The Biggest Single Cost of Healthcare

by | Jun 5, 2013

There was an interesting article in my local print newspaper over the weekend. The St. Louis Post-Dispatch talked about recent hikes in pay of hospital CEO’s. You can read about it here: http://www.stltoday.com/business/local/hospital-ceos-see-double-digit-pay-hikes/article_431263e2-81c9-5367-b0bd-f48885169adb.html

What caught my eye was not the primary premise of the article. From my perspective, hospital CEO’s are like CEO’s in any industry and are well deserving of the salaries they receive. I don’t see the point of expecting executives to work for peanuts just because a hospital is in the business of providing patient care services, no more than you would expect a grocery store executive to make minimum wage in order to keep the cost of vegetables low because people have to eat to stay alive.

What you should notice, however, are some very significant statistics that are cited. Check out these statements:

  • It’s not uncommon for labor to exceed 50 percent of a health system’s budget.
  • In 2011, BJC’s labor costs accounted for 48 percent of its annual expenses.
  • BJC[‘s]…operating revenue totaled about $3.6 billion in 2011…
  • The health system paid about $1.7 billion in salaries and benefits in 2011 to its 28,559 employees…

[Side note: Before I began consulting, I was employed at BJC Healthcare from 2006 to 2009 and can attest that those labor costs sound reasonably accurate.]

It is this scale of labor dollars and how it is overlooked that continually shocks [SHOCKS!] me. Read that last point again – $1.7 billion dollars in salaries and benefits.

If you read the whole article, you can quickly see the not-very-subtle point the author is trying to make. My paraphrased version: “Healthcare is a growing cost in this country and hospitals talk about cutting costs, but look how much they pay their executives!”

To me, everything about that is a great call to action, except the focus on the executives. That misses the point.

Here’s what I mean:  BJC’s CEO compensation in 2011 was about $3.3 million according to the article. That’s about 0.19% of the health system’s total labor cost. And I’m supposed to think that reducing that is a big deal to the total cost of healthcare? What about the other $1.6967 billion? Wouldn’t you get a much bigger “bang for the buck” if you could do something to reduce the overall labor cost even just 1%? At BJC in 2011, that tiny reduction would have resulted in savings of $17 million!

The biggest single cost of healthcare today is: Labor.

Hospitals that are serious about reducing costs address…labor. But you can’t (or shouldn’t) just go in a slash labor to reduce costs – that would negatively impact patient care. So you have to make improvements in how you deploy your staff (through scheduling) and monitor that deployment against patient care (productivity) in order to – and don’t miss this – reduce costs while improving patient care!

When I go and talk with health systems about their staff scheduling and productivity systems and processes, it is often not a priority – not in the budget to improve or not high on the pecking order of projects to be addressed. This baffles me. How is something like “making improvements to labor costs while improving the delivery of patient care” not on every hospital executive’s mind?! It impacts a cost that is half of the hospital’s operating budget and improves the hospital’s product (patient care).

I know it is human nature for us everyday folks to be surprised at how much executives make and compare that to how much (or little) we make. And it is easy to draw conclusions with that emotional comparison about the cost of healthcare. But the real story is in the numbers and lies elsewhere. For you and me both, I hope that hospitals can see through the noise to what really needs to be addressed.

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