With more jobs to fill than ever before, a widening skills gap, and an unprecedented staffing shortage, healthcare talent management professionals are facing an uphill battle where talent markets are tightening and their work is under increased scrutiny. Many talent management leaders are closely tracking key metrics, such as premium labor cost, as a means of understanding the business effects of their talent management practices.
Premium labor cost, in turn, is driven almost exclusively by an organization’s vacancy rate and its overall cost-of-vacancy. Therefore, to fully understand the business impact of its talent management practices, a healthcare organization absolutely must understand its cost-of-vacancy.
What Is Cost-of-Vacancy?
Cost-of-vacancy, the primary driver of premium labor cost, measures the costs healthcare organizations must incur when filling roles to meet mandated patient-to-staff ratios. Organizations can calculate cost-of-vacancy to see how their current hiring and retention efforts are directly affecting the bottom line.
Since organizations that excel at hiring, keeping, and growing top talent will always have a lower cost-of-vacancy than their competition, many consider it an overall performance metric that can help expose underlying inefficiencies in talent management strategies.
“Leading talent management professionals also expose this number as a critical strategy in securing new funds and new headcount within their organizations,” says HealthcareSource CMO David Wilkins. “It’s often unclear how much money is being lost through inefficient processes, prior to uncovering their cost-of-vacancy.”
And there’s good reason why talent managers and healthcare executives find cost-of-vacancy data so compelling.
According to Wilkins, “making the case for spending $200,000 to solve resourcing issues if it can save you $2 million in cost-of-vacancy reductions is a no-brainer.” However, making the case for that same $200,000 in budget is all but impossible without first quantifying the underlying pain, he says.
In order to recognize how cost-of-vacancy can expose red flags within an organization’s talent management efforts, you must first examine which factors contribute to the overall cost-of-vacancy for a given position.
What Contributes to Overall Cost-of-Vacancy?
According to Lean Human Capital by HealthcareSourceSM, an advisory group for healthcare recruiters, three main variables contribute to cost-of-vacancy:
- Hard Costs: When a position goes unfilled, the work required of that role needs to be accounted for in one of two ways: Healthcare organizations can choose to cover the vacant position through overtime pay (at 1.5 times the average salary) or through contract labor (at current industry rates).
- Soft Costs: While accounting for vacant hours through overtime or contract labor will physically fill the role, it’s not a true dollar-for-dollar replacement. Overtime and contract labor lacks the productivity of a full-time employee, and therefore soft costs must account for lost productivity. Lean Human Capital references a Harvard University study when discussing cost-of-vacancy that notes that the average employee’s value to an organization is three-times their salary. Since overtime labor is often also overworked and contract labor comes with a learning curve, the labor associated with hard costs can’t fully account for the value lost when a FTE leaves an organization. “Further, many research studies on quality patient care make a point of distinguishing between non-overtime FTEs and OT FTEs,” says Wilkins, “as the latter group often has a reported error rate so high it’s practically comparable to not having someone on staff at all.”
- Lost Opportunities: One of the biggest challenges healthcare talent management professionals face, that their non-healthcare counterparts typically don’t, are mandatory staffing levels. Healthcare organizations must maintain certain patient-to-staff ratios to meet regulatory compliance, and as a result, these talent managers are forced to spend on OT and contingent talent. As Wilkins explains, “if your cost-of-vacancy is already high supporting ‘normal’ operations, then your organization probably can’t go even more ‘in the red’ supporting physical expansions, entering new markets, or starting new service lines.” Simply put, organizations with lower costs-of-vacancy can afford to be more flexible with their resources and therefore can support future investments—or said differently, they’re less likely to create these lost opportunities.
Aside from these three main variables, other factors can act as multipliers for cost-of-vacancy. For example, the overall climate of the labor market, average time-to-fill, and fluctuating market rates for contract labor can all impact your cost-of-vacancy at a given time.
Knowing your cost-of-vacancy can help you identify red flags in your recruiting and retention efforts. For example, “if hard costs are driving your cost-of-vacancy up, then you’ll want to rework your strategy to rely less on overtime and contract labor by doubling down on your employee engagement and development efforts,” suggests Wilkins. “In doing so, you’ll be growing your own talent, and these employees will be more likely to stay at your organization, giving you the ability to hire from within when turnover at key roles, especially in leadership, occur.”
How Do You Calculate Cost-of-Vacancy?
You need to calculate cost-of-vacancy at the job level. So, when thinking about cost-of-vacancy, you shouldn’t be thinking about an overall number for all your recruiting efforts, but rather specifically your nurse or physician cost-of-vacancy, for example. It’s worth noting that cost-of-vacancy can also be calculated at the level of specialties, helping you tell the difference in costs for RNs vs. CRNAs, for instance.
To illustrate how cost-of-vacancy is calculated, imagine you’re a talent manager at a single hospital that is trying to understand its RN cost-of-vacancy. To uncover this metric, your hospital will need to understand its hard costs, soft costs, and lost opportunities.
First, you would find the hard costs by identifying your current total RN staff as well as your current RN vacancy rate. You’ll also want to understand exactly how much the average RN salary is and the current market value of contract RN labor in your region.
Calculating hard costs also requires that you break down the methods you use to fill RN vacancies by overtime and contract labor, as well as the percentage of vacancies that have to go unfilled. For example, let’s say you’re going to fill 40 percent of your vacancies with overtime labor, 40 percent with contract labor, and 20 percent of vacancies will go unfilled.
Soft costs, on the other hand, require a much more involved calculation that incorporates both clinical error rates and patient satisfaction scores as related to both OT and contract labor. “For example, if patient satisfaction dips below a certain level due to your percentages of OT and contract labor, then there are reputational impacts that will negatively affect revenue, and thus need to be accounted for in soft costs,” Wilkins says. “Further, if readmission rates are too high, you could be subject to CMS withholdings; or, if clinical outcomes or HCAHP scores are impacted, these could also hurt reimbursements.”
By combining the data you’ve collected around hard costs with the soft cost numbers, you can accurately calculate the total costs of overtime and contract staff covering the vacancies.
You can also factor lost opportunities into this equation to get a more complete picture of the effect cost-of-vacancy has on your organization, but Wilkins notes that the resources needed to do so make it very difficult for the average organization to execute against. Further, given how often the data required to calculate lost opportunities — and soft costs, for that matter — changes so frequently, it can sometimes lead to inaccurate results.
“We often suggest focusing primarily on hard costs because they are the easiest to calculate, give you the most accurate reading while expending the least amount of resources, and it’s easily defensible when leveraging cost-of-vacancy for funding and resource pushes,” Wilkins says.
To help you get there faster, we’ve taken our cost-of-vacancy calculation and boiled it down into an easy-to-use survey, based on averages. Find your cost-of-vacancy, today.