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Gain Control of Labor Costs While Saving Jobs

Jill Schwieters and Dave Harper, for HealthLeaders Media, June 15, 2009

Long viewed as one of the few safe sectors, healthcare is now feeling the pain of the financial crisis. Although hospitals generally are required to keep more cash on hand than other businesses, they are also suffering from an inability to access capital and remain solvent. The economic downturn has forced hospital and health system executives to make painful staffing cuts in recent months, and expectations are that things will get worse before they get better.

Understandably, many senior leaders are inclined to act aggressively to stop the bloodletting, but they must recognize that today's difficult decisions will have implications far beyond the immediate financial crisis. In order for organizations to emerge with their relationships and brands intact, they will need to be thoughtful and creative in the way they approach cost-cutting now and in the months ahead.

The research
According to research conducted in the fourth quarter of 2008 by the Institute of Healthcare Executives and Suppliers, 71% of hospital and hospital system CEOs surveyed have cut their 2009 capital budgets. Forty-seven percent cut budgets by 20% or greater. Nearly 10% indicated that they were "delaying major capital projects, i.e. construction projects, until later in 2009" or have "frozen all capital expenditures for first and second quarters to only critical items." Still another 11.5% haven't cut yet, but say they are "very likely to cut if current economic trends continue."

In terms of patient volumes for hospitals/systems, the numbers are misleading: 73% have seen a drop, but on average slippage is at a modest 2.1%. The problem with this number is that it is widely considered to be a reflection of a reduction of good-payer patients –people with insurance who will forego seeing a doctor for minor conditions in a downturn. Conversely, many organizations see an increase in emergency room—and other bad debt—patients in downturns. IHES survey respondents reinforced this conclusion, observing that "bad debt and charity care is increasing sharply."

Although the drop in patient volumes appears on the surface to be modest, the bad debt and charity care instances offset the number of good payer patients, creating falsely conservative patient volume data and a far greater expense ratio for hospitals. In other words, a bad payer mix that increases cost of care, lowers reimbursement and requires staff to work harder and thinner.

According to findings from Longbow Research, the numbers are actually worse. Hospital inpatient admissions are declining even more sharply than experts anticipated—more than 49% of hospitals reported declines in inpatient admissions in the fourth quarter, compared to almost 48% reporting increases in the third quarter. CEOs explained to IHES that they are addressing these financial concerns through hiring freezes, staff reductions, and not filling their open positions. Nearly one-third (32%) reported having reduced staff. However, almost 10% of respondents claim to be "establishing lean process improvement and strict budget adherence by managers."

The solution
So the question is not if, but how deeply, hospitals will have to cut this year, and just how much can be accomplished through process improvement, better fiscal responsibility and more progressive staff management?

Labor costs account for more than 60% of total healthcare expenses, so it is the most obvious place to focus your efforts. Unfortunately, it's also one of the most challenging areas to tackle. Many healthcare systems aren't equipped to efficiently manage expenses and productivity. Ironically, this can result in increasing labor expenses in the face of staff reductions and other efforts to save money.

In fact, labor expenses often add up unexpectedly, with overtime, extra shift bonuses, on-call and call-in bonuses, and other expenses necessary for safely staffing healthcare facilities. These are typically bundled into the pay system and go untracked and unevaluated. However, there are many ways to identify and address additional labor costs. It is critical to know how much your actual labor spending is and where it is coming from. Once you begin tracking these expenses, you can begin to benchmark—and then improve—efficiencies.

Following are several steps for gaining control of your organization's labor costs, while preserving as many jobs as possible. Once you have reviewed this list, talk to the key leaders in your organization. You need their buy-in to effectively evaluate and improve the use of resources.

Review payroll: Call payroll and review the average income of staff to find the outliers (people who are making significantly more than the norm because they are being paid overtime). Look at your current bonus programs and ask yourself if you still need them; is the design meeting your current needs? Most bonus programs are typically built around shortages when hospitals are desperate. In all likelihood your organization is no longer in this situation. Re-evaluate bonus triggers, you may even find you don't need them at all.

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