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Contract Labor: the Benefits, the Risks, and Best Practices

Contract labor refers to a flexible work force not considered permanent and is often engaged to perform services for a predetermined period. This applies to all disciplines and may include providers as well as clinical and non-clinical labor.

For many organizations, contract labor costs have risen exponentially in the last five years. According to the American Hospital Association and Beckers Hospital Review, the demand for contract labor increased 500% in 2021 over 2019 and led to a 37% increase in labor expenses per patient through early 2022. Hospitals with 25 beds or less spent about $460K on contract labor in 2020, while hospitals with more than 250 beds spent just under $11M. Although contract labor costs have begun to decline, it is still a major source of concern for health care facilities.

The Benefits of Contract Labor

There are many reasons to utilize contract labor, including cost savings resulting from not paying benefits, the flexibility of being able to more easily adapt to workload fluctuations, and the ability to obtain specialized skills that may not be available in house.

However, the #1 reason contract labor has increased so significantly is that the demand for workers has outpaced the supply.

The Risks of Contract Labor

When using contract labor several risks should be considered, such as:

  • Contractual Agreements – Using a Master Service Agreement containing established terms and conditions is recommended. The agreement should be approved in advance of hours worked in accordance with established authorization levels for financial commitments. It is important that controls are in place to guard against conflicts of interest.
  • If contracting with individuals, rates should fully defined and appropriate approvals obtained before expenses are incurred.
  • Time Keeping and Expense Reimbursement – A robust time tracking system should be in place and operating effectively. Time worked should be accurately calculated, adequately supported, and properly approved before payments are processed. Electronic transmissions of time and/or payments should be appropriately secure.
  • Billing and Monitoring – Payments should be adequately supported and accurately calculated. Proper approvals are required before processing invoices and sufficient oversight exists to monitor compliance with contract terms and conditions.
  • Conflicts of Interest – Ensure those approving contractual arrangements do not have a conflict of interest with the companies or individuals that are contracted with the organization.

Common control gaps in the contract labor process include:

  • No process exists to ensure time tracking files submitted for invoicing are complete and accurate.
  • Timekeeping records may not be timely adjusted for back-end vendor corrections, resulting in delayed billing.
  • There isn’t a process to assure invoices received are promptly processed and/or included in the monthly accrual.
  • Timekeeping system hours are not reconciled to hours invoiced.
  • An insufficient process for recording on-call hours may result in vendors’ billing more than 24 hours/day per contract employee and/or at incorrect rates.

Best Practices for Managing Contract Labor

The following best practices are recommended to manage contract labor:

  • Establish clear and transparent contracts/agreements with contract workers.
  • Utilize a vendor management system or managed services provider to streamline the hiring process and track performance.
  • Invest in technology solutions for efficient communication and project management.
  • Regularly evaluate the performance of contract workers.

Contact Blue for Assistance

If you are interested in how Blue might assist with contract labor concerns, please reach out to your local Blue & Co. Advisor or a member of our Audit Team below.

Jeff Reed, CPA, Director

Peter Szostak, CPA, MBA, CHFP, Director

Carrie Bucher, CPA, Manager

Beverly Burch, CPA, CIA, CFE, Manager

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