U.S. hospitals and health systems should expect to do a lot more with a lot less. Health care reform, demographic shifts and dropping reimbursements will cause a 15 to 25 percent decline in hospital revenue yields, according to a Booz & Company analysis. In the face of this more austere financial future, many hospitals and health systems in this country are taking action to reduce their cost structures by 10 percent or more to maintain margins and survive. The approach they take to cost reduction will shape their organizations for years to come.


The cost-reduction tactics that hospital leaders typically use — supply chain savings initiatives, budget trimming, capital spending freezes and benchmark-driven, head-count reductions — are neither sustainable nor significant enough to achieve the savings they need to survive and thrive.

Even worse, these heavy-handed approaches can severely alienate the front-line staff who perceive the cuts as more work with fewer resources. The result is disaffected caregivers, cafeteria workers, parking attendants and other hospital employees who have less empathy for patients and families. They won't go the extra mile to deliver great service.

Dissatisfied employees create dissatisfied patients — and no hospital can expect to thrive unless it is actively competing for patient loyalty. In the extreme case, multiple rounds of budget cuts and layoffs cripple an organization's culture of empathy and service quality and, paradoxically, make the financial picture even worse in the long run.

Rethinking Cost Reduction

There is an alternative approach. Redesigning care delivery to render it more efficient, to deliver better outcomes and to improve the experience of patients and families will have the secondary and equally powerful effect of cost reduction. The result is a simpler, better-functioning environment that is more conducive to empathy than the inefficiency of all too many hospital operations.

Other industries, such as retail, hospitality and financial services, have been raising the bar on this consumer-driven philosophy. They have succeeded in empathetically connecting with their workforce and their customer base to improve service, enhance efficiency and fuel growth, all while streamlining operations, maintaining a sensible cost structure and realizing savings.

This form of cost reduction is sustainable because the changes are hardwired into an organization's processes, systems and reporting structures. It also frees up resources for direct patient care and family assistance so that creating an exceptional experience becomes routine. Finally, it improves clinical quality and patient outcomes both through care delivery redesign and, we believe, because empathy creates a tighter bond between caregivers and patients.

Well-crafted cost-reduction programs strengthen the emotional bond between employees and the hospital. They create the sense that we are in this together; although tough decisions must be made, we will weather the storm and emerge better able to care for our patients and fulfill our mission. It may seem counterintuitive, but empathy and the tools organizations use to reinforce empathy play a central role in these programs.

Four Imperatives

When it comes to empathy's role in effective cost reduction, there are four key approaches every leader must start taking:

Be proactive. Start redesigning hospital operations now to have enough time for thoughtful and orderly implementation. Reactive cost reduction tends to be indiscriminate and doesn't prepare the organization or affected individuals for the sudden job losses that occur. Nothing creates leadership distrust and employee disengagement faster or more profoundly than surprise layoffs.

Understand that empathy starts at the top. Leaders must communicate honestly and often, walk the halls, and be accessible to employees who naturally have questions and concerns about how cost reduction will affect them. Provide a safety net for employees who will lose their jobs — severance packages, repositioning assistance, offers to move laterally within the organization. Use attrition to avoid terminations when possible. These actions demonstrate that the organization lives its values and will engender loyalty. Contrary actions undermine leadership, create apprehension and erode employee commitment.

Harness the energy. The operational changes needed to create a sustainable cost structure will be best understood by those who run the operations each day. However, these managers and front-line workers also have the greatest interest in preserving the status quo, tend to be trapped in departmental silos, and often lack essential skills in operations management or industrial engineering.

Well-designed, cost-reduction programs deliberately tear down these barriers to change. The process pushes the organization to ask why operations were designed a certain way and creates learning moments when the proverbial light bulb goes on and myriad possible improvements are revealed. It assigns ownership for developing improvements and accountability for savings. In short, lasting cost reduction cannot be done to the organization; it must be done by the organization.

Create the capacity for continuous improvement. Organizations that exhibit strong empathy tend to empower employees to make change, encourage innovation and collaboration, and actively tell stories of going above and beyond. These are the same attributes that reinforce a culture of continuous improvement. When coupled with the right skills and clear goals, continuous improvement enables ongoing operational improvements, essential for cost control over time.

The Power of Empathy

Empathy means understanding others' situations and taking action to improve the lives of those around us. It is a directed effort at making health care better, more affordable and less stressful, one patient at a time. Health care workers routinely demonstrate extraordinary empathy in their daily work, and it is a core value of virtually any health care organization. For health care leaders contemplating cost reductions, empathy will help them behave proactively and humanely to minimize the pain it creates for employees while creating a better future for the organization.

Editor's note: for more information, please watch Booz and Co.'s video, "Transformational Cost Reduction: A New Path for Hospitals and Health Systems" with Curt Bailey.

Curt Bailey is a partner with Booz & Co. and co-leads the Hospital and Health Systems practice in North America. Traci Entel is a partner in Booz & Co.'s organization, change, and leadership practice and is the firm's chief human capital officer.