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David Kim, Partner, Moss Adams Health Care Consulting Practice

7 Ways to Reduce Labor Costs - Without a Widespread Workforce Reduction

By David Kim
Moss Adams Health Care Consulting Practice

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Original Publish Date: June 2, 2020

COVID-19 has put an unprecedented financial strain on health care organizations. To exacerbate matters, these institutions already face razor-thin margins as many hospitals are relying on non-operating and investment income to survive.

To achieve financial stability, it may be necessary for organizations to cut operating costs quickly, which can be difficult and painful. Labor cost reductions in particular are hard to achieve and sustain, but important to manage; they still represent the single largest category of expense in a hospital—above 50% of total operating expenses, according to the Healthcare Management Financial Association.

However, before hospital leadership implements any labor cost reduction initiatives, it’s important to evaluate other opportunities in non-labor costs and revenue cycle enhancements so that you’re taking a balanced approach to financial health. This allows employees to be prioritized and labor reductions to be used as a last resort if non-labor cost reductions and revenue cycle improvements aren’t enough to meet a hospital’s financial goals.

If you’ve exhausted opportunities in non-labor and revenue cycle and need to implement labor cost savings initiatives, you have options before you start reducing your workforce.

Below, we outline key communication tips and seven alternative steps you can take before you decide to make widespread layoffs.

Communication Tips

Communications is key to successfully implementing any change to your organization.

An essential component of leadership is the ability to communicate that your people are a top priority for your organization. Develop a clear and consistent message about why you need to take action for the organization’s long-term viability.

Here are some tips on how to achieve good communication with frontline staff during this time:

7 Steps to Reduce Labor Costs

Once you have emphasized the importance of your people, your organization can continue to implement those communication tips as they go through the following steps.

1. Focus on managing pay practices.

Overtime and premium pay—such as double-time and triple-time pay–can be a significant expense, so evaluate opportunities to reduce these costs. To do this, analyze overtime and premium pay expenses by department to identify areas with high utilization. The financial data you’re reviewing should reach back at least 12 months.

From there, you can drill down to individuals incurring overtime and premium pay to determine if it’s appropriate. Take a look at on-call and call-back utilization by department to understand the total dollars being spent, and identify areas that incur on-call expenses while rarely calling-back the on-call employees.

A good overtime target is 3% or less each pay period. Premium pay utilization should be as close to 0% as possible.

2. Review your management structure.

There are several benefits to reviewing your management structure. Cutting management positions and layers demonstrates to the front-line employees that management isn’t exempt when cutting labor costs.

This review can lead to significant labor savings, improve decision making, and result in a leaner organization.

To conduct a review, consult best practices and benchmarks around manager-to-staff ratios by department and explore how to flatten a padded hierarchy.

3. Decrease reliance on outside agency staff and travelers.

This step can yield significant cost savings and other benefits.

Approaches include:

4. Evaluate sitter protocol.

Evaluating the appropriate use of sitters in a patient care unit can lead to significant cost savings.

There are multiple strategies and tactics to manage sitter utilization and costs including the following:

5. Evaluate skill-mix changes.

This step entails pushing work down to the lowest cost job description in the department when appropriate: patient care aides taking on nurse responsibilities, pharmacy techs doing more of pharmacists’ responsibilities, or laboratory techs taking on clinical laboratory scientists duties.

6. Reconsider time allotted for education, orientation, and training.

There’s a great deal of variation around how much time organizations spend on education, orientation, and training (EOT). You may find opportunity to modify to realize cost savings while meeting your EOT requirements.

During times of crisis, you should evaluate pushing EOT activities to the future so that you can focus your resources on the current needs of your hospital.

7. Implement a flexible staffing plan for all departments.

Both variable departments and fixed or overhead departments should be flexible with their staffing as volumes fluctuate.

Utilize appropriate volume indicators—such as patients days, visits, and procedures—for each department to determine if flexing needs to occur.

We’re Here to Help

For guidance on how to navigate these steps and potentially reduce your labor costs, please contact your Moss Adams professional.

David Kim is a partner in Moss Adams Health Care Consulting Practice and has been in the health care industry since 1992. He provides strategy and operational consulting services to health care providers and payers. He can be reached at or (415) 848-0945.

Assurance, tax, and consulting offered through Moss Adams LLP. Investment advisory services offered through Moss Adams Wealth Advisors LLC. Investment banking offered through Moss Adams Capital LLC.