Healthcares steady hiring has been a bright spot in the nations souring economy. But even this growth industry is showing signs of strain.
Hard-hit local economies, rising expenses and flat or poor payment from insurers have eroded budgets and prompted hospitals in Florida, Iowa, New York and elsewhere to put a stop to hiring, if temporarily, or take more drastic action to cut payrolls, officials say.
In recent months, more than a dozen health systems and hospitals have trimmed nearly 1,900 jobs through attrition and layoffs. The industrys brisk employment gains easily overshadow the losseshealthcare hiring made up one-quarter of jobs added to the U.S. economy (outside of farms) for the year that ended in April. But layoffs, which healthcare consultants describe as a last resort, suggest hospitals arent immune to the threat of a recession.
We cant spend money we dont have, so we have to make adjustments, employees at MetroHealth Medical Center were told in an e-mail explaining job cuts. The 574-bed Cleveland hospital announced May 15 that it would cut 1% of its payroll, or 73 full-time jobs, as part of its effort to save $17 million.
We have to deal with a declining local economy, a continuous rise in patients who are uninsured and underinsured, and unpredictable government support at the state and federal levels, the e-mail read. The struggling hospital lost $8 million during its first quarter. Half of affected workers found new jobs at MetroHealth.
Labor is a tempting, but unpopular target for healthcare executives facing a budget crunch, said George Whetsell, a managing director with Huron Consulting Group subsidiary Wellspring Partners. Whetsell said without severe problems as an incentive, hospitals avoid controversy by avoiding job cuts. Among Wellsprings clients, layoffs have been rare, he said.
The financial stress on hospitals comes as jittery credit markets are pushing hospital borrowers to build up cash reserves and balance sheets or pay more to borrow for technology and building upgrades, adding pressure, insiders said. Economic woes have crept onto hospital balance sheets in multiple ways, insiders said.
With employment flagging and insurance coverage falling, some layoffs are being attributed to a rise in patients who cannot or do not pay their medical bills. St. John Health, a Detroit-area subsidiary of the nations largest Roman Catholic health system, Ascension Health, unveiled an $85 million restructuring plan in April that called for 300 layoffs and cut another 100 open jobs, or less than 2% of its workforce. Officials at MeritCare Health System said earlier this month that as many as 300 jobs, or about 4% of its workforce, could go unfilled as the Fargo, N.D., system struggles to cut $15 million to $30 million from expenses.
In all three cases, unpaid bills contributed to the systems financial stress, officials said when announcing the cuts.
Healthcare providers also face increasing pressure from unions and struggling businesses to slow healthcare inflation that eats into profits and wages, said officials. Healthcare premiums on average have climbed faster than overall inflation and workers earnings since 1999, despite slower premium growth in the past four years, a Kaiser Family Foundation analysis shows. In 2007, premiums increased 6.1% compared with earnings, which rose 3.7%, and a 2.6% increase in overall inflation.
Group Health Cooperative, an integrated system in Seattle that operates health plans, laid off more than 260 employees and cut nearly 100 additional jobs through attrition, or 4% of its workforce, to curb its spending and push premium increases for its health plan members 2 to 3 percentage points below the market, said Scott Armstrong, Group Healths president and chief executive officer. This was not borne out of a financial crisis, he said, but an honest acknowledgement of the frustration consumers feel as healthcare costs spiral upward. The point I want to re-emphasize is that this was the first time in my career that we made really hard decisions that affected peoples jobs in pursuit of a strategic goal, not in response to a crisis.
To slow inflation, Group Health executives estimated the system would need to cut $400 million over five years, including $110 million in the first year out of a budget of $2.7 billion, or about 4%. Labor cuts amounted to roughly 60% to 70% of savings. The cuts did not include nearly 300 layoffs from Group Healths decision to close its Eastside Hospital. Some workers were offered jobs at a nearby expanding community hospital. No one wants to do this, said Armstrong, but he stressed that the response from local businesses has been positive. It reminded me of the really intense, pent-up frustration or demand that so many customers of the healthcare industry have for some relief.
Healthcare consultants said hospitals typically avoid layoffs unless efforts to boost revenue, cut other expenses, or curb labor costs through attrition have failed to get necessary results. Jim Braley, a senior managing director with the consultancy FTI Healthcare in Atlanta, said hospitals also turn to layoffs when they need results in a hurry.
