Hospitals across the nation are continuing to be challenged with finding adequate levels of cost savings to offset income constraints as they prepare for even greater reimbursement shortfalls from the government and private payers, as well as a rise in bad debt due to high-deductible plans offered through the health insurance exchanges. Most healthcare organizations are faced with limited options to squeeze the remaining opportunities out of the cost base, and the inevitable consideration of implementing a reduction in force must be confronted.
An RIF can come with many legal and cultural consequences that, when managed poorly, can eradicate the success of the cost reductions that the process was intended to accomplish. Before considering an RIF or any other substantial organizational restructuring as an option, healthcare organizations should consider the following six strategies to achieve savings and position the organization for long-term success in a value-based care system.
1. Execute due diligence and assure the infrastructure and accountability is in place to track, monitor and report labor and non-labor costs and variances to budget before any restructuring action. Does the finance and/or decision support department(s) adequately track all related operational and financial metrics? Are there seasonal and month-by-month comparisons of performance prepared with respect to budget? If the organization is limited in the slightest by either of these questions, consider if the tools are at hand to make the right decisions.
As a component of due diligence, it is important to determine how the organization's labor ratios stack up to organizations of like size and within close proximity. By recognizing the optimal staffing ratios for hospitals of similar characteristics, it provides perspective on whether quality will be sacrificed for reduced costs. This is especially important in clinical areas. To begin assessing labor ratios, utilize a robust department by department benchmarking database that allows one to compare each department's number of worked or paid hours per unit of service"" in comparison to other hospital department compare groups. Recognize that the comparisons are designed to show how a department ranks in efficiency compared to peers and use this knowledge to reinforce decisions on next steps.
2. In conjunction with performing due diligence on labor-related benchmarking, utilize appropriate department benchmarking tools to assess and quantify non-labor cost reduction opportunities. Leadership often knows there are inefficiencies in the institution from a global level but many times is uncertain what components of the organization are feeding that perception. Department-by-department non-labor benchmarking can bring awareness to areas that perhaps have not been considered to have a high-cost structure and validate other areas. Evaluating each department as it compares to its peer hospitals of like size and/or region gives concrete perspective on how the organization is operating from a non-labor cost standpoint. By incorporating benchmarks into your decision making process, they can provide the directional aptitude to strategically drive decision-making on a more concise and less conceptual basis.
3. Deploy a value analysis team, in conjunction with physician leadership, to standardize equipment/supply purchases and appropriately manage the adoption of new technology. As electronic medical records and other technology continues to prosper in the age of meaningful use, hospitals and physician groups should continually seek ways to be efficient and cost-effective in adopting technology and new age equipment. But what exactly is the appropriate median to balance cost and quality in a competitive marketplace? There is not a "one-size-fits-all" solution, but hospitals can make the choice to avoid the "shot in the dark" mistake of investing in poor equipment and infrastructure. By forming a value analysis team, hospitals can take a more objective and standard approach to assessing the clinical and financial appropriateness of capital and supply purchases.
Capitalize on the opportunity to engage the physicians in the organization to take leadership roles in evaluating ways to improve the cost and quality in care. Within the multidisciplinary team formed in the VAT, teams can meet periodically to focus on specific service line projects or choose to take on organization-wide projects to pull out cost. Nonetheless, whatever approach the organization chooses, the proactive development of a cost reduction team is invaluable in the age of declining reimbursement.
4. Consider all options available to achieve labor reductions such as attrition, restructuring, repositioning and early retirement. When considering a conventional RIF, executives may not be aware of the hidden costs and cultural consequences that exist post-implementation. AN RIF typically has substantial attorney fees for regulatory review and post-RIF employee settlements. For internal settlements, severance-based payouts are possible for employees who have been involved with the organization for an extended period of service. The most important consideration is that an RIF can hurt morale of the existing employees. Lack of employee confidence moving forward can lead to high turnover rates as well as difficulty in recruiting top talent moving forward. This could ultimately be the most costly impact, so it is important to consider an RIF as a last resort compared to other routes to reduce labor cost.
The most often used alternative to a conventional reduction in force in the short-term is to offer early retirement to employees that are targeted to be laid off. Providing this option offers pension opportunities or percent of salary guarantees post-termination. Although this is a culture positive option as it offers the ex-employee and current employees a sign of good faith, it still potentially leaves significant cash liability on the books for years to come. Consider an early retirement option for employees with more than 10 years of service as a rule of thumb. Another short-term option is to balance labor supply and demand by repositioning the targeted individuals to cost centers that need labor. This can be a tricky alternative, as the human resources department needs to be diligent in remaining objective and re-allocate employees based on skill set. Although the organization is not developing any major savings from labor reduction, it is in fact saving money from resources needed to recruit and hire new employees, which can be costly. It is important not to get in the habit of repositioning and shifting employees throughout the organization while metaphorically "kicking the can down the road." This can ultimately lead to the organization getting fatter through additional years of merit increases, service tenure and 401k vesting. If either of these two options carries too much risk, and there is more time, consider a mid- or longer-term alternative.
