• JANUARY 2007 FEATURE ARTICLES •
Decision Support: Financial
Balancing Labor Costs With Quality Care
Lasting improvements in productivity depend on a combination of
technology, talent, focus and time.
By Michael Bernstein
Because the workforce accounts for the largest cost of
care in every hospital, operational efficiency—achieving it and
sustaining it—is critical to managing the delivery of high quality
patient care.
The U.S. Bureau of Labor Statistics purports that RN positions have the
largest projected 10-year job growth, followed by orderlies, attendants
and medical technicians. It is clear that the cost of the healthcare
workforce will continue to rise. The challenge, then, for all hospitals
becomes providing the right staff with the right skill set to support
the highest quality patient care possible—while simultaneously improving
productivity and reducing costs. This is no small order.
Valley Medical Center is the first and largest public hospital district
in the state of Washington, with 303 licensed beds and more than 2,000
employees. Located between Seattle and Tacoma in the rapidly growing
city of Renton, we serve a population of around 400,000 people. We treat
75,000 people in our ER annually, making it one of the busiest on the
West Coast. Additionally, approximately 300,000 visits will be made this
year to one of our network of primary- and specialty-care clinics.
Understandably, the cost of labor has our attention.
When I joined Valley Medical Center in May of 2000, labor costs were
being tracked with paper, pencil and spreadsheet. That made it
impossible to get timely, meaningful data to help management make
informed decisions on how to get resources to where they were needed
most, much less identify opportunities to increase productivity. I knew
this coming into the job. In fact, even before I arrived I had conducted
analyses of the hospital’s financial statements; I knew that total labor
costs as a percent of net patient revenues were above the industry norm,
and I knew we had an enterprisewide productivity initiative ahead of us.
From the CEO: Do It
About 60 individual departments comprise Valley Medical Center. When I
assumed the CFO position, costs were rising in terms of hours per unit
of service and rate per hour, but there was no historical data to
formally assess them and especially no trended data. I asked the finance
department to go back, manually, for a three-year period, month by month
and department by department, to assess total unit statistics for each
one. They examined cost per unit of service, hours per unit of service,
and standardization of units by department. They identified fluctuations
and patterns of fluctuation in statistics as well as the source of data
for each department. The job was weighty, but the finance department
knew we wouldn’t be conducting manually-based assessments like this
again in the future.
When an organization sets out to improve productivity, labor performance
management and labor costs at the enterprise level, it’s not a matter of
simply matching skill sets to jobs or the number of employees to the
volume of work or improvements to processes. It’s all of those and
beyond. Twice before in my career, I had implemented Visionware from
Kronos, a labor productivity management tool and methodology that
supports productivity analysis and reporting as well as analysis of
labor utilization and investment. I recommended it a third time for use
at Valley Medical Center.
From past experience, I knew that executive leadership would be crucial
to this broad initiative. My first step was to involve the CEO and COO
and make the case for implementation. After some long conversations and
many hours of analysis, we scheduled a demonstration of the Kronos
technology in October of 2001 and formally began implementation in March
of 2002.
Implementing software is relatively easy. Orchestrating a change in
organizational culture is the opposite. Fortunately, Valley Medical’s
CEO viewed the escalating labor costs and fluctuating productivity
levels as one large opportunity for improvement. His reaction was, “Do
it. Make it happen.” That directive helped a lot of senior managers to
get on board, and to recognize that the service expansions and quality
advances we all wanted might be possible, if we could improve our
processes and free up the cash necessary to pursue them.
No Stones Unturned
Culture change came more easily for some departments than others. For
clinical and ancillary departments that generate patient charges—and
charges have statistical measurements attached to them—one of the first
changes we made was in capturing charge data. We told departments that
generate patient charges, “We are going to use the billing system as the
source of your statistics.” That meant these departments had to get
their charges entered on time, or else they would risk showing X number
of hours worked but no comparable levels of productivity achieved for
those hours. It is a side benefit, of course, that our charge capture
has improved considerably.
Other departments were evaluated differently. An underlying requirement
of an enterprise change of this breadth is that we examined and assessed
functions—not employees—but we did examine and assess every single
function in every department. For example, we might find that in our
billing department, a biller was also filing and, as a result, falling
behind. To get billing out promptly, the answer was not to add another biller; it was to identify what was impeding billing and get that
function handled by an appropriate level employee.
