Reduce premium labor
When it may fit: Contract and overtime drove the increase.
Evidence needed: Premium labor by department and vacancy data.
Trade-off: Reducing premium use without fixing vacancies strains staffing.
Hospital Intelligence Brief
What to Investigate When Labor Costs Rise Faster Than Volume
Labor growing faster than activity is the clearest sign that something other than volume is driving cost. The question is which of several things it is.
1. The business problem
If patient volume grew a little and labor cost grew a lot, what changed?
In a stable operation, labor cost should roughly track activity. When it grows much faster, the gap is a prompt to investigate. Possible explanations include wage-rate changes, more premium labor, new fixed positions, a richer skill mix, or lower productivity.
This matters because labor is the biggest cost, so the gap compounds quickly, and because the responses differ: retention for turnover, scheduling for productivity, recruitment for vacancies.
2. What the evidence can reveal
The investigation compares labor with volume at several levels:
- Calculated Total labor growth versus volume growth.
- Calculated Labor cost per case, which adjusts for volume.
- Information gap Hours versus rate: did hours per case rise, or did the cost per hour?
- Information gap Employed versus premium labor, and where the premium is.
- Information gap Vacancy, turnover and overtime by department.
Verified fact Public data shows labor cost in aggregate. The decomposition needs hours and rate data from payroll and scheduling systems.
3. Investigate the problem
In the synthetic hospital, labor rose 10.5%, from $60.8M to $67.2M, while discharges rose 4.5%. Illustrative
Calculated Labor grew more than twice as fast as volume and accounted for 55% of the total expense increase. At the model’s assumption that 35% of labor flexes with volume, volume growth explains only a small part of the rise. The rest is rate, mix or fixed additions. The scenario shows that a 1% change in labor cost rate is worth about −$672K.
Information gap What is missing is the decomposition: hours, rates, premium labor and vacancy. Those would show whether the increase was concentrated in a few departments (a targeted fix) or spread widely (a structural one).
4. Explore the interactive experience
Investigate it yourself.
Hospital Financial Investigator: a working dashboard, scenario simulator, evidence-linked answers from APIS, and a sample executive brief, all on synthetic data.
The experience below is built on a synthetic hospital, “Demo Community Hospital,” with two fiscal years of data. Nothing in it is real, so you can explore freely.
- Select the Labor row in the expense table. Note its share of the increase and its growth versus volume.
- In the Scenario tab, raise volume by 4.5% (as in the sample), then raise the labor cost rate by 3%. Which moves operating income more?
- Ask APIS “Tell me about labor costs” and open the evidence it cites.
5. Evaluate possible solutions
The best response depends on which part of labor moved.
6. What leadership should do next
Questions to answer
- How much of the labor increase is rate, hours or mix?
- Where is premium labor concentrated?
- Where are vacancies?
- What does cost per case look like?
Data to gather
- Hours and rates by role and department
- Premium labor detail
- Vacancy and turnover data
- Productivity indicators
Steps to take
- Decompose the labor increase.
- Target the largest driver.
- Track premium labor monthly.
- Re-test with the scenario model.
7. Engage Two Pillars
Explore Your Hospital’s Opportunities
Two Pillars can help hospital leadership investigate financial, operational, and strategic questions using relevant organizational data, public information, and a structured assessment process. A good first step is a labor cost decomposition that separates hours, rates, premium labor and mix.
Sources and data notes
- The organization, its figures, and every number in this article and its interactive experience are synthetic and illustrative. They are not real data, a benchmark, or a forecast.
- CMS, Cost Reports: www.cms.gov/data-research/statistics-trends-and-reports/cost-reports — public information on the annual cost reports that Medicare-participating hospitals file.
- Maryland Health Services Cost Review Commission: hscrc.maryland.gov — published Maryland hospital financial and utilization data.
- Reviewed October 2026. This article describes an approach to investigation. It does not replace review by qualified professionals.