Deloitte’s Chip Newton: Where your practice is overspending on labor

When it comes to finding waste in their labor costs, healthcare leaders need to sweat the small stuff, according to Chip Newton, senior manager at Deloitte Consulting LLP.

With labor expenses comprising more than half of total operating costs for most hospitals, smaller problems can add up to have a much larger impact on profitability. HealthExec spoke with Newton on where leaders can commonly find where they’re overspending on labors, how much it’s costing them and how to engage multiple departments to cut down on waste.

HealthExec: In what areas do you typically see much of the overspending on labor in healthcare?

Chip Newton: One of them is incremental overtime. There’s regular overtime, the hours you work over 40 that you should get paid overtime for, but then there’s incremental overtime that contributes to those hours as an overspend. It’s unintentional, generally. Sometimes it could be a negative behavior by an employee. Examples of it would be on-call that is never called back. I’ve seen clients where they’ll have clinicians on call for 1,000 hours in a year and not one time called them back. So (it’s) pretty expensive insurance.

Another example might be cancelled meal breaks. This is where you cancel your break, either at the clock-in device or telling the manager, and the reality is you were sitting doing paperwork at lunch and you did have your meal. That’s real common and those kinds of situations are hours, 30 minutes here, 15 minutes there and those really do add up and they’re almost always paid at a premium rate.

Besides incremental overtime, another category is contingent workers. I see a lot of providers who are not managing the contingent workforce well. Either they have too few or too many and they don’t ever correlate those to the per diem contract they have, they’re not making them work to their actual contract. Instead, those hours they’re not making (contingent workers) work, they’re putting their regular employees to work, which are almost always paid at a higher rate. It’s those kinds of things I would say are main drivers for excessive overspend and labor costs.

What percentage of this spending beyond what’s been budgeted is truly avoidable?

I’ll give you an easy number to think. Think about a provider which has 10,000 employees and they have about a $1 billion annual payroll. We find anywhere from 0.75 percent to 1 percent of their total payroll being amenable and unintended overspend. So that’s anywhere from $7.5 million to $10 million annually they could be taking out of their cost structure.

Are these new areas where overspending has recently become a problem or a more familiar problem for providers?

Some providers are aware of this and have taken steps to try to address it, however most providers don’t have visibility into this. That means they anecdotally know (an employee) is canceling meal breaks and they’re paying him more overtime, but they don’t have a full view. They also often don’t have a contextualized view of the analytics from their workforce systems, so I’m seeing a shift where CFOs, chief human resource officer, CNOs and COOs are really focusing on the data they can mine from workforce management, time, scheduling and budget system because that’s the system all those folks talk and have really good details in there about why things are the way they are. Some clients do have an understanding but they don’t know how to mine it and they don’t know how to get after it.

Do leaders see this as sort of small potatoes, such small increments adding up, that they don’t think they can do anything about it?

I think that’s their initial reaction until we can point out to them how you can get a hold of it, not only see it but fix it and then fix it before it happens. So within a pay cycle, having them see what’s happening and have the right kind of predictive analytics or contextual analytics that helps you know where it’s coming from and doing something about it, pull the right levers to remediate it. I think you’re right initially, they think it’s death by a thousand cuts, but they do realize they have to get their arms around it—65 to 70 percent of their total cost structure is labor, so any they can get out they’re interested in trying to do that.

How much of the solution is hiring or firing employees?

It can be part of the solution, but what I think they need to do is not cut FTE (full-time equivalent) workers initially. First, get the overspend out because that will help make existing FTE highly productive, highly efficient. It will help them be more engaged, meaning it will more be fair and equitable hours worked. You’re not working folks three shifts overtime in a row, that kind of thing. For clients that might want to consider hiring changes, one of the things they should look at is of their current overtime spend, their incremental overtime spend, how much of that is really due to outstanding open positions that you have that are contributing to that department or group spending overtime.

I’ll give you one example. One client had about 1,000 open positions and only 64 FTEs. Of the 1,000 open positions, 64 FTEs were contributing to over $3.5 million in overtime. We said if you hire them within the next 90 days, you’ll reduce your overall overtime spend by $3.5 million almost immediately. These weren’t high-demand jobs, like surgery and others. They were maintenance and engineering and other pieces of the organization that had been overlooked because they were just focusing on the clinical jobs.

So what do different departments need to do together to address these issues?

We recommend something called a workforce management center of excellence that includes the C-suite-level stakeholders and a core team that helps focus on things like the time and scheduling systems, but also the pay policies and practicing. That’s where HR and the clinical operations people get engaged because those things are generally very outdated. They’ve had the same pay practices for 15 years and with all this consolidation, they’ve never updated it or reevaluated it. The other thing is process. There’s a lot of clinical operational process inefficiency some of which is due to poor individual processes. So that’s what we would recommend, along with having a regular discussion of what their goals are and what metrics they’re using around the workforce. It can’t just be productivity or just quality. It needs to be metrics around employee satisfaction, patient satisfaction and also workforce-related metrics like incremental overtime and regular overtime, and of course productivity.

Do you see different levels of overspending when comparing smaller and larger providers?

I don’t think there’s a correlation really. One client we just worked with had 8,500 employees and had nearly 1 percent total improvement opportunity, versus one of the largest Catholic health providers in the country had almost 1 percent, as well. This is one of those things that has been on the backburner because providers have had other fish to fry around compliance, the (Affordable Care Act), regulatory issues, they’re trying to do (electronic health record) implementation, so I think they just had other priorities. But I’m seeing a large shift to getting the analytics around our people and understanding not only how we can manage our costs but also manage them to be more effective and more efficient.