Controlling Labor Costs in Healthcare: Tips for Improving Medical Facility Profitability

Written by , Healthcare Workforce Trends
April 15, 2024

As a healthcare administrator nearing the end of the fiscal year, you’re facing a major challenge. Labor costs have skyrocketed, and the amount of staff leaving due to burnout exacerbates the situation.

Finding effective solutions to curb the rising labor expenses has become your top priority. The healthcare industry is grappling with significant changes in managing labor costs. 

In this article, we’ll delve into the key drivers of labor costs in healthcare by examining the current trends. We will also explore 10 practical solutions tailored to help healthcare facilities effectively control labor costs. 


Table of Contents


key drivers of labor costs in healthcare


Why Is It Important To Control Labor Costs in Healthcare?

Labor costs consume a significant portion of healthcare budgets, demanding efficient management. Staffing, salaries, and benefits contribute significantly to operational expenses. 

Effectively controlling labor costs is essential for profitability and ensures optimal resource allocation and investment in other critical areas. This promotes flexibility for potential changes in the economy.


What Is the Current Trend in Hospital Labor Costs?

The healthcare industry has faced significant changes over the past several years, with labor costs emerging as a critical concern. Healthcare costs in general have been expected to rise 7% in 2024, driven by several key drivers of labor costs in healthcare:

  • Increased demands: The aging population and expanding healthcare needs intensified demands for medical services, increasing labor costs. Length of hospital stays has also increased, raising labor costs associated with prolonged patient care. 
  • Staffing pressures: Healthcare workers, both employed and contracted, are working longer hours to meet patients’ needs, resulting in more overtime hours. 
  • Change in workforce dynamic: Healthcare facilities are relying on more expensive contract labor as well as increased demand for other positions related to electronic medical records, IT, and other initiatives. 
  • Supply chain challenges: Disruptions in the supply chain have led to shortages in medical supplies. Healthcare facilities have incurred additional labor costs in sourcing solutions to the evolving market dynamics.
  • Inflation: Inflation pressures impact all labor sectors, and healthcare is no exception. According to McKinsey, clinical labor costs are rising steadily above inflation rates, and non-clinical labor costs are experiencing even higher inflation rates. This further exacerbates the financial strain on healthcare organizations. 


10 Methods of Controlling Labor Costs in Healthcare

Given the challenges highlighted, healthcare facilities must implement effective management strategies to control labor costs while still ensuring the highest quality of patient care.

In the following sections, we’ll explore 10 key strategies to address the key drivers of labor costs in healthcare. 


#1: Consider Flexible Staffing Models

Adopting a flexible staffing model is one strategy for cost optimization for controlling labor costs in healthcare. A balance is needed to effectively manage patient census while also balancing human resource allocation and its associated costs. 

Flexible staffing options such as float pools and temporary hires are one-way healthcare units that can meet the fluctuating demands of patient census while mitigating the impact of labor shortages. 


#2: Take Advantage of Technology

In the rapidly evolving landscape of healthcare, technology plays a pivotal role in transforming patient care and improving operational efficiency. Recent years have witnessed a surge in technological advancements with the widespread adoption of telehealth and electronic medical records.

Some new areas of focus in technology in healthcare include:

  • Automation: Simplifying tasks such as appointment reminders, scheduling, and claim processing are all ways to enhance operational efficiency in healthcare.
  • Artificial Intelligence (AI) integration: From interacting with patients via chatbots to complex applications like precision medicine for diagnosis, AI holds immense potential in optimizing healthcare delivery.

While some technologies are still in the research phase, healthcare companies need to stay on top of these advancements. 

Leveraging technology not only streamlines processes but also aids in reducing labor costs by alleviating time-consuming tasks, allowing healthcare professionals to focus on higher-value tasks.


#3: Utilize a Healthcare MSP (Managed Service Provider)

A healthcare MSP can significantly leverage technology to enhance operational efficiency and mitigate labor costs for healthcare organizations and clinics. By centralizing and simplifying the staffing processes, MSPs alleviate the strain of rising labor costs by:

  • Providing a reliable source of contingency workers,
  • Handling the onboarding process,
  • Managing scheduling and shift assignments
  • Ensuring compliance with regulatory requirements for workers

As a healthcare MSP,  Trusted Managed Services specializes in providing comprehensive staffing solutions tailored to the unique needs of our healthcare facilities. Our platform centralizes the staffing process from recruitment to onboarding.


controlling labor costs in healthcare


#4: Implement Data Analysis and Tracking

Data is extremely useful in identifying inefficiencies and maximizing profitability in labor costs. Within electronic medical records lies a wealth of valuable data. 

