s not impossible. A few best practices that can shorten an organization’s learning curve and ensure faster time-to-value include:

Secure Leadership Commitment

It is essential the organization’s leadership team link the vision and values of the organization to its strategy for improving productivity by educating, mentoring, and holding all levels of management accountable for positive results.

In my former role at Kaiser Permanente the team reviewed several key data points every day and followed up with the hospitals each month. There was clear accountability and the regional nursing team provided assistance to managers who needed to more fully understand how to reduce overtime and its associated costs.

For the organization to keep the compensation ratio at 55 percent or lower, it must have the proper tools (such as an enterprise data warehouse, analytics applications, and reporting tools) to capture and report the data. In turn, leaders must be held accountable for taking action on the information they receive to improve outcomes and reduce costs.

Implement Data Governance

The data cost-center managers receive must be timely, accurate, and relevant. Information that is easy to digest and actionable allows for better understanding, enables intelligent decision-making, and empowers the teams to drive for results.

To ensure all team members are working and reporting from a single source of truth, a data governance team is critical. The team is accountable for establishing data and reporting that consistently tells the same story, enabling managers to identify trends and areas for improvement.

Ensure Financial Targets Are Defined

Clearly defining goals is crucial. All departments must know and understand the goals for which they are accountable and have the strategy and resources necessary to achieve them.

Leadership must intimately know the supply and demand needs of their organizations. Analytics exposes resource needs by day, or by shift, enabling more accurate staffing forecasts. This, in turn, balances the need to provide the best patient care possible while still meeting financials commitments.

Create Transparency

All high-performing organizations foster an atmosphere of collaboration and learning. Creating an open environment where managers are comfortable learning from, and sharing with, their peers is crucial. Making the right thing to do the easy thing to do ensures everyone understands how their decisions and actions contribute to removing waste and lowering costs without sacrificing quality.

Texas Children’s Hospital is one example of a healthcare system that has developed and put in place a labor productivity tool to improve the cost structure and create a learning environment.

Keep the Productivity Metrics Balanced with Quality Goals

Improving productivity doesn’t occur in a vacuum. Lowering costs without maintaining quality will ultimately do more harm than good. Managers need to balance productivity, patient engagement, quality, and cost data in order to deliver the best results.

Quality Is More Than a Metric

Quality is an area where no one, single metric can measure success. Organizations can look at mortality rate, infections, or patient safety, and each area will have different metrics. Leaders must consider all relevant factors, such as the staffing levels required to deliver optimum care, to make a final determination on how best to deliver superior care.

Take, for example, surgeries. Most planned surgeries are performed early in the morning with a majority of procedures being completed on a predictable timeframe. Nursing managers who have access to, and an understanding of this data, will be able to schedule to the proper resources to care for these patients.

Start Small

While finding the right balance between productivity and staffing levels is crucial in the new world of value-based payments, organizations do not have to try and tackle all their issues at once. The data captured in an EDW can be used to identify the areas most in need of improvement. The knowledge gleaned assists teams in setting clear expectations, creating tactical plans, and developing metrics for success –providing quality care while keeping costs in line.

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