Hospitals Launch New Push to Slash Labor Costs
Policy + Politics

Hospitals Launch New Push to Slash Labor Costs


Faced with the prospect that the Affordable Care Act’s Medicare cost control measures will remain in place even if the Supreme Court rules its individual mandate and other insurance reforms are unconstitutional, hospital and physician groups are stepping up their efforts to control spending with a special emphasis on limiting labor costs.

The pressure has become especially acute in states like Arizona, where the leading hospital system now treats more patients on low-paying Medicaid than those who have private insurance. Arizona has been hit hard by the downturn in real estate and other lingering after effects of the Great Recession.

“We face pressures on costs that are enormous,” said Dennis Dahlen, chief financial officer of Phoenix-based Banner Health, which operates 23 hospitals with 37,000 employees in seven western states. “We need to achieve $150 million in cost reductions in the next 12 months.”

To hold down outlays, Banner Health plans to take a close look at its labor costs, which account for half of all hospital spending. A new analysis by Premier Inc., a group purchasing organization for about 2,500 hospitals nationwide, showed a typical 200- to 300-bed community hospital could save over $6 million a year by streamlining processes that take too long or use too many employees.
It also plans to make sure higher-paid employees don’t waste time performing tasks that are more suitable to lower-paid employees – having everyone work at the top of their license, as it is known in an industry categorized by highly credentialed and regulated professions. That could save another $2.4 million a year, the analysis suggested, bringing the savings potential to more than 10 percent of total hospital labor costs.

Other items that should be high on hospitals’ checklists for cutting costs in the next few years, according to the Premier analysis, include reducing excess readmissions within 30 days of a discharge, a situation that Medicare plans to stop reimbursing. That could save a typical hospital up to 9.6 percent of its annual budget. Further reductions in hospital lengths of stay, which have been on a downward arc for years, could cut another 5.4 percent in annual costs.

“We all know that there is opportunity for big savings in health care, but we have lacked specific measures to effectively go after these opportunities,” said Susan DeVore, president of Premier. Its tool for comparing any hospitals against the best performers in the country on labor and supply costs and health care outcomes will “give hospital leaders a road map . . . to wring as much savings as possible out of the system.”