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Nine Tips for Reducing Your Premium Labor Spend

Nine Tips For Reducing Your Premium Labor Spend Web

The ongoing COVID-19 pandemic is a crisis that continues to place significant financials stress on hospitals and healthcare systems across the country, and highlights the urgent need for organizations to understand and track, at a very granular level, how and where they are spending their labor dollars, beginning now.

Premium contracts and overtime labor account for nearly 10% of all staffing dollars. That may not seem like much money, but it can add up quickly over time. Several trends are driving hospitals’ increasing use of premium labor:

  • Hospital labor expenses as a percentage of net revenue have risen steadily over the past 10 years, due in part to an aging population that requires increasing healthcare resources.
  • Many lower-acuity patients now receive care in ambulatory settings, leaving hospitals to care for higher-acuity patients with more comorbidities, complex medical and surgical conditions, and greater clinical care needs.
  • Hospitals often struggle to find qualified candidates for hard-to-fill positions, resulting in staffing vacancies filled using premium labor.
  • The pandemic has exacerbated nursing shortages in many areas due to an increase of nurses taking sick leave to care for loved ones and to quarantine after being exposed to patients with COVID-19. Some organizations have also seen increased nurse burnout due to a surge of patients in hard-hit regions. Many hospitals and health systems contracted with nurse staffing agencies at an even higher than normal premium to supplement their employed nurse staffing.

Relying on premium labor to shore up gaps in clinical staffing is unsustainable. With surgical procedures continuing to migrate to outpatient settings and nursing shortages expected to intensify due to an aging population and high nursing turnover rates in acute care settings, hospitals need to optimize their staffing while effectively managing labor costs.

What Is Premium Labor?

Premium labor is defined as worked hours paid at a nonregular pay rate. This includes overtime, on-call pay, call-back pay, shift bonuses, shift differentials (i.e., holiday, shift, weekend), and agency/contract labor, including traveling nurses.

The use of premium labor increases the amount an organization spends on labor per unit of service; consider the nine tips outlined below to rein in those expenditures.

1. Inventory, then benchmark, current premium labor spend.

Analyze your organization’s current use of premium labor using available payroll data. Quantify the hours by the premium labor categories listed above. Use this data to then benchmark against organizations of similar size, complexity, geographic location, and market, and then compare further by unit or department to highlight areas for further investigation. Benchmarking the overall use of premium labor against industry-accepted metrics offers insight into how your utilization compares to peer organizations. Below is an example of a high-level trend graph that depicts agency expenses for a five-hospital system over 18 pay periods.

2. Explore root causes of premium labor spend.

Meet with department and unit leaders to understand why their current situation requires them to use premium labor and how they have tried to minimize it. This will provide insights about the root causes, help inform solutions, and engage department leaders in crafting sustainable solutions. Even small, incremental premium labor expenses can add up to hefty amounts. Examples of incremental overtime may include incoming staff arriving late (delaying the departure of outgoing staff) and surgical cases and interventional procedures that run past prime time.

See full case study.

3. Standardize processes and centralize control of premium labor.

Centralizing requests for contracted labor into a single department within the health system or hospital allows for an overarching view and better control of these expenses. Having a single point of contact in a standardized process can prevent redundant requests and help ensure that available nonpremium labor, followed by lower-cost premium labor, is utilized across the organization before relying on premium labor from outside agencies to fill staffing gaps. In addition, include standardized language in outside agency contracts to allow the flexing of contracted labor to support several units or departments, provided those contracted staff have the necessary competencies. Also include language in contracts that allows an organization to call off contracted staff without incurring a financial penalty.

4. Implement a review process for overall labor hours.

Create a consistent and standardized approach for reviewing worked hours and their associated pay categories across all departments to track premium labor spend. The review of overall labor hours at the department and organizational level enables leadership to understand the percentage of premium labor hours used to deliver care. Departments can then use this information to identify areas that are disproportionately using premium labor, or exceeding premium labor pay targets. If your utilization of premium labor significantly exceeds expectation or benchmarks, conduct this process weekly; otherwise, a biweekly review that corresponds with each pay period should suffice

See full case study.

5. When possible, end premium contracts early and minimize scheduled premium labor expense.

If possible, insert language into outside agency staffing contracts that allows for early termination once they are no longer needed. A new employee will still need time to orient and onboard to their new unit, but you can reduce your premium-pay spend if you are able to terminate the agency contract once the new employee is prepared for their role.

6. Establish staff planning tools at the frontline supervisory level.

Labor utilization that is planned and monitored at the frontline supervisory level simplifies the process of decision-making in cases where premium labor is being used. Frontline managers are empowered with the information they gather to make decisions to reduce premium labor spend while ensuring adequate coverage for their areas of responsibility. Predictive scheduling tools, such as Einstein II software, allow frontline managers to monitor staffing during the day and suggest staffing levels based on historical and current trends.

7. Prioritize coverage needs by first considering employees with capacity.

Actively monitoring labor utilization helps frontline leaders determine which staff have available capacity to pick up high-priority hours and provide needed coverage. Managers can utilize this information to staff employees with reduced capacity to ensure the additional hours are minimally impacting the department’s premium labor spend.

8. Ensure accountability in clock-in/-out procedures.

Clocking in and out on time can save minutes of premium-pay time for a single employee, and the effects for an entire health system or hospital can be significant. Ensuring that employees aren’t clocking in early or clocking out late, and understanding the barriers employees have to adhering to these procedures, can also reduce burnout.

9. Establish flexible resource allocation processes.

Establish an internal staffing agency that allows the hospital or health system to flex key staffing resources, adjusting to fluctuations in census and addressing unexpected staffing gaps more consistently without using costly premium labor.

See full case study.

Looking Ahead

Minimizing premium labor spend affects the organization’s bottom line and could mean the difference between having the financial resources needed to support staff or expand additional services to patients. In future blog posts, we’ll explore additional strategies for managing labor spend that aren’t directly related to premium labor, including formulating a baseline level of staffing to meet department needs, defining roles and responsibilities across the team, reviewing key workflows, and identifying opportunities to eliminate inefficient practices.

Looking to better manage your premium labor spend?

Contact ECG to continue the conversations.

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