Layoffs at its flagship Minneapolis hospital helped Allina Hospitals & Clinics rebound after the systems $250 million investment in information technology eroded the systems cash reserves in late 2006. Sluggish volume compounded the problem. The system cut 110 corporate jobs and another 200 positions at 626-bed Abbott Northwestern Hospital. In all, 100 managers and administrators were let go by the system, which owns 11 hospitals and contract manages one. The staff cuts equaled about 6% of Allinas workforce.
David Kanihan, an Allina spokesman, said that the systems executives pay closer attention to staffing and labor costs to avoid further layoffs. Credit analysts at Moodys Investors Service recently praised Allinas executives, who moved aggressively in late 2006 to offset its plummeting cash flow by adopting new productivity targets, among other measures.
Allinas finances have improved. Net income, which dropped roughly 70% in 2006 from the prior year, made a healthy return to $60.7 million on revenue of $2.5 billion when the books closed in 2007. Thats a 180% jump in net income, compared with $21.7 million on revenue of $2.3 billion in 2006.
Allinas turnaround included more than curbing labor costs, but job cutting was an effective strategy for fixing the systems financial jam, Kanihan said.
Layoffs may improve budgets, but can unsettle employees and harm morale, executives acknowledge. Were an urban facility, but were rural in our sociology and makeup, said David Kruczlnicki, president and CEO of 335-bed Glens Falls (N.Y.) Hospital.
The not-for-profit hospital, which operates on a roughly $280 million budget, announced 65 job cuts, including 15 layoffs, after rising expenses and flat reimbursement led to a $1 million shortfall between January and April, he said. Workforce cuts werent a knee-jerk reaction, he said, but part of an effort to cut expenses that would not affect patient care. Managers took a pay cut. Executives tailored budget cuts to each hospital division, from trimming $12,000 from corporate compliance to nearly $950,000 from its off-site services division. In all, savings should curb expenses by $3 million annually, he said, which will allow Glens Falls Hospital to break even this year. Nearly 70% of savings came from labor expenses.
Not all hospitals facing a financial squeeze have opted for layoffs.
In Fort Myers, Fla., the nations housing slump has toppled home values and halted construction, a major engine of the economy. For Lee Memorial Health System, which owns three Fort Myers hospitals and a fourth in Cape Coral, Fla., the stalled sector has wreaked havoc on its projections for patient volume and operating margins.
Steady population growth and a seasonal influx of snowbirds typically prompts Lee to add employees each November for a three-month spike in volume that begins each January, said John Wiest, Lees chief financial and institutional services officer. Last summer, Lee began hiring to meet an expected 4% jump in volume. By October, it appeared growth might be closer to 1%. As of April, the systems volumes were 1% lower than the prior year.
Wiest largely blames the local economy. Basically, weve been gutted, said the finance chief, whose own home has lost 30% of its value since its last appraisal three years ago. For the first seven months of Lees fiscal year, which started Oct. 1, net operating income was roughly 60% below budget, he said. The system earned a profit of $10.7 million on revenue of $579 million. Wiest said efforts to halt the slide have avoided layoffs, but will shed 415 jobs from the payroll through attrition.
WakeMed Health & Hospitals, Raleigh, N.C., saw its budget falter during the first three months of its fiscal year, which also began Oct. 1, thanks to a falling number of elective procedures, among other factors. We realized that while we didnt need to panic, we did need to be fiscally responsible, said Jeanene Martin, WakeMeds senior vice president of human resources.
First came the cuts to nonessential overtime or new hires, as well as nonlabor expenses such as travel, consulting, supplies and education that did not directly affect employees job performance or patient care. We tried to go after the low-hanging fruit, she said. The strategies succeeded. Still, the efforts left WakeMed, which owns two hospitals and manages a third, with an uncomfortable margin and below budget for the year. Executives again asked departments to curb expenses, this time by 4% for the second half of the year.
But round two called for no layoffs, Martin said, because layoffs can lead to unwanted turnover among workers in a highly labor-intensive industry. You dont have to be a rocket scientist to know how insecure employees can become when they are wondering if theyre the next one to be laid off, said Martin, who is also president of the American Society for Healthcare Human Resources Administration.
The second wave of cuts will get WakeMed to its budget. Savings are projected to put employees in line for a year-end bonus thats tied to financial performance, safety and patient satisfaction, she said. WakeMed has seen patient volume pick up after the years rocky start. Martin said she hopes such volatility is an aberration, but the nations economy suggests otherwise. I dont think healthcare organizations are going to be sheltered from the economic conditions of other industries, she said.