Inflation Destroyed My Margins, What Do I Do Now?

Health systems need concrete strategies to reduce costs and increase revenue with rapid results. The financial outlook for hospitals and health systems is the worst in decades. Projections are that one-half to two-thirds of the nation’s hospitals ended 2022 with a negative margin. Inflation is driving costs up much faster than the government and private payers are increasing their payments.

“2022 was one of the toughest in memory for hospital business operations, and S&P’s healthcare analysts don’t foresee much changing.” Healthcare Financial Management Association (HFMA) Report

The reality is that executive teams need to figure this problem out, as it is unlikely that the government or insurance companies will rush to rescue healthcare organizations.

Improving their approach to labor cost management is one way to enhance financial performance. This tactic is not “slash and burn” cutting of staff. Instead, it is a designed strategy using analytics, governance, and supportive policies to meet demand with appropriate resources more efficiently. My experience is that most healthcare organizations can save 2-6% of their overall labor expense by taking an intelligent, proactive approach to managing their staffing. While today’s tight labor market makes this strategy more complex, significant results are possible with management buy-in and commitment.

Key Components

Change Management: As with any significant transformation, the path from the old way of doing things to the new is difficult. While the danger an organization faces from negative financial performance is a strong motivator, steering the team through changing old behaviors and embracing new ones takes time and attention.

Analytics: Better data means better decisions. Data needs to be available to hold all levels of management accountable for performance. Optimally, the detail is available to provide managers with daily feedback and warn them about the potential for overtime. The targets need to reflect improvement but should be realistic, or managers will quit trying to achieve them.

Staffing Plans: Each pay period, thousands of decisions made by front-line managers around the clock throughout the organization determine overall performance. Staffing plans are guidelines developed in collaboration with managers to ensure they make the right decisions. More than a guideline that says X patients mean Y staff, each area needs a process or consistent methodology to invest the time during a shift to analyze their upcoming workload needs and make proactive staffing decisions.

Human Resources: HR is essential to labor cost success in today’s environment. Recruiting, retention, supportive policies, adequate pay, and position control are all critical components of meeting the labor needs of the organization as cost-efficiently as possible.

Governance/Process: Proactively managing labor needs to be a priority of an organization. Consistent with the organization’s culture and the amount of oversight required for success, the team needs to design an approach to ensure they get the required results. Executives need to identify negative performance and provide assistance and coaching as needed.

About The Author

John Stigaard has worked in healthcare analytics and operations improvement for over 30 years. His experience includes managing the annual staffing budget process for a single hospital-based health system. He has successfully led the development and installation of labor cost management systems in over a dozen organizations.