Some examples of questions to consider in leveraging data analytics to reduce labor costs in healthcare include:

  • How can we identify patterns in patient admissions and discharges to adjust staffing levels and reduce overtime costs?
  • Are there trends in patient length of stay that can inform resource allocation?
  • What are the peak hours of patient demand? Are there busier seasons that demand more contingency staff?
  • Are there correlations between staffing levels and patient outcomes?


how to control labor costs in healthcare


#5: Use a VMS (Vendor Management System)

Paired with an MSP, a VMS provides an invaluable service for reducing labor costs. VMS software automates and streamlines sourcing, acquiring, managing; and paying contingent workers.

It also enables companies to track metrics such as spend, candidate information, and payroll data. 

Partnering with a healthcare MSP like Trusted Managed Services allows you to utilize the benefits of a VMS seamlessly. The expertise provided by Trusted Managed Services streamlines the entire process and ensures full utilization of the VMS functionalities.  


controlling labor costs in healthcare


#6: Create a Contingent Staffing Strategy

When staffing healthcare facilities, administrators must balance patient demand while maintaining the highest quality of care. 

Through the support of an MSP, administrators can strategically use contingency staff such as:

  • Per-diem staff, who offer flexibility in scheduling to accommodate fluctuating census.
  • Temporary workers, who provide short-term assistance during peak periods or staffing shortages.
  • Travel staff, who are available to fill temporary positions in healthcare facilities.
  • Contract workers, who offer specialized experience for certain situations.


#7: Reduce Turnover Costs

Staff turnover in healthcare is on the rise due to staff burnout, and labor shortages, and a large segment of the workforce is retiring. While there’s not a single solution to combat this challenge, leveraging contingency staff can help alleviate strain on permanent staff. 

Other strategies to address turnover include:

  • Providing staff support resources
  • Prioritizing staff safety
  • Offering comprehensive training
  • Offer competitive compensation


#8: Reduce Overtime Costs

A recent study highlighted a concerning trend — the highest number of logged overtime hours ever. Given federal law mandates time and half the regular rate of pay after 40 hours of work in seven days, addressing this issue becomes critical in controlling labor costs in healthcare.

Leveraging data from a healthcare MSP like Trusted Managed Services enables administrators to identify trends and opportunities for correcting this overtime surge. By strategically using contingency staffing, healthcare facilities can reduce overtime hours.


#9: Regulate Rates

One significant benefit of partnering with healthcare MSPs is their ability to regulate labor rates effectively. By standardizing rates across all vendors, MSPs ensure fair pricing and prevent price gouging.

This approach helps healthcare facilities maintain cost control and transparency. Healthcare facilities can confidently engage with vendors knowing that they’re receiving fair pricing and that there are no hidden costs or surprises. 

By ensuring fair pricing and fostering a competitive marketplace, healthcare facilities can achieve overall cost savings while also strengthening partnerships between healthcare facilities and vendors. 


#10: Let Someone Else Cover Compliance Costs

How can hospitals reduce labor costs? Have someone else pay for it! 

This may be surprising, but MSPs come at no cost to healthcare facilities. So how does it work?

Instead of passing on costs to the healthcare facility, MSPs like Trusted Managed Services charge the staffing vendors within their managed system. 

MSPs also cover compliance-related expenses that typically healthcare facilities have to cover when hiring. This includes the costs associated with:

  • Medical certifications
  • Recertifications; and
  • Other compliance measures

These savings are factored into the bill rates charged to the facility, making it a cost-effective solution for staffing needs while also ensuring that staff members comply with regulatory standards. 


labor costs in healthcare


With Trusted Managed Services, Controlling Labor Costs in Healthcare Is Easier Than Ever

In a challenging economic market, maintaining the delicate balance between delivering exceptional patient care and controlling labor costs in healthcare is essential. With labor costs being a significant expense, healthcare facilities must explore innovative strategies to maximize their profitability.

Trusted Managed Services recognizes the pressures faced by healthcare administrators and offers a no-cost comprehensive solution tailored to meet the evolving needs in healthcare.

By partnering with us, healthcare facilities gain access to:

  • A centralized contingent staffing solution that streamlines the recruitment process to onboarding.
  • A unique model that charges staffing vendors and ensures that facilities can reduce financial burdens. 
  • Coverage of compliance-related expenses, enhancing regulatory compliance, and reducing financial impact. 

Trusted Managed Services empowers healthcare facilities to navigate the complexities of labor cost management with confidence.   


controlling labor costs in healthcare

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