There are nostalgic movies that you always pause your channel-surfing to watch, no matter how many times you have seen them. For me, The Blues Brothers is one.
As I absent-mindedly flipped through the channels recently, Dan Akroyd and John Belushi were playing “Rawhide” behind a chicken-wire fence in a bar called Bob’s Country Bunker. The comedy arose from the juxtaposition of an urban blues band in a venue better-suited to Brooks & Dunn. The setting conjured images of line dancing, the choreography of which often involves taking one step forward and two steps back. Without the accompaniment of country music, hospitals have experienced similar footwork in their labor productivity, with significant implications for health care costs.
Over a 10-year period (2007-2017), 40 member hospitals participating in the Vizient Operational Data Base have realized a 25-percent average increase in productivity, measured in terms of clinical output per full-time equivalent (FTE) of non-physician labor. By absorbing higher patient volumes, particularly in outpatient settings, without commensurately increasing staffing levels, hospitals have increased their clinical output per non-physician FTE. While the increase in productivity varies by hospital, nearly all have improved their clinical output per non-physician FTE, overall by about one-fourth.
On its surface, this accomplishment would be cause for celebration since productivity gains are the fundamental source of wealth creation and the basis for higher wages. A more sensitive measure of labor productivity is clinical output per $10,000 of non-physician expenses. This measure takes into account the unit cost of the labor inputs.
Replacing three FTEs who each earned $60,000 with two FTEs who each earn $100,000 actually increases the cost of producing the same output. In the example above, labor productivity would increase if measured as clinical output per FTE, but it decreases when measured per $10,000 of labor expense. Measuring labor productivity as output per dollar spent takes into account not just hours worked but also the cost per hour.
As this analysis demonstrated, all but one hospital increased their labor productivity when measured as clinical output per non-physician FTE. The 10-year improvements ranged from single-digit increases to as much as 60 percent, with the majority falling between 15 percent and 30 percent. For the overwhelming majority of members studied, gains in productivity were much smaller when measured as clinical output per $10,000 of non-physician labor expense.
Using the more sensitive measure of productivity, the most commonly observed gains were roughly half of those measured per FTE. Gains in output per hour worked were largely offset by increases in the cost per hour worked. More noteworthy, one-third of the hospitals studied had lower labor productivity in 2017 than they had in 2007 when measured per dollar spent.
Unit labor costs are increased by higher wages, an intensification of skill mix, or both. Virtually all of the hospitals studied saw nominal productivity gains significantly eroded by higher unit labor costs while one in three actually lost ground over the 10-year period.
According to the U.S. Bureau of Labor Statistics, within the hospital sector, management and professional compensation increased 60 percent faster than that of service workers over the last four years. The increased demand for medical services by an aging baby-boomer population has been credited with contributing to a shortage of professional health care labor, in turn driving wages higher than productivity gains alone would support.
A comparison of U.S. health care costs to costs in other developed countries shows that prices, not utilization, account for the largest share of observed variation. For hospitals struggling to manage labor costs in the face of a flatter revenue trajectory in the years ahead, a recurring theme emerges: the problem is price, not quantity. Unit prices, whether in the form of higher wages, an intensified skill mix, or a combination of both, have eroded nominal gains in labor productivity. Like boots on a sawdust floor…one step forward and two steps back.
