This is a question that few hospitals take the time to calculate and a few may not even know how to answer. One thing is for certain, the cost of a leadership vacancy is higher than you think!
The reason it is important to answer this question is because while healthcare is about helping people, it is still a business. It is a business where it is imperative to generate both revenue and profit, regardless if the organization is proprietary or not-for-profit. Healthcare is also a labor-intensive business that is perpetually striving to drive efficiencies to maximize productivity.
The way that hospitals generate revenue and profit is through their people, both employees and contract labor, and the technology in which they have invested. Similar to how hospitals expect a return on investment when they acquire equipment, they should also expect a return on investment from their people. So, what is the expected return on human capital in a hospital and how does that relate to the cost of a hospital leadership vacancy?
Let’s start with the premise that based on the economic landscape faced by hospitals today: consolidation, declining reimbursement, potentially pressure from shareholders, etc. that their employees are operating at full capacity. In other words, the labor model does not allow for an individual to come to work and not be 100% productive. Consequently, when employees leave and a position is vacant a void is created where something is not getting done. Other people can try to pick up the slack until a replacement is hired. But this means something they were doing before is not getting done and / or whatever they have picked up is probably not being done as well as it was before. This may result in an increased probability of error occurring, employee burn-out and degradation of team morale. This has a cost and it is measurable!
Perhaps the quickest way to calculate the cost of a hospital leadership vacancy is to use a compensation multiplier formula, such as:
Net Patient Revenue ÷ (Total Salaries + Total Fringe Benefits + Total Contract Labor)
Based on an analysis of the January 2019 Medicare Cost Reports, the average compensation multiplier, for all hospitals that reported all the variables in the formula, was 2.45. In other words, for every $100K in employee compensation (salary & benefits) a hospital should expect $245K in Net Patient Revenue in return. This works out to a little over $5,100 a week based on an expected annual work schedule.
The research also showed large disparities in the compensation multiplier depending on hospital ownership structure. It ranged from a low of 1.88 for government owned county hospitals to a high of 3.80 for proprietary hospitals owned via a partnership.
Given that we would expect managers, directors and executives to have a larger impact on the organization than an individual contributor, one could argue that the compensation multiplier increases the higher up one goes in the organization.
The question is, now that you know how much a leadership vacancy costs, what are you going to do about it?