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3 labor cost control questions every healthcare CFO must answer

Both hospitals and private practices benefit from tracking compensation costs by service area in order to determine profitability.

Rich Miller, Contributing Writer

In a climate where reimbursement rates are falling, costs are soaring, and patient satisfaction is tied to the bottom line, it is wise for any healthcare organization to focus on reducing costs directly under their control.

Labor, which typically represents 50-60 percent of healthcare operating costs, is one expense over which organizations have direct influence. Specifically, by tracking differential pay and overtime by cost centers, healthcare organizations can see a sizable reduction in their compensation costs.

To achieve this, CFOs need to have the data to address three critical questions:

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How much is it costing you to calculate payroll, overtime and incentive pay?

For non-exempt employees, calculating payroll not only requires tracking time, but also understanding the specific terms under which the time was worked. For example, a nurse who is scheduled to work from 7:00 am to 3:00 pm, but actually works until 7:20 pm may be eligible for various overlapping or consecutive pay differentials and/or incentive pay rewards. In this example, the nurse may be paid at one rate from 7:00 am to 3:00 pm, another from 3:00 pm to 5:00 pm and yet another from 5:00 pm to 11:00 pm, in addition to an incentive pay lump sum of $24 for accepting extra time after 5pm.

Traditional payroll and time tracking systems often fail to accurately track each person's schedule assignments and aren't capable of automatically applying nuanced and complex payroll rules. As a result, an astonishing amount of time is expended for each payroll to manually fill out time cards and audit the self-reported pay attestations of staff.

Similarly, though physicians are typically exempt salaried employees, they often are eligible for call and incentive pay that operates under its own set of rules. Call and incentive pay is typically directly tied to the schedule assignments that providers work, though it can also be tied to specific clinical work and cases performed by the clinician.

Performing these tasks manually using paper, spreadsheets and disconnected systems is an extremely labor intensive - and therefore costly – system, requiring considerable FTEs. To address this challenge, systems must be in place that automatically reconcile schedule and time information as changes, swaps, sick days, requests and PTO updates come in. Above all, they must ensure that these systems are 100 percent in sync and consistently applied. Additionally, time should be captured and verified securely and directly from staff.

Are you using cost and compensation data to make strategic decisions about how you use your resources?

The people who manage your staff need the proper tools to monitor, understand and react to demand and staffing conditions in their respective areas. In organizations where the scheduling data must be manually reconciled with time data for the payroll period, it is not possible to see who is at risk for overtime before the pay period has already closed. However, by maintaining schedule and time data in real time, organizations can see exactly where each provider stands in relation to overtime and under time before the end of the period. In other words, while there is still time to redistribute shifts and reduce overtime paid.

An integrated single source of truth should be established for managing this information, rather than a hodgepodge of spreadsheets, paper forms and various disconnected systems. Such a data repository allows for the detailed analysis of the data via business intelligence tools and provides an accurate historical accounting of how your practice works. This allows you to develop models that more accurately anticipate your needs across the clinical areas you serve.

What is the true cost of providing services across the clinical areas you serve? 

This seems like a very straightforward question, but healthcare organizations frequently lack the capacity to track exactly how much time each provider is spending in each location or cost center and how much this time is costing. They may know what the schedule says but the actual hours worked, or where those hours were worked, may be significantly different, which muddies the true cost of providing services.

Without this level of detail, it is impossible to gauge how much it is actually costing you to have a nurse or physician service various locations and areas.

Both hospitals and private practices benefit from tracking compensation costs by service area in order to determine profitability. This is accomplished by comparing the actual cost of providing staff (including base pay, overtime and differential pay) with the fees they charge for their services. By having these data on hand, organizations are able to evaluate the value of their client relationships, investigate the efficiency with which they can provide services and leverage data for more effective contract negotiations.

These three questions are critical but, to answer them, CFOs need access to high-quality data. In most organizations, those data are simply not available. As health systems plan for future budget and technology needs, an investment in tools that provide access to these data is worth exploring.

Rich Miller is co-founder and CEO of OpenTempo.