Operations Management

Finding Cost Savings at HackensackUMC: A Six-Year Retrospective

May 23, 2017 10:23 am

By engaging employees in efforts to reduce costs and improve performance, a New Jersey hospital achieved substantial financial savings and saw its patient and employee satisfaction levels rise.

In 2011, HackensackUMC, a 775-bed, not-for-profit research and teaching hospital in Hackensack, N.J., piloted a gainsharing plan in its ambulatory surgery center (ASC) designed to reward employees for identifying and realizing opportunities for cost savings and performance improvement. At the time, the ASC had more than 160 employees handling 1,100 outpatient surgical cases per month. In the first plan year, HackensackUMC saved $590,000, or about $5,000 per FTE, with a payout of about $1,700 per FTE.

The program proved so successful that it was expanded over six years into a major performance improvement initiative involving six other HackensackUMC units in addition to the ASC. From 2011 through 2016, total cost and productivity gains exceeded $12 million from all the plans, and the hospital has shared about $3.7 million with the team members who produced those gains (approximately 760 FTEs).

Gainsharing Defined

The type of gainsharing described here should not be confused with financial arrangements that have been closely scrutinized by the U.S. Department of Health & Human Services and its Office of the Inspector General. HackensackUMC’s program differs greatly from programs that offer physician incentive payments to increase referrals to the hospital or to alter their practices to assist the hospital in its cost-reduction efforts.

HackensackUMC’s form of gainsharing is one that has been used successfully for decades in a number of business sectors, particularly in manufacturing. “True gainsharing” may be best described as a system or philosophy of management that promotes higher levels of organizational performance through the involvement and participation of its employees. As performance improves, employees share financially in the gain/savings. It is a team approach, not an individual incentive. In a hospital setting, all the employees at a site or unit are typically included. In some cases, employed physicians may be included as well.

A true gainsharing plan has two key elements: group reward and employee involvement. In terms of group reward, under HackensackUMC’s approach, performance is measured, and then a predetermined formula is applied to share a portion of any savings with all team members. The organization’s actual performance is compared with baseline performance (often a historical standard) to determine the amount of the gain. Because gains are measured in relationship to a historical baseline, employees and the organization must change to generate a gain.

HackensackUMC has chosen to implement gainsharing on a unit-by-unit basis rather than installing one organizationwide plan to increase “line of sight.” In other words, performance is measured on factors that employees can control to a relatively high degree. As a result, what employees do and how they are paid is better aligned.

ASC Measurements

The ASC unit employs three measurement types: primary measures, a gate measure, and special focus pools. The other hospital units that participate in the program employ similar (but not identical) measurement and bonus calculations. However, the basic features of all seven models are reflected in the model used for the ASC, described below.

Primary measures. The primary measures involve two basic areas of focus: productivity and selected spending. The resulting calculation represents a true and direct financial gain.

Productivity is defined as hours worked by all team members assigned to the unit, including the unit head (input) divided by number of cases, regardless of length of time or cost (output). Spending is measured on the basis of selected cost (input) per case (output). Only those spending accounts that the staff can reasonably control are counted, such as medical-surgical, sutures, endo-disposables, instruments, disposables, stationary, printing, general supplies, equipment repair, and dietary spending. All capital and implant items are excluded.

The quarterly gains or losses from the productivity and spending measures are combined to determine the total quarterly gain or loss.

Thirty-five percent of the gain is shared with employees, provided a patient satisfaction “gate” is met. For each quarter in which a gain is earned, one-half of the employee share of the gain is paid in the quarter, and the second half is allocated to a year-end reserve account, which is there to offset negative quarters. If a loss occurs in a quarter, the full employee share of the loss will be subtracted from the reserve account. If the reserve is positive at year-end, it is paid to all participants. If the reserve is negative, the institution absorbs the loss, and a plan year begins anew. The reserve is intended to promote long-term thinking and provide consequences for below-average performance.

