Adapt to higher labor costs and worker scarcity
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“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.”
– Sam Ewing
“Invest in inflation. It’s the only thing going up.”
– Will Rogers
Anecdotally, since the world — and ophthalmology — started opening back up again, it has become harder and more expensive to find and hire practice staff.
The country’s major corporate employers are resetting their starting wages. Shops on Mainstreet are competing with McDonald’s for entry-level workers. And depending on where you live, once plentiful pre-COVID experienced tech applicants, at $18 or $20 per hour, may now be fetching more than $25 per hour.
This rising observation has many drivers.
The most acute — and now fortunately waning — driver has been the availability of supplemental federal unemployment benefits. These benefits, added to state unemployment insurance, have provided an understandable incentive for workers to stay home.
This has not been a moral failing on the part of workers, but the simple (if unintended) consequence of overly generous benefits, combined with parents having to drop out of the workforce to care for their homebound kids.
Part of the problem is the ongoing, long-standing decline in the “workforce participation rate,” exacerbated sharply by the pandemic. This participation rate is the sum of all U.S. workers (employed or seeking a job) divided by the available working-age population. As you can see from the graph, the participation rate has dropped about five percentage points in the last 20 years and swooned an additional three percentage points in a single year with COVID-19.
Supply and demand rule the day — when labor becomes scarce, its cost rises.
On top of that, emergency federal spending to counter the pandemic has sprinkled helicopter money over the land. Some of it landed on you in the form of Paycheck Protection Program funds. And household savings are plump from a year of tapered spending. That is a lot of money sloshing around, all at the same time that manufacturing and services are just getting back up to speed. More money chasing fewer goods and services leads to price gains, which may be transient, enduring or even the start of the kind of extreme inflation seen in the 1970s. It is too early to tell.
Even if wage inflation turns out to be transient and tames down as people return to work, the impact on your practice will be lingering. Not only will your new hires in the quarters ahead demand higher wages, but your existing workers will quite understandably expect their own incomes to rise to higher market rates.
Here are eight practical things you can do to brace for and at least to some degree mitigate the impact of what will hopefully only be transient conditions.
1. Take stock of your unique situation. If you practice in competitive, costly suburban and urban America, your business model may need adjusting. Maybe lots of adjusting. But if you practice in rural America, you might as well turn the page; the jobs you fill are probably already among the best paying in your community, and you will experience little if any wage demands from workers and applicants. (And in any case, most of your other costs are lower as well. Once again, at least in business terms, rural practice beats urban practice hands down.)
2. Reduce staff turnover. The average practice loses about one in five workers each year. If you have more workers to replace, your recruitment challenges and across-the-board labor costs will rise. When staff learn that other practices in town are paying more, your turnover rate will rise. Stay a bit ahead of the wage inflation curve, and revise hourly wages accordingly.
3. If you are obliged to raise staff compensation, try to do so with a quarterly bonus program rather than by raising base wages. If the labor market loosens back up in 2022 and beyond (as many suspect will be the case), you will not have locked in higher hourly rates.
4. Remember that people work for money, but even more, they work for respect, appreciation, kindness, and warm relations with patients, peers and bosses. If you are in a tight position and cannot afford to pay your people more, you had better love them more. Compliment their accomplishments. Avoid undue or disproportionate criticism.
5. Harness any worries you have about looming wage escalation to closely examine and boost labor productivity and efficiency. Here is one of many examples:
- Imagine a general practice seeing 500 patient visits per month with four full-time techs (inclusive of workups, testing and scribing).
- With 173 labor hours in a typical working month for a full-time worker, that comes in this practice to [4 techs × 173 hours/month]/500 visits = 1.4 tech hours per visit.
- The norm for this “tech hours per visit” benchmark in a general practice is 1.0. (It is 1.1 in a pure LASIK practice and 1.3 in a retinal practice. All of these benchmarks can be found in John Pinto’s Little Green Book of Ophthalmology, published by SLACK Books.)
- So, on paper, this practice is quite inefficient — overstaffed by 40% in the tech department.
- The practice has four options:
- Boost patient volumes — in this example, to nearly 700 per month so that all tech time is being efficiently used.
- Reduce tech numbers to the ±3 full-time staff that are actually needed in this setting.
- Reduce some tech hours worked per week so you are only paying for about 500 hours of tech labor in a month.
- Live with low tech labor productivity and try to find savings in other areas.
6. Boost your own productivity as a surgeon. The typical ophthalmologist generates about $200 in net revenue per average patient visit and spends about 30% of that, or $60, on the roughly 2.5 hours of lay labor it takes to transit each visit. If you can boost your net revenue to $240 (a more surgically dense practice due to better referral patterns, higher refraction fees, more assertive testing where clinically indicated), that same $60 in labor costs is reduced from 30% of cash flow to 25%, giving you some room to move when wage costs climb. If you cannot boost your average revenue per visit, boost the number of visits using the same staff resources.
7. Realize that 80% of labor productivity on the clinic floor is driven by the ophthalmologist. If you arrive late, check email between encounters, go out for extended lunch breaks or get overly social with patients when you are running behind, you will condition your staff to adopt your same inefficient habits. And vice versa: If you buzz through the clinic in a purposeful, caffeinated state and stay on the clinic floor throughout the session, your staff will rise to your energy level.
8. And finally, you may have to surrender a bit to the trending conditions of higher labor costs and accept lower profit margins. As one hospital administrator I know said during the run-up in nursing wages a generation ago, “I can’t run a hospital without nurses. So, whatever the market rate for RNs rises to, I’ll pay it.” For the last 50 years, real wages have been falling. Some would say it is about time that nonprofessional, nonexecutive pay gets a topping up.
- Reference:
- 25-year U.S. labor participation rate. https://tradingeconomics.com/united-states/labor-force-participation-rate.
- For more information:
- John B. Pinto is the author of several books on ophthalmic practice management, including John Pinto’s Little Green Book of Ophthalmology: Strategies, Tips, and Pearls to Help You Grow and Manage a Practice of Distinction, UP: Taking Ophthalmic Administrators and Their Management Teams to the Next Level of Skill, Performance, and Career Satisfaction (with Corinne Wohl), Simple: The Inner Game of Ophthalmic Practice Success, and Ophthalmic Leadership: A Practical Guide for Physicians, Administrators, and Teams. Available now for purchase at slackbooks.com. Receive 20% off with promo code PINTO20. He can be reached at 619-223-2233; email: pintoinc@aol.com; website: www.pintoinc.com.
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