In a recent article, published in Healthcare Finance News, I provided commentary on effective means of managing labor costs and performance improvement within the healthcare industry. It’s clear that implementation of effective cost improvement strategies will continue to be a top priority for organizations, but in this era of healthcare reform, it has become even more critical for hospitals and health systems.

Within healthcare organizations, where labor is the largest and most controllable cost, it is important for leaders in finance, human resources and clinical operations to partner and evaluate opportunities that can reduce or effectively manage labor costs without sacrificing the quality of patient care or patient satisfaction.

Balance Cost Reduction Strategies with Quality Care and Service

Setting clear expectations and goals related to managing labor is an important first step. These goals are often established as part of a broader strategic and financial planning exercise. Utilizing benchmarking data as a context to identify cost savings opportunities, as well as to establish targets for cost saving initiatives, will translate to higher-level labor ratios. These ratios can then be used to help guide additional budgetary targets which, in turn, can drive points of accountability down to operational/manager levels.

As a guide, there are four key steps to help effectively implement initiatives targeted at sustainable cost reduction.

1. Establish a Culture of Accountability

Ensure key stakeholders, across finance, clinical operations and HR teams, have a clear understanding of the goals you are trying to achieve. Since managers influence staffing decisions and ultimately labor utilization and cost, education that highlights financial realities and utilizes benchmarks to frame where opportunities exist can promote greater buy-in.

Any proposed reductions should be evaluated against three simple criteria before being adopted:

  • What’s reasonable?Benchmarking data provides needed context to identify and quantify where potential cost-savings opportunities exist.
  • What’s achievable?While analytics can provide valuable data, it never tells the complete story. It is important that clinical managers have a voice in determining where potential outliers may exist and what labor changes can be reasonably made.
  • What’s sustainable?If reductions in staffing levels are being evaluated, it is important to ensure those changes don’t negatively impact quality of service and care, or employee morale.

2. Ensure Timely and Actionable Reporting

Providing consistent and timely feedback at an executive level is important for sustained results. Reports and analytics should clearly highlight:

  • Are we on track against established labor cost and efficiency goals?
  • What has been achieved in key labor management initiatives to date?
  • What action steps are being taken if course correction is needed?
  • What risks do we see in achieving our goal?This reporting should also include trended views of actual labor utilization against target staffing levels.  While retrospective, it does help clinical managers make informed decisions on how to schedule staff and utilize overtime or call-back hours to better manage labor costs, especially in departments where workload demand isn’t always predictable.

3. Improve the Feedback Loop

All too often, reporting is a one directional push of data that highlights outliers but doesn’t provide any insight into why those outliers exist. Introducing a process where clinical managers can provide commentary and action plans against those outliers helps to improve the feedback loop and guides executive attention to where it is needed most.

4. Incorporate Non-Financial Measures When Evaluating Performance
It is important that cost reduction initiatives include close monitoring of patient experience and outcome measures to ensure quality service is not diminished along with cost reductions. Including those measures when reporting cost-savings results allows for any management or executive intervention that might be necessary. 

We’d like to hear from you. What are your challenges and strategies for effectively managing labor costs and performance improvement? Email us at