Like a growing number of healthcare organizations, Franciscan Health System of Cincinnati and Intermountain Health Care of Salt Lake City, are cutting costs without the slash-and-burn technique of layoffs.
Over the past five years, through job attrition and its quality-improvement program, Franciscan has reduced its work force by 13.5%, held labor-cost growth to less than 0.5% each year and increased employee job satisfaction three percentage points. As a result, profits have steadily increased over the past three years to $4.1 million in 1995 (See related story, p. 82).
Intermountain, a leader in the total-quality-management movement, began a re-engineering project and job security program in January. As Intermountain retools its operations, officials believe the job security program will help displaced workers find new positions within the 23-hospital system.
Hospitals across the nation are looking for ways to cut expenses for two reasons. They want to become more efficient to win managed-care contracts, which are fast becoming major revenue sources. And they need to prepare for expected restrictions in the growth of the Medicare and Medicaid programs. But hospitals are learning that the pink slip usually isn't the best way to achieve those cost reductions.
Because labor expenses accounted for 53% of a typical hospital budget in 1994, layoffs often are one of the first places executives look. Although layoffs produce immediate budgetary savings, many experts contend they seldom achieve long-term goals of improved profitability and greater efficiency and productivity.
"There is more acceptance today that hospitals can lay off employees to meet economic indicators. (Layoffs don't) have the stigma of a few years ago," said Edwin French, a consultant with French and French, Dallas. "(But) a hospital should do everything possible to avoid layoffs, which, to me, is an indication of a lack of management initiative to deal with a crisis."
Downsizing is up. No comprehensive data exist on the number of hospital employees laid off over the past two years through re-engineering and downsizing. But an array of news stories and studies has documented dozens of hospitals that are paring their employees' numbers. In addition, monthly database searches of hospital layoff announcements by Challenger, Gray & Christmas, a Chicago-based outplacement firm, reveal a glimpse at the hospital layoffs.
From 1993 through January 1996, 140 hospitals or systems laid off a total of 23,910 workers, or an average layoff of 171 workers per hospital. In 1994, however, three hospital groups alone laid off a total of 6,250 workers. If those numbers are subtracted from the total, the average hospital layoff was 129 employees over that three-year period (See chart, p.78).
MODERN HEALTHCARE surveys have indicated the movement toward a strategy of layoffs as a primary method of controlling costs.
In 1994 and 1995, more than one-third of hospitals reported plans to reduce staffing levels (Dec. 11, 1995, p. 53; Dec. 12, 1994, p. 33). In contrast, in 1993 only 27% of hospitals said they planned layoffs (Dec. 20/27, 1993, p. 49).
Data from the American Hospital Association indicate hospitals slowed the growth of full-time-equivalent staff from 1992 to 1994, the most recent year available.
For example, in 1993, the AHA said there were 3.68 million hospital FTEs, a 1.6% increase from 1992. By 1994, however, hospital FTEs increased only 0.4% to 3.69 million (See chart, p. 82).
More significantly, the growth of total labor expenses declined to a 6% increase in 1994 from a 6.3% rise in 1993, the AHA said.
Healthcare experts interviewed by MODERN HEALTHCARE*said more hospitals are taking the layoff approach to solving short-term revenue problems because it has gained acceptance in all industries.
For example, when AT&T earlier this year announced layoffs of 40,000 employees to bolster its future earnings and restructure its operations, most Wall Street analysts praised the telecommunications giant for its fourth downsizing in 10 years. Without the layoffs, AT&T would have earned
$5.4 billion. Instead, after taking restructuring charges such as severance costs for departing employees, AT&T recorded net earnings of only $139 million. But the company expects those earnings to rebound over time, given lower overhead costs.
AT&T is considered another industry leader in the total-quality- improvement movement, winning several prestigious Malcolm Baldrige National Quality Awards. The movement, in part, is driven by shareholders' desire for greater return on investment.
Long-term effects. Some experts have questioned the long-term value of such extensive layoffs and whether the drive for greater profitability has overshadowed corporate responsibility to employees.
French believes too many hospitals lay off employees as a first response to a financial crisis caused by events such as a loss of a managed-care contract or greater competition from outpatient providers.
Layoffs "don't always work out the way they planned," French said.
Data from the American Management Association, a New York-based organization that sponsors educational conferences for industry and government, bears out that statement. In a 1995 survey, only 47% of the companies that downsized enjoyed increased profitability. For about 15% of companies, profits decreased.
Other troubling factors emerged from the association's study, which surveyed 1,003 companies, including 51 healthcare organizations. While improving customer service was a goal of 61% of the companies, only 33% experienced improvements. Improving productivity was a primary motive for 58% of companies, but only 33% achieved it.
A spokesman for the association said the small sample size of the healthcare companies, which included hospitals, group practices, HMOs and insurers, makes it difficult to compare healthcare with industry in general.
"Healthcare is facing as many changes as other industries. We don't have the statistically significant data, but I don't see how the results can be any different" from general industry data, said Eric Greenberg, the association's director of management studies.
