At the Margins

Lessons from the Cleveland Clinic: How to tactically address workforce reductions

by John Johnston, CPA, MHA

Cleveland Clinic is renowned both for both the quality of care it provides and for the stability of its economics. So when the Clinic announced a plan last September to shrink its workforce as part of a larger initiative to decrease its operating budget by $330 million, it attracted attention across the industry—and raised a new question for executives: How should we view workforce reduction?

In the past, workforce reduction initiatives have been a "slippery slope" for CEOs. Boards often assume staff reductions are a reflection of management competency. Furthermore, most health systems are major employers in their communities, and workforce reductions can be translated as instability and an indication of deeper problems.

As a result, any reduction efforts historically were instituted only after all other options were exhausted.

They're making cuts while margins are still healthy.But that’s not the case with the Cleveland Clinic, where leaders have stated that budget reduction initiatives and the associated labor cost cuts are in response to expected reimbursement cuts stemming from health care reform—not to any immediate fiscal crisis. In other words, they’re making cuts while margins are still healthy, so that they can be thoughtful and intentional about where to reduce staff and how to redesign care processes.

It’s a savvier way for hospital and health system leaders to approach the very sensitive issue of labor cost reductions. Reducing workforce should no longer imply some failure on the part of health system leaders. To survive, hospitals have to move toward a leaner, more efficient workforce today—and we're already seeing many of our clients take big steps forward.

Why current labor costs prevent health system sustainability

The Workforce Efficiency team surveyed 150 executives and found that many organizations still struggle with retroactive staffing, outdated budgeting methods, and disjointed strategic planning.


Setting the right targets

Before considering other reduction strategies, most hospitals need to refresh their current productivity targets. Much has changed over the last 18 months alone, yet many hospitals are managing to targets that were set three or more years ago. Therefore, positions are being approved and filled based on targets that no longer reflect maximum achievable productivity.

Today, we guide clients in a top-down approach that bases labor cost targets off of revenue projections, not volume projections. The entire labor budget is set to maintain labor at a target percentage of net revenue. Department allocations are still aligned with volume, but at no time should the overall labor cost structure exceed this target percentage.

This model introduces a new view of budgets and full-time equivalents (FTEs), whereby managers have an efficiency target to maintain instead of having an FTE budget. This model is difficult for some managers to understand. It requires shifting culture and training managers to think in a new way.

Progressive organizations are also looking hard at how they structure overall departmental staff resources. In the past, departments looked at their staffing needs by direct patient care activities. For example, nurse-to-patient ratios would be the metric of focus. However,a large percentage of a department’s staff is non-clinical and should be managed just as closely as nurse-to-patient ratio.

As challenging as it seems, reexamining structure is also a good opportunity to ensure your health system’s leaders have the right set of skills to focus on how to deliver care in today’s market, especially with regard to ambulatory care and population health management.

Remember, we're a people business

Your workforce is your most important investment. Don’t let the idea of workforce reductions confuse the fundamental reality about health care: your workforce is your most important investment, above technology and buildings, because your best asset is the care your people provide.

The hospital business is a people business, and that’s one thing that’s not changing. As hospital leaders, we have to be intentional in every decision we make around changing the structure and composition of that workforce. But we still need to make those decisions and take the necessary strides to get a right-sized workforce.