More on Budgeting

Controlling labor expenses through budgeting software

With labor being a healthcare organization's largest operating expense, budgeting software can provide accurate data

With an increasing number of healthcare organizations realizing they need to focus on labor costs, their largest operating expense, technology companies that provide budgeting and forecasting software are bringing the accurate data and predictive information to organizations right when they need it most.

“In the budgeting and forecasting process, what we’ve found is that it’s important for healthcare organizations to have a tool specifically focused on labor. It’s 50 to 60 percent of their expense budgets, so they’re looking for a tool that both helps them set up an annual target around the general utilization of that large expense and a sophisticated tool that will help them transform the way they budget for labor, especially for clinical areas on what an annual budget is right down to a shift-by-shift plan,” explained Chris Fox, senior vice president of growth and innovation at Avantas, a labor management services company based in Avantas, based in Omaha, Neb.

According to Jackie Larson, vice president of client services for Avantas, the company offers Smart Square, which is healthcare scheduling software, to its clients to predict staffing needs well in advance of a shift.

“Companies without some kind of budgeting software rely on monthly or yearly budgets, and are hiring and staffing through this budget level regardless of actual volumes so they overstaff for shifts and send staff members home, which causes staff dissatisfaction,” said Larson. “Smart Square will predict the need most accurately 30 days in advance and have the exact need without being under or overstaffed. Organizations have the assurance that they have the right staff at the right time at the right place. One client had a predictive modeling accuracy at 96 percent. It’s spot-on accuracy.”

Logan Pigg, CFO at Mountain States Health Alliance, a 13-hospital system headquartered in Johnson City, Tenn., said using labor budgeting tools like Smart Square gives frontline leadership staff the ability to learn and understand how their company is running workforce-wise and how they should run in the future.

“Having staff that much more educated on the nuts and bolts of what makes up labor is really helpful,” said Pigg. “There’s a daily productivity function, where you are taking budgeting numbers and dissolving them into day-to-day functions, and using the tools to pick how many registered nurses are needed or other professional people for that particular shift.”

Fox said one thing that has changed in the last few years in regards to budgeting and forecasting is that hospital leaders now need to focus on all areas of the organization in order to best manage labor.

“The sophistication around being able to build a flexible variable budget is key,” he said. “Traditionally, I think they’ve always needed to do that in the nursing areas, or the ED areas, but that only gets about half of their labor budgets. They’ve come to realize that in order to better manage labor, they need the same tools and data available in other areas as well, like in certain therapies, labs, outpatient care, dietary and billing.

Managing their largest expense in a more sophisticated and scientific way has become hugely important in terms of their viability moving forward.”

Pigg said the budgeting technology and upgrades that have been made at Mountain States Health Alliance have really taken the place of much of their financial reporting in terms of managing hours and the dollars associated with those hourly rates.

“We manage monthly rates on a high level anyway, but we’ve talked with different CFOs and realized they are 27 people over what’s needed, which ends up being one million over in salaries,” he said. “It’s not just hours, but also what we’re paying for those hours.”

Going forward, Fox believes labor will only become more important when it comes to budgeting, and tools will need to be as sophisticated as possible.

“Volumes in healthcare are constantly changing in terms of how it’s impacting the inpatient and outpatient worlds, and sophisticated tools that allow predictive modeling and forecasting are going to be important with helping them do a better job with the budgeting piece,” he said. “It’s great to have a budgeting forecasting tool but in the end the management is dependent on the budgeting piece and the operational component.”

Pigg agrees. “I think there will absolutely be more of a connection between that dollar and cents and what it’s taking to take care of patients right down to the level and types of people. It’s where the industry is going to have to go with healthcare reform coming,” he said. “We still need people to take care of the growing population with baby boomers coming up. So it’s going to be important to find the right people in those right places. It’s about making sure you aren’t spending an excessive amount of money on labor.”

Hospitals that correctly manage their labor save costs, Fox said.

“In a hospital with 20 nursing units, we’ve typically seen a $2 million opportunity in savings over what they had spent in a previous year’s budget,” he said.

Pigg said his organizations have created organizational charts for every level of the hospital to ensure they are never spread too thin or have too many staff members on at a particular time.

“The main thing that I’m seeing and we’re focusing more on is getting down to the weeds of what is really affecting operations,” he said. “Without getting into that level of detail, I don’t know how a healthcare organization can survive going forward.”

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