3 Reasons Why Layoffs Don't Benefit Hospitals in the Long Run

Dean Gruner, MD, and Chris Van Gorder are not your everyday health system CEOs. Dr. Gruner is president and CEO of ThedaCare, a five-hospital system in Appleton, Wis., with roughly 6,100 employees. Mr. Van Gorder, a former police officer, is president and CEO of Scripps Health, a five-hospital system in San Diego with almost 13,000 employees.

The one thing both have in common? They each have instilled a "no layoff" philosophy, meaning their employees will not see layoff notices unless there is a catastrophic event or hospitals close down.

Dr. Dean Gruner, CEO of ThedaCare, has a Both Dr. Gruner and Mr. Van Gorder emphasize the word "philosophy" because it is a mindset and collection of values held within their organizations. "Initially, we called it a policy, but a policy was an overstatement," Dr. Gruner says. "But with this as a philosophy, layoffs are our absolutely last choice. We believe we can make some improvements instead of laying people off and invest in retraining those people so they can perform capably [in other roles]."

A "no layoff" philosophy among hospitals and health systems is almost unheard of today, as dozens of healthcare job eliminations are reported every month. Whether they are related to healthcare reform or generally constrained finances, hospital layoffs remain prevalent. However, Dr. Gruner and Mr. Van Gorder have adhered to these philosophies because they believe layoffs don't actually accomplish anything worthwhile.

A recent op-ed from two Harvard University economists this summer agreed with that premise. Politicians often judge a reform effort on whether it is a job creator or job killer, but the economists argued an emphasis on jobs doesn't really match the crux of healthcare reform. "Treating the healthcare system like a [wildly inefficient] jobs program conflicts directly with the goal of ensuring that all Americans have access to care at an affordable price," the authors wrote.

Here, Dr. Gruner and Mr. Van Gorder explain why layoffs are not a panacea for hospitals and health systems enduring financial hardship. Instead, investing in the employees already within the organization will lead to a better culture and a more optimistic bottom line.

1. Layoffs are only a short-term financial solution. As any hospital executive knows, labor constitutes anywhere between 45 to 60 percent of an organization's operating budget. It's a prime target for budget cuts when money is running low, but Mr. Van Gorder says it's a fallacy to think layoffs will solve long-term budget problems.

"The easiest and fastest way, at least in the short run, to save money is to do layoffs and get rid of people," Mr. Van Gorder says. "But what happens is usually finances are back under control, and then you are rehiring people. You'll have a good year, then a bad year. When I came to Scripps 13 years ago, I said there has to be a better way."

Mr. Van Gorder helped jumpstart an organizational restructuring at Scripps — a "horizontal" strategy instead of a vertical one. "We wanted to construct a way to eliminate non-value-added variation and take those costs out of the system as opposed to taking people out of the system," he says.

In fiscal year 2011, Scripps' horizontal management structure and strategy of eliminating variation through physician and staff collaboration resulted in $77 million in performance improvements, Mr. Van Gorder says. In FY 2012, that total was $60 million — all without a single layoff.

Dr. Gruner says ThedaCare has had a "no layoff" philosophy and commitment to Lean techniques, similar to Scripps, since 2003. He agrees with Mr. Van Gorder, saying layoffs are only a patchwork strategy with immediate financial gains and long-term financial and cultural losses. However, focusing on the retention of employees without layoffs is actually the simpler strategy — it just requires an undying commitment and focus.

"[A 'no layoff' philosophy'] is very simple," Dr. Gruner says. "But in practice, it's just hard work. It's not easy to do."

2. Retraining employees is cheaper than laying them off or outsourcing. Conventional wisdom says that keeping employees around costs more than not having them on payroll or finding cheaper labor. However, layoff maneuvers are not completely cost-free, as unemployment and severance pay are usually involved.

Chris Van Gorder, CEO of Scripps Health, has a Mr. Van Gorder says instead of laying people off at Scripps, the health system has invested in a career resource center. Scripps will place employees whose jobs may have changed or are no longer needed into the CRC for 90 days — with full pay and benefits — and professional human resources staff will help those people develop their interview skills, update their résumé and enhance their general job searching abilities. Those employees are also first in line for any new open positions that pop up at Scripps.

In 2012, 51 employees went through Scripps' CRC, and 90 percent of those people stayed with the health system in a new position or were helped in finding another job. The other 10 percent voluntarily decided to not stay at Scripps. "It saved us $697,000 in unemployment and severance," Mr. Van Gorder says. "It's really a cost avoidance strategy because laying people off is pretty damn expensive, but it's also created an enormous amount of loyalty because we help ensure them they can have a job at Scripps, if that's what they want."

Dr. Gruner says at ThedaCare, there is only about 9 percent employee turnover. The system wants to keep that number low because low employee turnover usually means high morale and reduced amounts of waste without having to resort to layoffs or outsourcing. "If you have to hire someone from outside, there's a big learning curve," Dr. Gruner says. "So isn't it wiser to take someone who knows you, your policies and likes to work here, and then retrain them? It's still cheaper than hiring from outside."

ThedaCare retrains its employees in a similar fashion to Scripps in that it guarantees to help employees find new employment primarily within the health system or elsewhere, and its emphasis on Lean principles has led to very successful retraining efforts. "The number of people we've redeployed or retrained has varied from as few as 25 to up to 75 per year," Dr. Gruner says. "We would like that to be a higher number, not lower, because a higher number means we're doing a better job of identifying waste."

3. The possibility of layoffs breeds fear and distrust. More than anything, layoffs — and the potential for layoffs — causes a sense of panic within the employee base. The past four years have signaled the deepest recession in the United States since the Great Depression, and the thought of being unemployed in today's economy is frightening to anyone who has bills to pay.

Dr. Gruner says the reality of the healthcare sector is stark: The utilization of services has flattened or even declined in some areas, and hospital revenues are growing at a much lower rate than in the past five to 10 years. Reimbursements from the federal government and commercial payors are also trending downward, leading to even fewer dollars to spread around. However, the way to overcome those obstacles is to make sure the entire organization is onboard with its strategy, and layoffs will only undermine those efforts.

"In order to really match your expenses to revenue growth, you really need the energy and engagement of employees to manage that new environment," Dr. Gruner says. "Rather than having people focused on the old [cover yourself philosophy] where they are protecting their jobs and doing things that are trying to justify their position, we hope we have people out there trying to improve their work and the care of the patients that count on us."

Mr. Van Gorder adds that employees are just as important as the patients they treat every day. Patients deserve the best care possible, and the same should apply to those employees.

"I'd get emails from employees, saying thank you because they were the only person in the family who has a job," Mr. Van Gorder says. "People can count on their job at Scripps to get through the recession without families falling apart. By supporting people, you end up with a much better culture and employees that are more motivated to help you through these challenges ahead."

More Articles on Hospital Layoffs:

This Year's Mass Layoffs in Hospitals Projected to Equal 2011

Layoffs, Reduced Services Loom for West Penn Allegheny

13 Recent Hospital and Health System Layoffs

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