Another side effect of re-engineering and downsizing is diminished employee morale, increased cynicism and shattered loyalty, healthcare consultants said.
"Hospitals can avert layoffs if they don't wait until they are losing
$1 million a month. By then, there are no options left," said Thomas Atchison of Atchison Consulting Group, an Oak Park, Ill.-based change-management consulting firm.
Atchison said hospitals that use incentives for employees to reduce costs and improve quality always come out ahead. "If I (as an employee) trust you, then I will try to save you money," he said. "If I think you are abusing me, I will screw you."
Layoff alternatives. To help avoid the need for layoffs, dozens of hospitals are working with physicians to reduce costs by improved utilization management and by streamlining medical procedures through the use of clinical pathways.
These hospitals also are reducing their work forces, but they're accomplishing it through attrition, creative work schedules, cross-training and retraining, said Chip Caldwell, vice president of healthcare for the Juran Institute, a Wilton, Conn.-based consulting firm.
"We work with hospitals to prevent the slash-and-burn of massive layoffs," Caldwell said. "Layoffs are the least time-consuming strategy. It's the easiest to do, but that doesn't mean it's the best."
Caldwell considers layoffs to be the fourth-and least preferable-strategy to reduce payroll costs.
"Most organizations can achieve their strategic goals by attrition (first)," Caldwell said. "We find most hospitals that have laid off people have hired them back for other jobs."
The second and third strategies involve placing employees in other jobs by expanding or improving clinical service lines or by partnering with other local healthcare organizations such as clinics, Caldwell said.
"Many times, openings can be found for displaced workers in growing service lines or affiliations with others," he said.
For example, Juran has worked with three-hospital General Health System in Baton Rouge, La., over the last three years on its quality-improvement program, said Thomas Sawyer, General's president and chief executive officer.
Instead of layoffs, General has added several hundred employees because it has expanded into services such as home health, a clinical reference laboratory and extended-care facilities, Sawyer said. Exact numbers were unavailable.
"Too many hospitals go the route of layoffs to reduce their expenses," Sawyer said. "Lots of organizations don't look down the road far enough and do other things to cut costs."
Gary Hart, Intermountain's director of human resources, said it's essential to address the long-term effects of job elimination caused by re-engineering. "Re-engineering is dramatic change for a work force that can erode morale and affect loyalty," he said. "But if you do it right, you can design a mechanism to address the people part."
Two years ago, Intermountain announced a reduction of about 50 positions in its Salt Lake City hospital operations. That's when Hart decided to develop a job security program to prevent future layoffs among the system's staff of 19,000.
Under Intermountain's Salary and Benefits Continuation Program, employees displaced from their jobs because of work redesign will be placed in a temporary work pool and paid at their old salary levels until a new position is found.
"We know some jobs will be eliminated" this year as Intermountain begins its re-engineering program, Hart said. "We are doing everything to protect their job security without guaranteeing them a lifetime job."
The Mayo Foundation in Rochester, Minn., embarked on its continuous-quality-improvement program in 1994 and has identified 11 clinical areas with an estimated $4 million in savings. The clinical areas were chosen based on an internal review process and demonstrable success at the Cleveland Clinic and Henry Ford Health System in Detroit.
For example, Mayo's carotid endarterectomy team streamlined the surgical bypass procedure for blocked carotid arteries. As a result, the average length of stay decreased to 3.8 days in September 1994 from 6.7 days in February 1994, saving a projected $375,000 a year.
Mayo executives project continuous-quality-improvement savings in the tens of millions of dollars.
"The big opportunities were not in back-office, administrative overhead areas, although there were certainly millions there," said Carleton T. Rider, Mayo Foundation's continuous improvement officer. "The biggest opportunities for improvement were in the core medical processes that comprise the majority of what we do."
Like most systems, Mayo began its quality-improvement process not specifically to avert layoffs but to maintain its reputation as an industry leader, Rider said.
"You can use a lot of techniques to reduce costs and improve efficiencies," Rider said. "But sometimes, when the marketplace changes, you might not have another choice" other than layoffs.
Since Mayo laid off 400 of the 15,000 employees at its Rochester operation in February 1994, Rider said the system has focused on reducing its work force through attrition.
"We have a process in place now to transfer people internally," he said.
Besides clinical and administrative savings, hospitals are taking another look at standardizing supply purchases to cut costs. For example, Stamford (Conn.) Hospital will save $34,000 this year by purchasing only one type of surgical gown rather than buying different gowns from multiple vendors.
And Tampa (Fla.) General Hospital officials are working with physicians to select common vendors for supplies such as surgical gloves, said Fred Karl, Tampa General's president and CEO.
"It was difficult to get the doctors to go along with the changes," Karl said. "But after we explained it to them, they understand we are trying to save the hospital money."
Atchison said most employees and physicians will assist hospitals that want to reduce costs while avoiding layoffs.
"The big question for hospitals is: `How do we get costs out of the system?"' Atchison said.
"There are plenty of ways to do it with compassion and save the integrity and reputation of the organization. Layoffs are an act of desperation and an indication of poor management and planning."