Workforce

The Hardest Cuts of All

By Haydn Bush

The bleak economy has forced a number of hospitals to lay off staff and more are likely. But workforce decisions must balance current realities with long-term plans for growth.

As the recession drags on, unemployment is growing at an alarming clip. Businesses shed 598,000 workers in January, according to the Bureau of Labor Statistics. That follows declines of 577,000 jobs in December and 597,000 in November. All told, private-sector employers cut 3.6 million jobs between December 2007 when the recession officially began and January 2009.

Hospitals are not immune; sluggish patient volumes, shifting payer mixes and declining investment income are prompting painful workforce decisions. Several large hospital systems announced significant cuts this year; Crozer-Keystone Health System in Springfield, Pa., announced it would eliminate 400 positions via layoffs and a hiring freeze, while the University of Chicago Medical Center said it would lay off 450 employees, including 15 senior managers, as part of a broader push to reduce costs by $100 million, or 7 percent of its total budget.

For most hospitals, layoffs would have been unthinkable as recently as last fall. But Susanna Krentz, director of private sector health care for the Noblis Center for Health Innovation, says the credit crisis that began in October, followed by a rapidly declining economy, changed everything. “The market dynamics so quickly took so many resources, many organizations are gasping for breath,” she says.

While shrinking the payroll may be hard to avoid as financial pressures mount, analysts say hospitals should keep long-term growth in mind when making decisions about staffing.

Sudden Changes in Fortune

In November, Michigan’s Beaumont Hospitals announced layoffs that ultimately will total 500 full-time positions. Nick Vitale, senior vice president of financial operations, said at the time that the three-hospital system’s growth in outpatient volume began to fall short of projections in early 2008, followed by a dramatic change in payer mix over the summer. While the hospital began to adjust for the drop in outpatient growth, the payer mix changes proved more challenging.

“We were on track through the first six months to reflect the reduction [in outpatient growth],” Vitale says. “When the change in payer mix hit, we were not able to react with our expenses. Now we have a turnaround in place.”

Salaries, wages and benefits comprise 58 percent of Beaumont’s overall costs, Vitale adds.

To date, Beaumont has eliminated open positions and relied on retirements and reassignments to reduce its workforce, with only a handful of actual layoffs. The organization also reduced the pay of managers by 4 percent, and cut the CEO’s pay by 10 percent.

In December, Park Nicollet Health Services in Minneapolis announced plans to cut 233 positions, or roughly 3 percent of its workforce. CEO David Wessner says the layoffs were spurred by reduced demand for health care services that he expected would continue well into 2009.

Taking Stock

Hospitals that so far have been able to avoid workforce reductions are bracing for a period of prolonged financial difficulty. Kenneth Kaufman, managing partner of Kaufman, Hall & Associates, says the pace of layoffs could intensify later this year as hospitals assess the impact of the current recession and strategize for the future.

“We’re still in a taking stock stage,” he says.

In the wake of the credit crisis, larger organizations that depended heavily on outside investment and global capital markets are particularly vulnerable to potential layoffs, Kaufman says.

However, he believes hospitals that have managed to avoid layoffs and hiring freezes to date will probably hold off on long-term strategic changes, including staffing reductions, until they are able to analyze the Obama administration’s impact on health care policy and payment. As the president focuses primarily on reviving the economy, his overall approach to health care policy may take several months to develop. “People are waiting to see what Obama’s all about as far as health care,” Kaufman says. “They see that as a critical piece of information before you would make any really radical judgments.”

IT, Middle Management May Be Targets

When hospitals downsize staff, they typically begin with hiring freezes, Krentz says. If financial problems persist and they have to cut current staff, hospitals may first look to information technology departments and middle management posts that CEOs don’t see as having a direct impact on patient care.

“There’s been a general trend of simplifying management layers,” Krentz says. “This may give an impetus to making that happen.”

Most hospitals avoid staffing reductions directly related to patient care as long as possible, Krentz says, unless they decide to eliminate marginal service lines. “One of the challenges is that, given the employment market, if you laid someone off, it may be difficult down the road to hire a qualified, capable person,” she says.

Don’t Sacrifice Strategy

Consultants say hospitals should carefully consider the long-term strategic impact of layoffs and hiring freezes. Mike Chamberlain, senior vice president of Simpler Healthcare, a consulting group in Ottumwa, Iowa, says hospitals should try to redeploy staff to focus directly on patient care areas and consider strategic moves to increase productivity before cutting employees.

“People come to us to cut 20 percent to 30 percent to meet budget,” Chamberlain says. “We try to figure out what are they doing to drive value, and generate enough productivity improvements to get to where they don’t have to reduce staff.”

Target staff reductions at specific areas, Krentz advises, rather than make broad cuts. “You’re always better off doing strategic reductions in force and not ‘every department across the system has to cut this number,’” she says.

Rash decisions could eventually hurt the bottom line by cutting into needed revenue streams and amount to “rearranging chairs on the deck of the Titanic,” Kaufman says. “If you’re just going to try to solve this problem with layoffs, I don’t think that’s going to do. Most organizations are going to need to scrub their strategic viewpoint.”

Krentz concurs. “If you totally slash business development or marketing, it may hurt the organization, especially if your competitors haven’t stopped,” she says. “Not only do you have to start from scratch, you start from a hole. Competitors will move forward, and the gap will grow between various organizations.”

This article 1st appeared in the March 2009 issue of HHN Magazine.

To respond to this article, please click here.