Hospital Layoffs Don’t Work -- Here’s Why


By Ron Benfield and Craig Wilcox

In our experience working with many organizations across the country, we’ve found two things to be true when you need to cut costs in your hospital system:

  1. Layoffs are a tempting strategy to reach for, and

  2. They rarely work the way you want them to.

Let’s elaborate.

Common reasons for layoffs

  • It’s the end of your annual budget prep and the inputs just aren’t lining up with your target. What do you do? How are you going to cut costs?

  • Or it’s three months into the new fiscal year -- and you’re already not hitting budget. How are you going to course-correct?

  • There’s been a downturn in volume with no clear reason. How are you going to make up for it?

  • Labor costs and benefits are up, managed care rates are deteriorating, and you’re taking hits from value-based purchasing -- not to mention the hurricane from last year is still making drugs hard to get, sending prices through the roof. And that’s all on top of the cost of new technology.

Somebody in the room mentions layoffs as an option to reign things in. Someone else agrees -- heads are nodding.

But that’s a short-term fix.

Layoffs, especially ones done in haste, tend to not anticipate the unintended effects. Often key functions end up unstaffed, and the jobs tend to come back in weeks or months. In several instances, we’ve observed that FTE’s had returned to pre-layoff levels in 9-12 months.

Other times we’ve observed hospitals eliminate positions that generated a high multiple of their salary in measurable revenue. Saving $100K to eliminate a clinical documentation RN resulting in a $1.2M drop in DRG reimbursement is not a wise decision.

Why layoffs in hospitals don’t work

One major issue with layoffs is their negative effect on staff morale. When employees see their colleagues being let go en masse, it signals that management doesn’t value their people, and they begin to look for new employment -- at someplace more stable where they’ll find more job security.

This is especially true of your best employees. Their experience makes them highly attractive, and one of your competitors will quickly hire them. To make matters worse, layoffs may lead to a unionization campaign or exacerbate existing labor relations.

Financially, layoffs are expensive. First, you’ll likely be paying severance to every laid-off employee. Then, when staff shortages follow, you need to fill in with agency positions or overtime to meet staffing needs. The FTEs inevitably return -- but now they’re more expensive. By this point, the savings gained from layoffs are nearly devoured, and you’ll still have more expenses later when you reintroduce deleted positions.

Finally, layoffs send strong messages to your patients, physicians, community, and other stakeholders:

●      “That hospital is struggling and might have to skimp on care”, think patients.

●      “Management is doing a poor job”, say physicians, managed care companies, local businesses, and donors, “maybe we shouldn’t engage”;

●      “Don’t go there”, whisper members of the community, “let’s go to the other hospital in the next town over”.

So, if layoffs don’t work, what’s the alternative?

There may be times when a carefully planned layoff is the only thing you can do, but proactive avoidance is far less damaging. Every healthcare organization should have an active, robust multi-year resourcing plan. It should include:

·       a long-term objective that is aligned with the multi-year strategic financial plan (usually stated as salaries, wages and benefits as a percent of total operating revenue)

·       an annual assessment of current productivity (hospital-wide and at the department level), using internal trends and external benchmarking,

·       a functional labor management system that ensures the organization is progressing on its long-term plan and is responsive to market pressures (i.e. revenue trends). When each operational leader meets the plan’s objectives, increased autonomy to manage labor costs can be granted.   

·       appropriate use of attrition. A typical hospital’s annual employee turnover is 15-20%. This provides ample opportunity for maintaining the appropriate level of staff.

“That sure was a good layoff!”

When was the last time you heard a colleague say this? Never.

Fundamentally, layoffs are a sign that management may not have paid proper attention to labor management. You can’t “catch up” by doing a layoff. And if you try, it probably won’t last.

Layoffs in a hospital are often used as a poor substitute for finding things that are truly broken and fixing them. By identifying things other than labor that are broken, a hospital can avoid falling to the temptation to solve financial problems by layoffs and inflicting more harm than good.

Our favorite approach to fix what’s broken is to segment all patients (both inpatients and outpatients) into discreet groups, measure each group’s performance on the bottom line and apply improvements to those that don’t even cover their own direct costs. Using this approach is highly effective in improving overall financial performance, avoiding layoffs and achieving sustainable margin fixes.

ABOUT MILLWOOD ASSOCIATES: We’re a healthcare consulting group that helps hospitals improve their financial margins to ensure sustainability of mission. All of Millwood’s solutions are designed to fix broken processes which erode hospital margins. For example, by helping hospitals get paid fairly for the services they provide, we can remove the pressure and damage of harmful cost cuts, typically adding 2 to 3 percentage points to their margin. Follow us on LinkedIn, or click here to find out how to get started with sustainable fixes for your margin challenges.