Layoffs Can Provide Short-Term Relief, Long-Term Misery

A new American Hospital Association survey released today reaffirms a lot of what we already knew: Hospitals are in rough shape.

Seven in 10 hospitals are reporting declining finances that they're blaming on low in-patient volumes and a decline in elective procedures, poor investment performance and a drop in philanthropy, and the costs of treating a rising number of uninsured patients. As a result, nearly half of the 1,078 hospitals that responded to the survey say they have cut staff.

Anticipating the results of the AHA survey, hospital executives, forecasters, and consultants I've spoken with say hospitals need to be careful about layoffs. They might provide short-term bottom-line relief, but that could create the groundwork for long-term problems.

"With labor being one of the biggest expenses it's natural for organizations to look there first," says Jill Schwieters, executive vice president at Pinstripe Inc. recruiters. "I encourage clients to look at those additional labor costs—the overtime, the bonus structure, the agencies—before you go after the core staffing."

Schwieters says many hospitals have pre-recession bonus structures that were designed for a time when it was hard to staff shifts. "Oftentimes those compensation plans become engrained in the payroll system," she says. "Look at all of those incentive tools to get people to work and ask ‘do we need them anymore today?' We are seeing part-time nurses pick up more shifts. We are seeing people willing to work more and you don't need to incentivize them with a bonus. You can get rid of those additional labor costs without impacting your people in another way."

Of course, reducing overtime can also create as many problems as it solves if the cuts are done with a machete instead of a scalpel. It's like the old carpenter's maxim: measure twice, cut once.

"We've been cautious about wholesale job cuts and reductions," says Michael Sachs, president and CEO of Sg2, the healthcare intelligence firm. "There are some situations that require the organization to do that, especially if they are in a dire cash situation. But what you don't want to do is go through massive staff reductions that alienate physicians and/or patients and drive them away in a short period of time."

For example, Sachs says hospitals looking to cut costs might reduce overtime by limiting operational hours at the post anesthesia care unit. That tactic, however, could also alienate physicians who have scheduling conflicts, disrupt a revenue stream, and drive those physicians and their patients to competitors.

Sachs recommends looking at historical data and projections for service lines before deciding what to eliminate. "What is historically your performance and how well can you take care of these patients? Secondly, given the changes in the economy, what are likely to be the volumes going forward?" he asks. "If you've lost money the first half of 2008 and in 2007 and the prospects for volume going forward are weak, that would be something you'd clearly want to seriously consider eliminating."

Chris Van Gorder, president and CEO of Scripps Health, says the San Diego-based health system has avoided layoffs because they have an in-house employee retraining program. "In some cases we allowed those employees to fill positions that they would not be normally fully qualified for but we will try to keep them fully employed. That is our obligation to them and maybe the overall economy to keep people employed," he says. "Having said that, we must continue to restructure ourselves and adjust to the market because if we don't we will cease to exist."

Schwieters says one of the few bright spots in the weak economy has been a temporary respite from the nursing shortage.

"We are seeing people be more flexible in what shifts they are going to work. We've seen people who traditionally would have held out for full-time are taking part-time jobs to get their foot in the door," Schwieters says. "We are also seeing nurses who haven't worked for years come back to the work force because their spouses may have lost their job or had their hours cut back. That is one reason why it isn't necessary to have a lot of those extra shift incentives that hospitals in many way were held hostage to to get nurses to work."

Schwieters warns against pruning low-hanging fruit such as tuition reimbursement and loan-forgiveness programs. "Despite the economy today, the numbers are still the numbers. There is a work force shortage. There will be into the next 10 to 15 years," she says. "We want to continue to provide resources to our existing employees as well as graduates who are going in to nursing, pharmacy, physical therapy, those in-demand critical roles that, by the way, help drive revenues in the organization. We want to make sure we aren't cutting off that pipeline."

It's important to remember that hospital employees know what's going on in the economy. They read the newspapers and watch TV and talk amongst themselves. They all have friends and family who've been impacted by the recession. Everyone's retirement portfolio has taken a hit. Employees are willing to make short-term concessions. If benefits, overtime, or bonus cuts are communicated by management as a way to avoid layoffs and other more drastic cuts, employees will likely understand.