Gate measure. To ensure that patient care would not be sacrificed in the efforts to generate financial gains, HackensackUMC determined that a patient satisfaction gate had to be surpassed before a payout could occur. The gate is not a goal or target; it is intended as a safeguard against a decline in patient satisfaction. The mean composite patient satisfaction score for the gate is set at a point that marks the absolute lowest acceptable level for the unit.

If employees do not meet the gate measure in a quarter, the total employee share for the quarter (including that quarter’s reserve allocation) is deferred to the end of the plan year. At that time, if the mean score is above the gate, the deferred gain will be paid. Otherwise, it will be forfeited. Therefore, the consequence of a poor quarterly patient satisfaction score can be significant. The ASC unit failed to meet the gate for one quarter in 2012, and $120,000 was deferred, equivalent to $1,000 per FTE. As one would expect, this deferral got everyone’s attention, and an increased focus on improving patient satisfaction yielded impressive results and a payout of the deferred sum at the end of the plan year.

Special focus pools. The third measurement group, special focus pools, provides a dollar award for goal attainment and is paid quarterly, independently from the primary measures. These measures are for activities that do not provide a direct dollar gain but do contribute to the overall success of the organization.

The ASC has two special focus pools: patient satisfaction and operating room (OR) turnaround time (wheels out to wheels in). Patient satisfaction can award up to $350 per quarter per FTE, and OR turnaround time can award a maximum of $1,000 per year per FTE. Unlike the patient satisfaction gate, which is a penalty measure intended to prevent a decline in patient satisfaction, the patient satisfaction special focus pool is designed to promote and reward improved performance.

The patient satisfaction pool has successfully served its purpose. Patient satisfaction has improved since the focus pool was added in 2013. On the other hand, turnover time has shown more limited improvement, but some progress has been made. Currently all team members (including scrub techs, equipment techs, circulators and environmental team members) are involved with preparing the OR for the next patient.

Gainsharing Implementation Process

Gainsharing also has an ongoing employee involvement element. For example, the ASC has a cross-functional involvement team of about seven employees who meet monthly to solicit, review, and implement employee cost-saving ideas. Employees present their ideas directly to their team representative, who then brings the ideas to the team to discuss details. The team is charged with providing timely feedback to the employee and seeing an approved idea through implementation. The system permits all employees to become more involved by funneling suggestions to the team. Interestingly, many of the ideas are quick fixes that do not require spending or new equipment.

A healthcare organization considering a gainsharing plan should first ensure that its culture will embrace such a program. It is critical that management recognize the level of ongoing commitment required for the plan’s success. If the organization or unit is not fully prepared, a false start or failed plan can lead to a decline in morale and a loss in management’s credibility and trust.

To anticipate this potential pitfall, HackensackUMC follows a rigorous implementation process comprising eight steps:

  • Educate and orient management
  • Assess readiness
  • Promote employee awareness of the process’s purpose and objectives
  • Develop models, educate employees, and identify measures
  • Form a design team
  • Launch the model
  • Conduct team training and communicate with employees
  • Monitor results

Four steps warrant additional discussion here.

Educate and orient management. Conducting a gainsharing education/orientation session for the unit’s management team as an initial step is important to get all team members on board and ensure they have a common understanding of gainsharing’s basics, philosophy, and key principles.

Assess readiness. The management team should survey unit members to ascertain the level of cooperation, trust, and communication in the unit. The survey also should assess unit members’ attitudes regarding employee involvement and need for change. The results are tabulated and benchmarked against the norm for successful plans. The norm comes from a proprietary database of the results of successful gainsharing plans. The findings are thoroughly discussed among the participants, and the team then tallies the factors that support progress and those that hinder it. At the conclusion, the team determines whether there is a consensus to proceed.

Raise awareness of the process’s purpose and objectives. Fostering employee awareness is particularly important for HackensackUMC. The hospital recognizes the critical need for non-management employees to understand the gainsharing concept and the implementation process and be able to contribute to the process, and for the organization to be able to gauge these employees’ commitment to the program.

