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June 5, 2020

Many hospitals are weighing labor cuts. Here are 10 principles to consider.

Daily Briefing

    For most health care organizations, it's clear that continued financial turmoil lies ahead. One in five hospital executives expect over a 30% decrease in revenue in 2020, according to a recent Healthcare Financial Management Association survey. The looming economic downturn will only exacerbate the damaging financial impact of Covid-19 on health systems.

    Use the Covid-19 Elective Surgery Cancelation Impact Estimator to estimate losses

    We know from previous recessions where many of the first cuts will be made: labor. Since labor is the largest part of the operating budget, the cuts made there are typically swift and severe. And while making cuts anywhere isn't an easy choice, labor is particularly painful for a few reasons.

    First, these cuts have an outsized downstream impact. Decreased engagement can drive up turnover costs, and a reduction in clinical staff is correlated with a decrease in quality. And since many health care organizations are the biggest employers in their communities, cuts that impact employee livelihood have a ripple effect on the local economy.

    Second, these cuts come at a time when workforce burnout is at an all-time high. Clinicians are enduring one of the most difficult practice environments in living memory—all while juggling concerns about their personal safety, well-being, and finances. Cutting compensation or eliminating positions at this time can further test staff trust and engagement.  

    Decisions about how to cut the labor budget are rarely easy, especially when staff are giving their all and making very real sacrifices. But if approached wisely, leaders can prevent a difficult situation from turning toxic.

    10 principles to inform your labor savings plan

    1. Look beyond the labor budget. The labor budget is often among the first places executives look for savings because it represents the biggest chunk of overall expenses. The problem with this approach is it overlooks more promising opportunities for reducing near-term operating costs. For example, organizations could start by renegotiating unfavorable contract terms and updating outdated care protocols before moving on to labor cuts that impact employee livelihood.

    2. Forecast future revenue decline—and make your labor contingency plan now. Model future financial performance for best-, middle- and worst-case revenue declines. As a starting point, use the Covid-19 Elective Surgery Cancelation Impact Estimator to estimate losses. Identify a set of cost cutting moves to enact for each revenue scenario. For example, you may cut leader salary in the best-case scenario, reduce health benefits in the middle, and implement a broad-based salary cut in the worst-case. To make these decisions, assess the cost savings potential as well as the impact on patient care and staff.

    3. Start at the top of the house for salary cuts. Avoid cuts that are going to impact frontline staff before exploring options to reduce administrative overhead, including senior leader salaries and bonuses. Shield as many of your patient-facing positions as possible. Significant cuts to staff pay and benefits can backfire when senior leaders are still getting bonuses and paychecks that are sometimes 30 times that of a frontline worker, as seen by a recent controversy. Several CEOs—including those at Providence, Advocate Aurora, and WellSpan Health—chose to donate their salaries or bonuses to mitigate the impact on frontline workers. If this is financially feasible, this can go a long way in bolstering your reputation and brand with staff, patients, and prospective employees.

    4. Don’t forget to invest in the remaining workforce to support emotional recovery. Whether or not your organization was in a Covid-19 hotspot, the workforce has endured an unprecedented level of anxiety and grief. Even—and especially—if labor cuts have to be made, it’s important to help the remaining workforce heal and re-engage in your organizational mission.

    5. Communicate carefully and transparently. There's too much uncertainty right now to say that the worst-case scenario won't happen. When organizations make their first round of cuts, leaders shouldn’t be tempted to make promises they can't keep when communicating with staff. Leaders may also be concerned that transparently discussing the organization's financial performance will negatively impact engagement. Ultimately, communicating the "why" behind cuts to the labor budget will improve morale more than leaving staff in the dark about impacts to their livelihood. Communicate that cost savings are to protect patient care.

    6. Where possible, provide options. When cuts will impact the frontline, aim to provide an option so staff can choose what works best for their personal financial situation. For example, you may offer voluntary furlough, or the choice between taking a defined amount of PTO or a salary reduction.

      You might also consider this for staff benefits—ask for input on what they can do without. Involve staff where it makes sense (and when you can actually incorporate their opinion before a decision is made). The same also applies to renegotiating physician contracts. Employers could offer the choice between delaying bonuses, reducing salary, or asking doctors to take PTO for a predefined time period.

    7. Align current decisions with long-term strategy. Many labor budget cuts (e.g., furloughs, salary reductions, hours reductions) have to be made based on who is currently needed to serve patient volumes right now. However, organizations that take the long view are better equipped to sustain savings and performance in the long-term.

      If you can, partner with your organizational development team to do a more thorough organizational review to understand what functions and/or roles are redundant or may no longer align with your future strategy. For example, now may be the time to evaluate leadership layers. Are all the leadership layers that you have necessary and uniquely differentiated? Simplifying your leadership structure is hard work, but rebasing some leaders may give you the savings necessary to avoid layoffs down the road.

      This also may be the time to evaluate and take action on essential and non-essential work. As you have to eliminate positions, also readjust work expectations so that staff aren’t left with impossible jobs.

    8. Cut fringe benefits that staff can live without. Entering into a recession, some of the fringe benefits you currently have may not be as important as they were to staff last year. Many organizations are already cutting back on 401K matches and tuition reimbursement. Spending on retention-related programs may be less important right now than supporting staff’s emotional and financial health.

    9. Prioritize your top talent. Remember if you offer voluntary furloughs, layoffs, or early retirement, you risk losing some of your best talent. Even as you pause other engagement efforts, now is the time double down on retaining top performers. For example, ask managers to schedule stay interviews with their top performing staff to prevent an exodus of staff down the road. Have a plan in place to hold onto your expert clinical staff.

    10. Minimize risk. Create clear defensible criteria when making cuts, especially when they will only impact a subset of staff. Ensure that any changes are not disproportionately impacting protected classes.

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    Leaders and the front line alike are facing some of the most difficult professional and emotional challenges of their career. We'll be there to support you as you as you navigate the trying times ahead.

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