Controlling Labor Expense: Strategies for Reducing Cost per Volume Unit

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Leadership and Management

Douglas Kramer
Senior Performance Engineer

Kartik Bharat
Operations Advisor Consultant

In most industries it is accepted that increased volumes result in lower costs per unit because fixed costs are spread among additional units. In healthcare, however, we see cost per unit increases during higher volume periods. We will demonstrate why this occurs and four strategies that will control costs.

A basic business concept when trying to determine profitability is the more units of volume produced results in lower costs per unit because fixed costs are spread over more units. Most businesses, however, have more lead time to plan for production than hospitals, which often are planning for resources to match a given volume over the next eight-hour shift. A distribution curve shows how variable actual volumes are compared to the budgeted value, which demonstrates the challenge for department managers. The concept of declining costs per unit is true in hospitals up to the point where actual volume meets the budgeted volume level; then costs per unit actually increase as overtime, agency, auction, and bonuses are heavily used. Hospitals can keep these costs under control by setting up strategies that can ramp up resources quickly and efficiently before the demand actually occurs, including float pools and scheduling software packages. Hospitals should also look at fixed vs. variable FTE when determining productivity and annual budgets. Finally, when FTE reductions or increases are necessary due to changing volumes, we often give the department manager an FTE target, but it is important to make sure changes occur in appropriate skill mix levels.