As the largest share of overall expenses for most healthcare organizations, managing labor expenses is critical to ensuring both effective patient care and financial stability. 

Labor expenses account for nearly 60% of expenses for the average hospital, according to the American Hospital Association (AHA).i While some staffing expenses are predictable, numerous factors can contribute to fluctuations in labor costs, such as workforce shortages, spikes in patient demand, and the need to rely on contract workers and temporary staffing.  

Contract labor expenses surged more than 250% in recent years as organizations increasingly turned to staffing firms in response to nationwide labor shortages.ii Recent data from Strata Decision Technology suggest that increases in contract labor expenses appear to be easing,iii but employed labor costs are on the rise. These trends highlight ongoing volatility in labor costs, as organizations try to strike a balance between retaining ample employed staff and meeting shifting patient needs. 

Such inconsistencies pose challenges for healthcare leaders working to develop accurate budgets and staff departments appropriately to provide effective patient care. Fortunately, benchmarking data from peer organizations can help healthcare leaders answer important labor-related questions, such as how efficiently the health system is using its labor and how the labor budget accounts for productivity data. 

In a recent panel, finance leaders from three health systems discussed how they successfully integrated benchmarking data into labor tracking and planning processes at their organizations. Panelists included Kyle Davison, Director of Management Engineering at Lehigh Valley Health Network in eastern Pennsylvania (now part of Jefferson Health); Bill Deemer, Senior Accounting Specialist at Memorial Health System in Illinois; and Callie Grisham, Financial Systems Analyst, and Mollie Parks, Controller, both of Conway Regional Health System in central Arkansas.  

Understanding labor productivity  

Since Lehigh Valley Health Network (LVHN) integrated benchmarks into its labor productivity processes with Strata’s Comparative Analytics, the finance team is now able to compare LVHN’s performance to peer organizations on a monthly basis. The health network adopted a saying: “Get to the 60th,” Davison said. It refers to LVHN’s goal of achieving the 60th percentile compared to peers for worked hours per unit of service. 

“We’ve integrated it pretty seamlessly since we have other products within the Axiom Healthcare Suite,” Davison said. “It just makes it easier for reporting and budgeting.”  

At Conway Regional, the health system had difficulties with its previous system of tracking and measuring labor productivity. Implementation of Comparative Analytics has helped the organization overcome many of those challenges. 

“Before, our percentages for labor productivity were all over the place,” Grisham said. “It’s more level now. Fewer departments are showing that they’re overstaffed or understaffed. That’s been huge for us to be able to compare our departments to that of other hospitals our size.” 

Deemer, of Memorial Health System, said his organization has benefited from the ability to compare multiple metrics — such as worked hours per test or worked hours per equivalent patient day — to peer health systems. The health system can then break down those analyses by the 25th, 50th, or 75th percentile to identify actionable targets for performance improvement. 

The data have helped guide recruitment and staffing decisions at Memorial Health System. The human resources department can use the benchmarking data to evaluate organizational needs and help them identify where to add additional resources. 

“We use it to get tighter control on the departments that have position requests,” Deemer said. “It’s also encouraged managers to get into the system and start looking at their numbers ahead of time to better understand how their departments are doing and where they can get better.” 

Incorporating benchmarks into budget planning 

The health systems also use labor productivity as a driver for budgeting. Once the organization selects a target, they can put it directly into the budget. “It calculates full-time equivalents (FTEs) based on the volumes we input,” explained Davison of LVHN.  

Conway Regional incorporates its departmental labor targets of achieving the 50th percentile of worked hours per unit directly into its budget planning. This allows the health system to better align its budget and productivity goals, something leaders struggled to do with the previous labor planning solution.  

“Now, we can set our departments at the targeted worked hours per unit and allow the budget to calculate an adjustment on their labor, so that every department staffs according to their benchmark,” Parks said. “It really pushes them to achieve the 50th percentile because that is what their budget is set at, and they’re being judged on it for productivity and budget.”  

Aligning budget goals with productivity benchmarks helps department leaders understand exactly what they should target. “Having those align has been really helpful, and it’s very easy to do inside our budgeting solution,” Parks added.  

With benchmarking data to understand optimal productivity levels — and the ability to easily integrate those targets into the budget — healthcare organizations can more accurately determine staffing needs and align budgets.  

Get more information about Strata’s Comparative Analytics here.