How to Calculate Cost-of-Vacancy for Healthcare Hiring

Man calculating cost on computer

With more healthcare jobs to fill than ever before, a widening skills gap, and an unprecedented staffing shortage, healthcare talent management professionals face an uphill battle. On top of those challenges, their work is under increased scrutiny and the pressure’s on to track and deliver key metrics—such as premium labor cost—to leaders as a means to demonstrate 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 must understand its cost-of-vacancy. Here's some information to set the stage and guide you in accomplishing that task.

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.

Because 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 essential 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. Failing to calculate cost-of-vacancy also makes it difficult for an organization to identify how much money is being lost through inefficient processes.

And there are yet more reasons why talent managers and healthcare executives find cost-of-vacancy data so compelling. Securing budget in today’s healthcare systems is a challenge because there are so many competing investments. However, making the case to spend $200,000 to solve resourcing issues that, for example, could ultimately save an organization $2 million in cost-of-vacancy reductions might push the request to the front of the long line.

To recognize how cost-of-vacancy can expose red flags in an organization’s talent management efforts, you must first examine which factors contribute to the overall cost-of-vacancy for a given position.

What factors contribute to cost-of-vacancy?

There are three main variables that contribute to cost-of-vacancy:

  1. 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 (often at 1.5 times the average salary) or through contract labor (at current industry rates).

  2. 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. Research regarding cost-of-vacancy indicates that the average employee’s value to an organization is approximately 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 full-time employee (FTE) leaves an organization. Further, many research studies on quality patient care make a point of distinguishing between non-overtime FTEs and overtime FTEs, as the latter group often has a reported error rate so high it’s practically comparable to not having someone on staff at all.

  3. Lost opportunities: One of the biggest challenges healthcare talent management professionals face that their counterparts in other industries typically don’t are mandatory staffing levels. Healthcare organizations must maintain certain patient-to-staff ratios to meet regulatory compliance. As a result, these talent managers are forced to spend on overtime and contingent talent. If an organization’s cost-of-vacancy is already high supporting “normal” operations, it’s unlikely the organization is readily equipped to support vital growth initiatives such as:

    • Physical expansions
    • Entrance into new markets
    • The establishment of 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 experience lost opportunities.

Aside from these three variables, other factors can act as multipliers for cost-of-vacancy. For example, the overall climate of the healthcare workforce 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 also help you identify red flags in your recruiting and retention efforts, a key part of workforce management. 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. 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, occurs.

How to calculate cost-of-vacancy

Calculate cost-of-vacancy at the job level. So, in considering cost-of-vacancy, you shouldn’t think about an overall number for all recruiting efforts, but rather specifically your nurse or physician cost-of-vacancy, for example. It’s worth noting that you can also calculate cost-of-vacancy at the specialty level, helping you tell the difference in costs for registered nurses (RN) versus certified registered nurse anesthetists.

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.

  1. 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% of your vacancies with overtime labor, 40% with contract labor, and 20% of vacancies will go unfilled.

  2. 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 overtime and contract labor. For example, if patient satisfaction dips below a certain level due to your percentages of overtime and contract labor, then there are reputational effects that will negatively affect revenue, and thus need to be accounted for in soft costs. Further, if readmission rates are too high, you could be subject to withholdings from the Centers for Medicare & Medicaid Services. Or, if clinical outcomes or HCAHP scores are impacted, these could also hurt reimbursements.

  3. 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 complete picture of the effect cost-of-vacancy has on your organization. However, the resources needed to do so make it difficult for the average organization to execute against. Further, given how frequently the data required to calculate lost opportunities—and soft costs, for that matter—changes, it can lead to inaccurate results.

To combat this, experts suggest focusing primarily on hard costs. The reasons: they are the easiest to calculate, give you the most accurate reading while expending the least amount of resources, and are easily defensible when leveraging cost-of-vacancy for funding and resource pushes.

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