Managing Labor Costs – Back to Basics

Addressing high labor costs is a pressing concern for hospitals and health systems and effective management of these costs is essential for maintaining financial health. In this post, we’ll examine critical success factors for labor cost management (LCM) that organizations should consider. 

“Healthcare is a labor-intensive industry, and labor expenses account for more than half of a hospital’s operating budget. The cost of labor is increasing faster than inflation and patient revenues, and this trend is expected to continue.” American Hospital Association (AHA) Report 

Setting the Stage 

Before we dive into the critical success factors, it’s important to understand the challenges organizations face when it comes to labor costs.  

  • Expense Management: Labor expenses are the largest percentage of overall expenses for hospitals and health systems. It is essential to understand the difference between controllable and uncontrollable labor expenses. 
  • Labor Shortages: The healthcare industry is experiencing shortages across multiple job categories, including nurses, physicians and support staff. 
  • Aging Workforce: A large portion of the healthcare workforce is approaching retirement age, leading to higher likelihood of staff shortages. 
  • Generational Changes: As the healthcare workforce ages, younger generations are entering the workforce with different expectations and motivations. 
  • Competitive Marketplace: Organizations must compete with other employers to attract and retain staff. 
  • Desire to Work in a High-Performing Environment: Employees want to work in an environment where they can make a difference and provide high-quality care. 

Critical Success Factors 

To effectively manage labor costs, leaders must focus on the following: 

  • Operations Ownership: Effective LCM requires ownership from the operations team. The finance team should work closely with operations to develop and implement a strategy, but it should be operations-driven. 
  • Leadership Involvement: Front-line leaders have a critical role to play. They are responsible for managing schedules, monitoring productivity and ensuring staff are meeting performance expectations.  Buy-in is essential as performance is driven by the impact of the decisions made by these leaders every day. 
  • Staff Engagement: Involving staff in the process can help to identify areas for improvement. Staff provides valuable feedback on workload and productivity measures, and they help to identify areas where efficiency can be improved. 
  • Data Emphasis: Organizations must ensure that their data is available, accurate and accessible.  Data on hours and workload must be readily available for analysis, workload measures must match true workload and data must be available in a timely manner to allow for effective decision-making. 
  • Improvement Orientation: Organizations should be comfortable using data to drive improvement. This includes being able to respond and make changes quickly and a willingness to be vulnerable by acknowledging areas where improvements are needed. 


Effective LCM is critical for hospitals and health systems, especially in the current economic climate. The industry is facing several challenges that impact labor costs, and organizations must have a proactive approach in addressing these challenges. By focusing on the critical success factors outlined above, leaders can develop a strategy that is effective and sustainable. 

About the Author

Jeff Cooper has worked in healthcare and operations improvement for over thirty years.  His experience includes positions with two major Atlanta-based healthcare systems as Chief Operating Officer and Vice President of Operations, where he led teams to drive process improvement, increase employee engagement, and enhance the patient experience.  In addition to his hospital-based roles, Jeff is a Lead Examiner for the Florida Governor’s Sterling/Georgia Oglethorpe Quality Award, an Examiner for the Malcom Baldrige National Quality Award, and is a certified Lean Six Sigma Black Belt.