CHICAGO — Hospital executives track numerous benchmarks related to hospital operations, yet Steven Berger, founder of data analytics firm Healthcare Insights, argues that one rises above the others.

Labor ratio — a hospital’s total labor costs divided by total revenue — “should be the most important metric you use in doing your budget every year,” Berger said in a session at the American College of Healthcare Executives 2015 Congress.

Why? Because labor represents hospitals’ largest expense, and each incremental improvement in the labor ratio goes straight to the bottom line. Plus, many hospitals have a significant opportunity to improve due to wide variation in performance on this metric.

The median labor ratio for U.S. hospitals is 55 percent, but the highest and lowest performers vary by 20 percent, said Berger. “Best practice is about 45 percent,” he said.

Not all hospitals track labor ratio. Instead, many rely on FTE per occupied bed to benchmark productivity, but this metric fails to account for FTE and contract labor costs, said Berger.

Determining your labor ratio is the first step to improving labor productivity. Once this is complete, which should take your CFO “about 20 seconds to compute,” said Berger, set an achievable goal for improvement. He recommended selecting a target well above the 75th percentile. Next, calculate how many dollars will be saved if the target is achieved, and communicate this to physicians and others to gain support for improvement efforts. After the goal is set, engage physicians in those efforts.

While physicians’ role in reducing costs is most often associated with supply standardization, physician practices impact 70 percent of hospitals’ costs, which greatly influences labor demand.

“Physicians need to understand how a hospital is deploying non physician staff,” said Berger. “It’s the practice patterns that [physicians] use that create the kinds of staff that you bring in and the way you deploy that staff.”

Leaders should work closely with physicians to explore productivity challenges for staff and within their own roles. For example, if a hospital employs physicians who spend a significant portion of their time on administrative tasks, significant savings may be achieved by employing scribes, which has been shown to increase physician productivity, explained Berger.

To ensure that the target ratio is met, hospital leaders must work with managers of each department to examine productivity demands, department by department, shift by shift, said Berger. Department managers should set staffing plans based on productivity demands, and leaders must hold managers accountable for meeting staffing expectations.