A mid- to long-term alternative to an RIF is to eliminate positions through attrition and/or organizational restructuring. The concept of elimination by attrition is to not backfill a position once the person formerly in the position vacates; while the restructuring concept relies on shifting functions and potentially merging roles when someone leaves or is promoted. Typically, organizations will begin the planning phase of eliminating through attrition and restructuring six to 12 months prior to any action. By being prepared for opportunities to close the door on non-essential labor coming back in the system, this prevents the need to eliminate it outright later. As the saying goes, it is easier to keep the alligator out of the boat than it is to get him out of the boat once he is in it.
To properly plan for these aforementioned alternatives requires decision-making in line with the organization's long-term goals and made in stride with the organization's culture.
5. Reinforce that it will not be business as usual, and utilize Lean, Six Sigma or other process improvement tools to re-engineer care processes that demonstrate value. The world is full of process improvement techniques, tips and tricks. It is time to stop thinking they are gimmicks or "one-off" tools and actually use them long-term to drive down cost. Many of the leading healthcare organizations have been using these tools for years, and it has allowed them to remain profitable despite dwindling revenue streams.
Lean/Six Sigma have different approaches to limit variation and reduce unnecessary processes (waste), yet both have a common goal to deliver value to the customer (or patient, physician, staff member, etc.). When introducing Lean/Six Sigma to an organization, it is important to implement the work in small doses, such as pilots in small departments, to gain buy-in and engagement of these methodologies. Identify the areas that have high cost structures or have the potential to be "quick wins" through benchmarking, and begin process improvement on those areas first.
In the early stages of implementation, there will be those interested in blocking attempts at change or war torn with past collapsed process improvement initiatives. Remain steadfast in the pilot projects and trust the tools that Lean/Six Sigma provide. Reinforce that these process improvement initiatives are not intended to cut labor; if they were, no one would want to participate in any process improvement initiative ever again. Leadership needs to set the precedent that process improvement activities are intended to drive out unnecessary processes and allow employees to do their work with minimal frustrations.
Upon completing the first sets of goals, begin embedding these tools into the organization's culture and assign leaders to spearhead this effort. Set near- and long-term goals to assure progress of ongoing projects and sustainability of completed initiatives. As time goes on, compare your post-implementation cost ratios to baseline and seek opportunities to continually improve. Part of the process improvement game is recognizing that it is a continuous improvement lifecycle without an end. As a value-based leader, embrace and be comfortable with this notion.
6. Start aggressive care redesign to lower costs permanently. In the new era of value-based care, clinicians are tasked with moving away from the incentives that were drawn from a fee-for-service environment and moving toward full-continuum patient and population health management. In an effort to keep patients out of the inpatient setting and to limit unnecessary tests and treatments, care protocols need to change.
Similar to starting up a process improvement initiative, begin with one or two service lines to carry out care redesign and gain buy-in from physicians and clinical staff. Keep in mind the process needs to be transparent and that the goals of the care redesign should be laid out upfront. Some examples of the goals of care redesign follows:
- Develop clinical protocols with the concept of value to the patient and to the organization.
- Update pre-procedure and post-procedure order sets to be in line with evidence-based practice and to limit overutilization of tests.
- Reduce the variability of the service line both in terms of clinical and financial outcomes.
- Present and understand baseline performance in cost and throughput efficiency.
- Develop a consistent, evidence-based approach across providers.
- Develop a timeline and accountabilities for service line goals and objectives.
Care redesign — when managed and engaged appropriately — can lower the costs of care, limit variability in clinical practice, and improve the quality for patients in the targeted service line.
Consider the above strategies prior to taking the course of a reduction in force. Ultimately, if all else fails, there may be no other choice than an RIF. However, if the organization is able to buy a few extra months of cash on hand, many of the above considerations are may help pull the organization out of the red and away from the threat of an RIF.
For more information on alternate strategies to a reduction in force, please contact Peggy Crabtree, RN, MBA, vice president at The Camden Group, at 310-320-3990 or pcrabtree@thecamdengroup.com.
Ms. Crabtree is a vice president with The Camden Group and an expert on service line planning and development, co-management arrangements, bundled payments, and hospital operations. She has more than 25 years of hospital leadership experience and a strong clinical background, having held service line director and executive leadership roles in numerous hospitals.
Mr. Goddard is a senior consultant with The Camden Group and is an experienced healthcare executive with a focus in surgical and hospital operations, revenue cycle analytics, process improvement initiatives, mergers and acquisitions, value-based care initiatives, and business development tactics. He has worked for a variety of healthcare organizations — from community hospitals and physician groups to some of the largest academic medical centers in the country.
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