Analyzing your hospital's labor productivity
by Steven Berger
Healthcare Financial Management, April, 2005
When fringe benefits and contract labor are added to salaries and wages, total hospital labor costs constitute more than half of total revenue. As an example, Fitch Ratings reported in August 2004 that across its 215 rated not-for-profit hospitals, the labor ratio was 52.2 percent. More accurate forecasting of staffing needs compared with projected volumes and better use of labor can lead to improved profitability.
With a simple three step method, and without any commercial tools other than Excel, hospitals can begin to manage their labor costs through labor productivity only.
Step 1. Determine your current labor ratio (salaries, contract labor, and fringe benefits divided by total revenue). Do not forget to include any nonemployee labor costs, such as agency fees and purchased services.
Step 2. Set positive overall labor ratio goals--that is, a ratio less than the median (for example, 52.2 percent). If you are currently unfavorable to the median, set initial goals to get to the median. If you are at the median, set goals 1 or 2 percent less in the upcoming goal-setting period (6 to 12 months from now). If you are currently favorable to the median, set goals to move toward best practices (44 to 45 percent for a single freestanding hospital).
Step 3. Develop a labor productivity system that will help your organization determine the level of hours needed per unit of service. Each department should have its own productivity standard. Then, on a daily, biweekly, and monthly basis, labor productivity information should be collected, reported, and distributed to the department managers so any necessary action can be taken to ensure meeting the goals. Hospitals can use commercial products to generate these reports automatically, or they can use an Excel spreadsheet to capture and report the information.
The first table shows the initial step in developing an effective labor management process in the nursing and radiology departments. The hospital determines its daily staffing needs based on expected units of service and the number of labor hours it has chosen to use as a standard, based on benchmarking.
The second table represents a spreadsheet analysis of biweekly hours in relation to the units of services produced. In the last column, the totals show just a 2.1 percent unfavorable variance in the nursing department (956 hours were required but 976 hours were used) and a 1.4 percent unfavorable variance in the radiology department (1,081 hours were required but 1,096 hours were used) during this two-week period. This may not be considered a poor outcome, yet there are several days when the unfavorable percentage exceeded lo percent in both departments. If the managers had been able to maintain productivity within the standard goals, the hospital would have used fewer staffing hours and thus saved on labor costs.
Keep in mind that this analysis purely reflects labor productivity analysis but not any rate variances (based on average hourly rates). A full labor management tool would take both into account in determining the operating manager's results in achieving labor cost goals.
SAMPLE DAILY LABOR PRODUCTIVITY NEEDS
Daily Standard Hours Potential Units
Per Unit of Service of Service Total Hours Available
Nursing Radiology
(Patients) (RVUs) Nursing Radiology Nursing Radiology
4 to 4.5 1.2 14 55 60 66
4 to 4.5 1.2 15 60 60 72
4 to 4.5 1.2 16 65 72 78
4 to 4.5 1.2 17 70 80 84
4 to 4.5 1.2 18 75 80 90
4 to 4.5 1.2 19 80 80 96
Daily Standard Hours Total Employees
Per Unit of Service Needed (Calculated)
Nursing Radiology
(Patients) (RVUs) Nursing Radiology
4 to 4.5 1.2 7.5 8.25
4 to 4.5 1.2 7.5 9
4 to 4.5 1.2 9 9.75
4 to 4.5 1.2 10 10.5
4 to 4.5 1.2 10 11.25
4 to 4.5 1.2 10 12
SAMPLE BIWEEKLY LABOR PRODUCTIVITY ANALYSIS
Actual Units Standard Hours
of Service Required
Nursing Radiology Nursing Radiology
Sunday 2/13/05 15 24 60 29
Monday 2/14/05 18 65 80 78
Tuesday 2/15/05 17 75 80 90
Wednesday 2/16/05 15 82 60 98
Thursday 2/17/05 18 74 80 89
Friday 2/18/05 14 89 60 107
Saturday 2/19/05 10 40 48 48
Sunday 2/20/05 15 26 60 31
Monday 2/21/05 19 78 80 94
Tuesday 2/22/05 20 75 88 90
Wednesday 2/23/05 16 74 72 89
Thursday 2/24/05 17 75 80 90
Friday 2/25/05 14 86 60 103
Saturday 2/26/05 9 38 48 46
956 1,081
Standard Hours Percentage
Used Variance
Nursing Radiology Nursing Radiology
Sunday 64 24 -6.7% 16.7%
Monday 78 88 2.5% -12.8%
Tuesday 78 104 2.5% -15.6%
Wednesday 68 112 -13.3% -13.8%
Thursday 90 88 -12.5% 0.9%
Friday 56 100 6.7% 6.4%
Saturday 48 48 0.0% 0.0%
Sunday 65 24 -8.3% 23.1%
Monday 82 88 -2.5% 6.0%
Tuesday 84 88 4.5% 2.2%
Wednesday 66 88 8.3% 0.9%
Thursday 92 88 -15.0% 2.2%
Friday 58 108 3.3% -4.7%
Saturday 47 48 2.1% -5.3%
976 1,096 -2.1% -1.4%
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