Your HR Department…and how it Affects the Bottom Line.
January 1st, 2007 by tpierceby Tari Pierce, M.H.A., Project Manager, Health Care Division
Business is business…and even though most people don’t think of their local hospital as a major corporate entity, they should. Health care organizations, just like other “big business” must make a profit in order to keep their doors open. And, just like any type of business, every department in a healthcare organization impacts the overall bottom line, including the human resource department.
Your Human Resource Department
What does your Human Resource department bring to your organization? True, their day-to-day activities focus on staffing the departments in the facility. However, unbeknownst to many, most HR teams bring so much more to the table, especially in regards to reducing expenditures and capturing new revenue streams for a facility.
A Focus on Retention
Because of the shortages in healthcare, HR departments across the globe are faced with employees that know they can switch jobs at the drop of a pin. When you factor in employee burn-out, lack of work/life balance, and too much stress, many hospitals are seeing higher percentages of turnover in most areas including both clinical and non-clinical areas.
Currently, the Bureau of Labor and Statistics estimates the annual health care staff turnover across the nation at 20%. In laymen’s terms, that means if you have a hospital with 5,000 employees, your recruiter would have to replace 1,000 individuals. And, that number doesn’t include new positions needed to staff new floors and/or units. Unfortunately, turnover not only creates additional work for the recruiters by requiring them to replace exiting employees, it affects continuity of care, and therefore patient satisfaction.
The American Hospital Association estimates the average cost of replacing one staff nurse equals 100% of the annual salary for that nurse. If that is the case, the costs associated with turnover are staggering.
For example, in Washington State, the Washington State Hospital Association reported that in 2005, there were 1,900 registered nurse vacancies in Washington State hospitals alone. At a median annual salary of $65,000 for RNs, it adds up to a $123 million problem that hospitals and their recruiters are faced with1. The potential for savings is huge. If hospitals in Washington could reduce their turnover by only 4%, they would save almost $5 million annually.
Recruiters are also focused on reducing the time needed to fill a vacancy, which in turn reduces expenditures. By utilizing a cost of vacancy formula, facilities can “see” the amount of money saved by cutting days-to-fill in regards to hiring new employees. And, just by cutting a few days, hospitals are seeing big savings.
Retention of staff also correlates to the bottom line in terms of hospital billings. In a study by the Voluntary Hospital Association, research showcased how facilities with high turnover (21% or more) had an average length of stay of 5.02 days; medium turnover (12-20%) had a length of stay of 4.81 days, and low turnover correlated with a length of stay of 3.81 days2. It also showed a marked increase in cost per adjusted discharge compared to turnover – high turnover (21% or more) had costs of $7190; medium turnover (12% - 20%) had costs of $6120, and low turnover (11% or less) had costs of $52682. Not only does this show an increase in the average cost-per-discharge of patients, it also demonstrates a substantial decrease in profitability. These numbers show how important it is to retain staff, and how a lack of continuity of care can cost the facility money.
Effective HR Practices
Successful Human Resource departments are currently shifting in their mentality of who to hire. While recruiters are cognizant on decreasing time-to-fill and increases seen in employee turnover, they also are making sure that they are finding applicants with the best ‘fit’ for the organization, instead of just the person whose experience most closely matches the job title.
A two-year study conducted by Cornell University found that businesses that invest in formal employee selection, management and retention strategies see direct, quantifiable results to the bottom line. Organizations that implement workforce alignment practices show 22.1 % higher revenue growth, 23.3% higher profit growth and 66.8% lower turnover than companies that do not. Overall, organizations with a well-aligned workforce perform 39% better than companies with less effective strategies3.
By hiring smarter, and through stronger retention practices, which make for happier employees, health care facilities are reaping other cost-saving rewards. Consider absenteeism. Bearing in mind that paid leave is one of an organization’s most expensive benefit, the thought of reducing overall absenteeism should be a huge priority. However, currently fewer than 20% of large companies calculate the direct and indirect costs associated with absence and only one-third track the use of leave. For those that do track, many are starting to realize that these costs can quickly add up. The direct and indirect costs of absenteeism can add up to 15% of their total payroll. Unbelievably, an organization with 20,000 employees, absenteeism’s total cost can exceed $45 million per year4.
As seen in the 2006 CCH Unscheduled Absence Survey5, the rate of unscheduled absenteeism has climbed to its highest level since 1999, which costs organizations big bucks each year in direct payroll costs, lost productivity, temporary labor costs, and employee morale. And, the survey also shows that organizations with low employee morale reported 70% of unscheduled absences were attributed to reasons such as stress, entitlement mentality and personal needs, other than personal illness.
What Next
Tremendous cost savings can be realized once your organization has determined the reasons for its turnover, and then works on resolving them. What is that turnover costing your organization, and how much are you spending on replacement costs? Depending on the position, replacement costs, lost of productivity and temporary staffing can cost the facility between 50% and 150% of an individual’s base salary. And, what is the overall morale for the employees who are on the units and in the departments? Were they hired to fit the organization, or to just fill a ‘hole’? Are they happy in their jobs, or are they planning on leaving in the next year?
Many HR departments have a firm grasp on these metrics, and are working diligently to reducing the overall cost associated with them. And, by doing so, these HR departments are showing that they are doing more and being more strategic than just hiring to fill a vacancy. Their hard work and diligence is affecting the organization’s bottom line.
References:
- Sheenan, P. (2006) Cutting staff turnover helps patients and profits. Puget Sound Business Journal (Seattle)
- Gelinas, L,. & Bohlen, C. (2002). The business case for retention. Journal of Clinical Systems Management, 4(78), 14-16, 22.
- Collins, C. (2006). Effective HR Practices Benefit the Bottom Line. HRMagazine, 51(9), 14.
- Navarro, C., & Bass, C. (2006). Guidelines for Managing Employee Absence. Benefits & Compensation Digest. 43(9) 32-34.
- CCH (2006). Absenteeism Survey Issue – HR Ideas & Trends. http://hr.cch.com/products/ProductID-4385.asp