Is Healthcare Past the Softer Cuts?

Is healthcare in its first wave of labor cost containment, or has it come to full blown cuts of what used to be the untouchables: salaries and jobs? A recent Hewitt Associates survey of HR execs at 518 large U.S. employers suggests that while healthcare organizations are making some tough cost containment decisions, they are still in the first phase of softer cuts compared to other industries. For example, of the 42 hospital/healthcare organizations that responded to the survey, 83% said they were increasing travel restrictions compared to the 72% overall response.

Also, nearly a quarter of healthcare organizations are changing their PTO policy vs. only 9% of the entire group. The overall group has probably already made this change as a first-wave response, says Lori Wisper, senior consultant of the broad-based compensation consulting practice at Hewitt in Lincolnshire, IL.

The survey also found that healthcare organizations are implementing drastic cost containment measures such as layoffs and salary freezes at much lower percentages than their colleagues in other industries. In fact, 33% had undertaken layoffs vs. 63% of the total respondents. When it came to freezing salaries or wages, again healthcare was lower than the overall respondents at 38% vs. 58%, respectively.

"If you look at the numbers in healthcare vs. the overall survey, there is a bit of a lag" in the more severe types of cuts, says Wisper, who believes this may be due to the fact that healthcare hasn't felt the recession as strongly as other industries.

At the same time, Wisper says there may be other reasons for the lag. "Healthcare organizations might be struggling financially, but there are labor market issues they have had to deal with in terms of shortages that you don't see as much in other industries," says Wisper. "They've had to deal with the shortage of nurses for many years, so even if they were in cost cutting mode, they might not cut pay because it would make that shortage worse."

The survey found that 12% of healthcare organizations and 16% overall had reduced salaries or wages, a move that is considered severe in the labor world. While both numbers seem relatively low, Wisper says when the same survey was conducted during a downturn in 2001, only single digits had taken these actions. "When we consulted with clients in the past and they would ask ‘what should we do?' the very last thing anyone did was cut. You might hold things steady and say no increases or very small increases, but cutting was the big taboo and that has certainly been broken this year. Companies have had to survive."

Wisper, for her part, believes there may be more cost cutting on the table for healthcare with 38% of healthcare organizations, for example, still considering salary freezes. Indeed, healthcare may be catching up to other industries with layoffs. My colleague John Commins reported that after a two-month lull, three hospitals and health systems recently announced layoffs.

Of course, when it comes to labor costs, there is the challenge of cutting while preserving employee morale and more importantly holding on to top talent. To that end, if you look to the survey for answers, healthcare companies are offering flexible work arrangements. Healthcare is doing it far more than the overall survey number suggests at 31% vs. 14%, says Wisper. "I see this as a more progressive approach as an employer. You are using non-cash related things to make employees feel valued by giving them more flexibility or allowing them to telecommute if that is feasible. It helps you retain them in times when you are actually containing costs or cutting them."

I haven't talked to anyone who is particularly optimistic that the economy is going to turn itself around in the next six months, but if it does, healthcare might stave off additional suffering. "If the economy holds enough industries up healthcare might not actually hit the bottom spot that many other industries have hit," says Wisper.

Even if the economy starts to improve and hospitals, for example, start to see an uptick in elective procedures, which benefits do you restore first? It may take months or years before healthcare organizations can ramp back up to the point of offering the kind of benefits and salary structures they did in the past such as 401(k) employer match, year-end bonuses, and regular salary bumps.