HackensackUMC’s employees are eligible for an annual incentive award based on a set of broad, organizationwide performance indicators, but units with individual gainsharing programs must opt out of the organizationwide system. At the end of the awareness session, employees are asked to vote whether to remain in the organizationwide system or begin a gainsharing program. At least 80 percent of a unit’s employees must vote for gainsharing in order for the program to proceed. Among the seven units participating in HackensackUMC’s initiative, an average of 94 percent of employees were in favor of moving forward with gainsharing. To date, only one unit has voted against the program.

Once a unit’s employees have voted in favor of moving forward, the project moves on to the design step, in which a task force is formed composed of five to 10 employees (depending on the unit’s size) to develop the plan’s elements. The task force includes representatives from a cross-section of the unit’s personnel who become change agents for success. The design task force is given management-approved parameters to develop many of the plan policies, such as which employees are eligible and when. Once the group has defined and thoroughly understands the plan measures and bonus calculation, it drafts a plan document to submit for management approval. The task force also is responsible for the plan kickoff and helps educate all other employees in the unit.

True Gainsharing Results

Total Gain Primary Measures per Year Over Initial Plan Years Baseline

The exhibit above provides the specifics of the gain/savings for HackensackUMC’s seven gainsharing units. For benchmarking purposes, a meaningful statistic is the annual gain per FTE. HackensackUMC’s average annual gain is just over $4,800 per FTE per year over the past six years. The average annual payout is a little more than $1,500 per FTE.

The exhibit below provides a more detailed view of the HackensackUMC improvement experience by measure. On average, spending, productivity, and patient satisfaction have improved by 9.0 percent, 6.3 percent, and 13.2 percent, respectively.

Improvement by Measure Over Initial Baseline

Success Factors

Six years after the ASC pilot, HackensackUMC has fine-tuned its gainsharing program by identifying and applying the following key learnings.

Give units flexibility to tailor the program to their specific needs, while ensuring the program’s overall design and purpose remain intact. Small hospitals may choose to implement a hospitalwide gainsharing plan, but because HackensackUMC is a large organization, with units that have relatively independent, stand-alone operations, it decided to implement gainsharing in each unit separately. Such an approach increases the level of awareness, teamwork, and accountability within each unit. There is no significant need for close collaboration among units, but all units had to agree to adhere to the underlying principles of the program.

Pilot the plan in a unit where success seems most likely. Employees often stand by and take a wait-and-see attitude whenever a new initiative is implemented. When launching a program that requires employee engagement, therefore, healthcare organizations should select as the pilot unit one that has clearly demonstrated a high level of employee engagement compared with other units. The pilot unit’s employees also should exhibit confidence in management’s abilities. The pilot unit’s success will help foster trust in other units, and trust is critical to success.

Get the timing right. It is best to implement a plan when the organization is not embarking on another major initiative or faced with unique and pressing business conditions. At HackensackUMC, the gainsharing initiative in one unit, the emergency trauma center, experienced somewhat of a false start in the second quarter of 2014, which came after a major expansion and reconfiguration of the unit.

The timing also paralleled the rapidly increasing number of insurance enrollments resulting from the Affordable Care Act. After a positive first quarter, the unit was inundated with patients and experienced an increase in emergency department (ED) admissions. The hospital was near capacity, resulting in slower patient throughput. Due to the severe strain on department personnel and other resources, spending, productivity, and patient satisfaction were adversely affected, undermining any near-term opportunity for further gains.

Unfortunately, the gainsharing model no longer matched the business environment, and the plan was temporarily suspended and replaced with a transition incentive plan focused strictly on patient throughput. Yet employee attitudes toward participation remain positive, and the unit eventually will return to gainsharing.

Ensure employees are represented on the design team. The best way to promote organizational change is to get employees involved in the process. Including employees in the planning was a key to HackensackUMC’s success.

Set an achievable, fair baseline. The baseline, the level of performance that must be exceeded to generate a gain, needs to be one that is fair and acceptable to the institution.

