Reducing Labor Costs

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September 30, 2009

Lower volumes, shrinking revenues, and pressure from payers are putting a squeeze on many healthcare organizations. The need to cut costs is focusing attention on staff productivity increases, as well as reductions in the labor force. These efforts are never easy, but a focus on communication, transparency, and strong leadership can help mitigate the pain.

Building a Culture of Inclusiveness

Although Sherman Hospital in Elgin, Ill., had experienced a difficult round of layoffs as recently as 2006, less-than-projected volumes in 2008 meant that the hospital had to find an additional $4 million in cost savings. By managing communications and establishing financial transparency, Sherman's leadership guided the organization through a significant labor adjustment. A discussion of the hospital's strategy in communicating labor reductions is a featured new resource this month on HFMA's Healthcare Financial Pulse web site .

The 2006 layoff had taught Sherman's administrators a lesson. They had begun sharing hospital financials with all employees monthly. They also established a Sherman Employee Hotline that was published whenever rumors needed to be addressed.

When tough times struck again in 2008, the culture of inclusiveness that Sherman had built enabled frank discussions with staff. And staff responded with ideas of where cuts could be implemented, helping to identify $3 million in non-salary cost cuts. Although no one was happy about the need to reduce salaries by $1 million to meet the $4 million in required savings, staff was able to take the news in stride. They knew that leadership had trusted them to know the truth without secrets.

Beth Israel Deaconess Hospital in Boston also turned to staff for cost-saving ideas when it faced a projected operating loss of $20 million dollars for 2009. Find out how the staff's ideas helped protect the jobs of 900 lower-wage earners and contributed to $16 million in savings in this interview with Beth Israel's president and CEO Paul Levy, featured in the most recent issue of HFMA's Healthcare Cost Containment newsletter.

Fast-Tracking Productivity Gains

High operating costs at a West Coast hospital-affiliated multispecialty group had put a managed care contract covering 10,000 of the group's 55,000 patients in jeopardy. Analysis revealed that the group's non-physician staffing costs were far above industry benchmarks.

With an immediate need to reduce overhead and make the group more cost-competitive, the group's chief administrator put a productivity program in place in just two months, using an innovative "train the trainer" approach. The program, described in this article for HFMA's Physician Alignment Forum, produced about $1.1 million in productivity gains for the group and helped it retain about 7,000 of the 10,000 patients covered by the managed care contract.

The group also realized some "lessons learned" from its rapid implementation of the program. First is the need for cooperation and leadership. In this case, group members were highly motivated to work together to avoid downsizing, which made it easier for leaders to successfully take a "we're all in this together" approach. Second, rapid implementation inevitably produced some trade-offs in training. There was wide variability in the creativity and effectiveness of supervisors in improving performance, which would likely have been diminished if more time had been available for training.

A special preconference seminar at this year's Revenue Cycle Strategies Conference, November 5-7 in Chicago, will address "Employee Productivity and Management in the Revenue Cycle." Earn seven CPE credits while finding out how hospitals are doing more with fewer staff. Learn more and register today.

Also New on the Healthcare Financial Pulse Site

Many healthcare organizations are also facing higher costs of capital. A recent change in the Department of Housing and Urban Development's Section 242 hospital mortgage insurance program has opened up the program for use in straight refinancings. But high eligibility thresholds might temper the program's usefulness. This month, Lancaster Pollard CEO Thomas Green discusses"Is the New HUD Refinance Option for You?" in the Capital section of the Healthcare Financial Pulse web site.

And remember to visit HFMA's web site for answers to your healthcare business questions.

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