Cutting Health Care Costs: Where to Start?

by Michael Rosenbaum, Founder and CEO, Arena

It’s hardly a secret that the cost of providing health care is escalating and that hospitals are facing ever increasing pressure to control those costs. Almost four out of every five health system executives told an Advisory Board survey that they would have to cut operating costs aggressively by 2018.

The healthcare industry has seen a dizzying array of ideas on how to achieve cost control, from making patient intake protocols more efficient to adopting reverse auctions in procurement. When you look at a hospital’s income statement, however, the biggest category of expense is the people who work there. In a typical hospital, labor represents half of operating costs.

Source: The Advisory Board Company

At the same time, the people who work at a hospital are also its greatest resource. Hospitals need all, from specialist physicians to registered nurses to cooks and maintenance engineers, to provide exceptional care to their patients and ensure that those patients are satisfied with their hospital experience.

One proven way to control labor costs is to reduce staff turnover, which creates a cascade of costs, beginning with severance, unused vacation time, and benefits for departing employees. Turnover also means lost opportunities for revenue: A short-staffed hospital must turn patients away, leaving beds empty, operating rooms dark, and imaging machines dormant.

Until those missing employees are permanently replaced, hospitals must pay overtime to current staff or hire contract workers, often with an added fee to the agencies that supply them. Managers and coworkers must train these contractors, only to do it again for the new employee.

Finding that new employee will require many hours of effort by HR and others, with time spent recruiting and screening and interviewing and reference-checking. And with the healthcare industry adding an average of 32,000 jobs a month in 2016, according to the Bureau of Labor Statistics, employees have an expanding range of options. So job offers may include signing bonuses or relocation costs.

Some of these expenses may sound insignificant on their own, but taken together they add up quickly. The average hospital had a 16.2% annual turnover rate in 2016, according to the latest Nursing Solutions report on employee retention. That number can vary from five to almost 30 percent. And for every one percent reduction in the turnover rate for registered nurses, for example, the average hospital will save $410,500 a year.

At Arena we believe that that the best way to reduce staff turnover is to make better hiring decisions — and the best way to do that is to use predictive analytics based on large amounts of data. Our approach is different from the many organizations that depend on assessment tests to determine whether a given candidate has the qualities likely to make him or her a good fit for a role. As I’ve said before, resumes mainly tell you about someone’s socioeconomic status. Interviews are more useful for recruiting than evaluating talent, since outdated assumptions and unconscious biases inevitably get in the way of human judgment.

The candidates who are the best fit for each role may not be who you think they are. By looking for patterns in large amounts of data, Arena can filter out bias and save healthcare institutions from making costly mistakes. We’ve worked with more than 400 client facilities so far. Every single one of those 400 facilities has seen an improvement in employee turnover, by a median of 38% across every job category. Perhaps most impressive is the resulting return on investment: between 200% and 1,000%.

Contact us today so we can create a customized ROI analysis that shows how much impact predictive analytics can have on your organization.