Financial results in 2017 were a warning for many U.S. hospitals, as operating cash flow margins reached their lowest level in the last decade. Revenues are rising but costs are increasing faster, resulting in downward pressure on margins and reduced hospital liquidity. The Vizient Research Institute’s recently completed Strategic Viewpoint, “If the Road Narrows: A Closer Look at Hospital Operating Margins,” examines the macroeconomic factors contributing to the downward trend, and explores the potential opportunity for labor productivity gains to restore margins despite anticipated declines in revenue growth.   

The report notes that while non-labor costs merit attention, efficiencies gained will not, alone, solve the problem. With labor accounting for roughly half of a hospital’s total expenses, productivity becomes a critical component of financial success. A closer look at the study’s findings revealed the importance of staffing levels, skill mix, wages and having a process for measuring and monitoring productivity.

When measured as clinical output (adjusted patient days) per non-physician full-time equivalent (FTE), labor productivity varies widely across hospitals. Based on an analysis of 40 member organizations participating in the Vizient Operational Data Base, the Research Institute team found labor productivity ranging from approximately 97 days per FTE among lower performers to 127 days per FTE among higher performers. Virtually all hospitals experienced relatively similar increases in labor productivity between 2007 and 2017. While focused efforts to enhance labor productivity were likely undertaken by many organizations during this time span, the Research Institute’s analysis suggests that observed gains in labor productivity, when sustained, largely arose from higher outpatient volume. 

“A more sensitive measure of labor productivity is the number of adjusted patient days per dollar spent on labor, as it takes into account unit costs and differences in skill mix,” said Bob Browne, vice president, clinical enterprise insights for Vizient. Holding clinical output constant, replacing three FTEs who each earned $60,000 with two FTEs who each earn $100,000 actually increases costs. “In other words, labor productivity appears to increase if measured per FTE but decreases if measured as clinical output per dollar spent.” 

Labor productivity key to financial success

The unit cost of labor rises as wages are increased, if skill mix is intensified or both.  While nearly all organizations studied improved their nominal labor productivity— measured in adjusted patient days per FTE—for the overwhelming majority of hospitals, increased unit labor costs eroded a portion of the gains achieved. For one-third of hospitals, increased unit labor costs more than completely offset the gains, resulting in a net decrease in labor productivity when measured in adjusted patient days per dollar of labor expense. 

"Focused attention on staffing levels, skill mix, wages, and having a system in place to measure and manage productivity—both enterprise-wide and at the unit level—are all keys to achieving sustainable gains in labor productivity,” added Browne.  

Should revenue growth slow as expected, labor productivity—specifically, clinical output per dollar spent (not per FTE)—will separate organizations that prosper from those that struggle. “Moderate gains in labor productivity offer the opportunity to reduce cost per adjusted patient day by amounts of 5 percent or more for an individual hospital, which would translate to a measurable improvement in bottom-line operating margin,” Browne concluded. 

For more information about joining a member network and accessing the resources provided by the Vizient Research Institute, contact Cindy White, vice president, methodology and programming.

To learn how Vizient Advisory Solutions can help your organization maximize resources, share best practices around labor usage and maintain optimal patient care, contact us today.

Published: August 21, 2018