In billing, this might mean adding clerical help. But, in other
departments, the resolution might be to transfer functions out of one
department and into another that could tackle them more
cost-effectively. A few departments actually acquired more FTEs in the
process.
One of the benefits of the three years of data assembled manually, and
especially data added since the implementation of Visionware, was
availability of trended data. It wasn’t long until we could approach a
department head and say, “For 25 percent of the pay periods, your
department achieves X level of productivity, but for the other periods,
it reverts to Y level.” We challenged departments to examine their
internal process; we challenged them to identify processes that would
consistently deliver the optimum productivity levels. New targets were
set by using this approach.
Lean and Mean? Yes and No
Effecting change in internal processes and FTE levels doesn’t
necessarily equate with running a lean-and-mean organization. In fact,
our staffing levels in clinical functions are quite rich by comparison
to other hospitals. Cutting dollars by reducing FTEs isn’t the immediate
path to improved clinical productivity. When a hospital takes this
approach, services may suffer and then patient, physician and staff
complaints will begin.
Over the past five years, Valley Medical Center has been voted one of
the best, large not-for-profit organizations to work for in the state of
Washington. Why? One major reason is that we have allowed our nurses to
assess patient acuity and to adjust staffing levels to acuity levels.
Staffing for high quality care doesn’t depend on the number of patients
alone; it also depends on how sick those patients are.
When the quality of care is excellent, word gets out. Doctors
increasingly will refer their patients here. We have actually had
physicians relocate their practices to Valley from other Puget Sound
area hospitals because of our results. We view our massive productivity
initiative as an investment in our most important assets, our human
assets, and we believe that the investment will improve outcomes and
quality. Theoretically, improvements in outcomes and quality will
increase our market share.
Results Backed by Data
For Valley, those improvements did increase our volumes. For the period
from 2003 to 2006, our patient volume grew 13 percent, and we added
about 50 MDs to our medical staff, a 10 percent increase, and FTEs grew
by 6.9 percent with only a 2.6 percent increase in labor costs on an
adjusted discharge basis. For our first full year under our productivity
program, total labor dollars, in gross dollars, went down. Our auditors
said they had never seen an increase in staff with a simultaneous
decrease in labor costs.
Within the first year of the Kronos Visionware implementation, our nurse
managers went from checking productivity once every two weeks to meeting
on it three times a day. Other department managers met daily to discuss
productivity, and other staff met weekly. This oversight continues
today.
Within the first year, we reduced premium labor pay by $400,000 and
improved labor productivity by $1.8 million. These results mean we
reached ROI (return on investment) within the first five months of
installation through premium reduction alone. Within the first two
years, we also achieved a:
• 7.5 percent reduction in premium time (agency and overtime combined);
• 2.75 percent reduction in FTEs per AOB (adjusted occupied bed);
• 1.5 percent reduction in labor expense as percent of net revenue
(approximately $1.5 million).
Preventing FTE Creep
Today, we have nine years of data collected upon which we will continue
to base our process improvement. Balancing costs and maintaining
productivity is a way of life, not a time-limited project. If an
organization fails to hold managers responsible and to stay constantly
focused on this type of initiative, the momentum slips away and “FTE
creep” returns.
For that reason, we review every FTE request. Each one goes through a
detailed, rigorous process of justification with a productivity analyst.
Finally, we have set and met our internal benchmarks, so the future will
find Valley Medical Center focusing on meeting external, industry-based
best practice benchmarks. Today, we use Kronos Visionware to support our
productivity improvement efforts with a best-practices focus, and we
plan to implement additional Kronos technologies for absence management
in the future.
A 2002 Press Ganey study found a strong correlation between staff
satisfaction and patient satisfaction. By providing our managers with
timely data to help them achieve efficient and cost-effective staff
deployment, we improve Valley’s productivity and reduce our costs. We
also provide higher quality patient care by assigning the right staff
with the right skill set to the right patient at the right time.
For more information about workforce and labor-productivity
management solutions from Kronos Inc.,
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