Moreover, employees must trust the baseline and perceive it to be fair and reasonably attainable. Department budgets are never used to set the baseline. In larger institutions, many employees don’t understand or trust the budgeting process. By employing a historical standard rather than budget as the baseline, people will trust the number and readily recognize that the possibility of improving performance. Most of HackensackUMC’s units use the 12- to 24-month period prior to the gainsharing plan’s initial implementation as the baseline.

The baseline also should be readjusted each plan year to encourage continuous improvement. The practice has been that the baseline goes up, but not radically. Generally, the baseline is adjusted gradually each year by using a weight averaging approach, weighting the initial baseline by two and the first-year results (current year) by one. However, the process must be carefully managed to ensure fairness to the hospital and team members as well. In some cases, as the opportunity for gains diminish, a maintenance baseline is established. In other instances, baselines have been eased to account for changing business conditions. Most important, when the baseline is adjusted, communication of the change is critical. The unit head should meet with the design team to discuss the fairness and soundness of the change.

Foster open communication. Information should be shared with all employees on a straightforward, understandable, and ongoing basis. Employees should understand their impact on the measures. HackensackUMC typically uses bulletin board postings, charts, newsletters, and other forms of written communication in addition to verbal communications. Management conducts a gainsharing meeting with the full staff at least quarterly to review results, identify factors in success or failure, and recognize individual and team activities.

Focus on patient satisfaction. All gainsharing programs should contain a patient satisfaction element to help maintain employees’ focus on identifying opportunities for financial gains. The practice at HackensackUMC is to set the gate at a relatively moderate level of performance that the unit has actually experienced over the past few years.

Provide for ongoing employee involvement. The employee involvement system is an integral part of the gainsharing system. It gives the organization a structure to change employee behaviors. Without change, there is no gain. An employee involvement system encourages teamwork and collaboration. The resulting environment will make the plan viable over the long-term. The involvement team takes performance improvement ideas from unit team members, fully evaluates them and implements the viable ones. In all cases, prompt feedback is required. It is this type of employee engagement that builds trust, partnership, and ownership for the team members.

Ensure the plan is dynamic and adaptable to changing circumstances. Regardless of what may be measured, there are always factors outside of both the employees’ and the organization’s control that may affect the results. Using actual historical information and zero-based budgets helps to build in responsiveness to unknown or unpredictable factors. Management should be continuously prepared to modify the calculation if necessary. HackensackUMC reviews its gainsharing plans annually.

Commit time to training. Some employee training is needed before a gainsharing program can begin. An obstacle that HackensackUMC faced was finding time for busy medical care professionals to attend training, especially for those who worked in the ED and operating rooms. Trainers should be available to provide a potentially large number of sessions with flexible timing.

Hackensack Meridian Health

Since the merger with Meridian Heath, the interest in expanding the gainsharing program has heightened. New gainsharing initiatives are under way at several units at Jersey Shore University Medical Center and Southern Ocean Medical Center, and three other medical centers are currently exploring the gainsharing concept.

HackensackUMC views gainsharing as being much more than a compensation system. Gainsharing is an employee engagement tool that makes employees true business partners and involves them in the business decisions of their department. Gainsharing has become an important part of the hospital’s business strategy and a method to promote performance improvement through its people. HackensackUMC has learned that gainsharing can be a powerful tool for positive change and employee satisfaction.

Michael A. Camuso, CCP, CBP, GRP, PHR, 
is vice president, compensation and productivity programs, Hackensack Meridian Health, Edison, N.J..

Robert L. Masternak 
is president, Masternak & Associates, Medina, Ohio.

Lani Garris, MAS, BSN, RN, CNOR, 
is vice president, office of the experience spectrum, Hackensack Meridian Health, Edison, N.J., and formerly, administrative director of ambulatory peri-operative Services, Hackensack, N.J..

Mary E. Bautz, CCP, 
is senior compensation analyst, Hackensack Meridian Health, Hackensack, N.J..


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