Lean as an Alternative to Mass Layoffs in Healthcare

When faced with financial pressures, hospital leaders often try to reduce costs by laying off hospital employees. This is, in a way, understandable, since payroll makes up 60 to 70 percent of a typical hospital's overall costs.

An increasing number of hospitals, however, are questioning the long-term impact of layoffs on morale, cost and quality. As a result, many are turning to "Lean management" practices, based on the Toyota Production System, as an alternative. The Lean methodology reduces costs, with lower costs being the end result of higher staff engagement and better patient care. Denver Health is one such health system with a "no-layoffs philosophy," having saved over $150 million through their Lean program. Without those savings, Denver Health would "absolutely have had to cut jobs," said CEO Patricia Gabow, MD, in a Denver Post report.

This change in approach comes during a period of economic uncertainty. Coupled with reimbursement reductions associated with health reform efforts, hospitals have been laying off more employees. In fact, the number of mass layoffs at hospitals and ambulatory care clinics has spiked, with June's rate being twice that of earlier months in 2012, according to the Bureau of Labor Statistics.

Nearly every day, there are headlines about a new layoff at a different hospital or system. In many of these cases, executives say they are forced to lay off employees, often directly blaming payment reductions from private payers or Medicare and Medicaid reimbursement rates. The American Hospital Association says a 2 percent Medicare cut, a loss of $41 billion over eight years, would lead to 93,000 layoffs in 2013 and a total of 195,000 layoffs by 2021.

Giving up on the cycle of layoffs

One CEO who is questioning the use of layoffs as a cost-reduction method is Gary J. Passama, the CEO at NorthBay Healthcare in Fairfield, Calif. In a blog post, Passama wrote that NorthBay has "unfortunately had to deal with various cost crises by laying off staff" during his tenure, adding that senior leaders sometimes "really have no choice" about layoffs.

Mr. Passama now questions if their past layoffs really reduced costs in the long term. He wrote, "After a year or so, the employee count is back up and the savings evaporate," adding, "There has to be a better, longer lasting and less traumatic way to deal with such fiscal situations." Like many healthcare CEOs over the past ten years, Mr. Passama has learned that there are, indeed, other choices, and Lean management is one of them.

Eliminating or avoiding layoffs

Lean improvements are made by relying on the participation of frontline staff, as opposed to relying only on external "best practices" or experts. The use of the Lean methodology to redesign and improve processes very commonly leads to productivity improvements of 20 to 30 percent. But, translating productivity improvements into layoffs would understandably kill the participation in any future Lean improvement efforts. In a system so dependent on frontline workers, layoffs are to be avoided as much as humanly possible.

The term "Lean," in everyday usage often has negative connotations of not having enough people or resources, while the Toyota-based Lean methodology is based on having the right number of employees to meet customer needs while ensuring the best quality and safety. In hospitals, employees sometimes joke, fearfully, that "LEAN" means "Less Employees Are Needed." 

The Lean methodology, however, is based on Toyota's philosophy that continuous improvement and what they call "respect for people" go hand-in-hand — this includes not laying off people for short-term financial benefits. During the 2009 slowdown in car and truck sales, Toyota did not lay off any permanent employees, using their downtime for training, volunteering and process improvement activities. Toyota does this, arguably, not to be altruistic, but for the long-term financial good of the company — investing in its people instead of casting them aside when convenient.

Park Nicollet Health Services in Minneapolis developed and instituted a "no layoff policy" early in their adoption of Lean management, says Steve Mattson, senior director of quality improvement at the health system. Mr. Matteson adds, "It was critical, as we began our cultural transformation and commitment, to focus on process problems, not people." The goal at Park Nicollet, he says, is to "bend the cost curve" by reducing waste (which leads to lower costs), adding that Lean is "a great way to involve teams in improving the work in their own areas."

Martin's Point Health Care in Portland, Maine, is "aggressively trying to cut our costs but are committed to doing it without broad layoffs," says their COO, Dale Bradford.

Oregon Health & Science University in Portland, Ore., has just started adopting Lean methods, but "we'll probably adopt a no-layoffs-related-to-Lean policy," says Charles M. Kilo, MD, their CMO. Dr. Kilo adds, "There are ways to manage workforce other than layoffs, which are generally a bad cultural idea," and those include redeploying people to other areas and allowing reductions to occur through natural attrition. "These measures should allow appropriate management of FTEs without layoffs," says Dr. Kilo.

Avoiding the "quick fix" that isn't a fix

While some organizations avoid layoffs that might otherwise result from Lean-driven process improvements, others are managing themselves so they can avoid layoffs altogether. Doing so requires, for example, managing growth carefully and being disciplined about not over hiring to avoid situations where the hospital suddenly becomes overstaffed. Some health systems have a formal policy, a set of practices, or they work hard to avoid layoffs even if they can’t promise they will never happen.

St. Boniface General Hospital in Winnipeg, Manitoba, faced very tough times, including government funding cuts that led to a projected $12 million budget shortfall. In the face of that, their CEO, Dr. Michel Teatrault, re-emphasized his "iron-clad commitment that nobody will lose their jobs," a policy that has been in place for over four years.

Dr. Teatrault asks, "How can you expect the workplace to be with you on improving quality, safety and productivity when they're mad as hell at you [because of layoffs]?" The focus at St. Boniface is about "preserving employment for the people who are here" and not about "preserving a certain number of jobs."

Dr. Teatrault adds that "layoffs are a quick fix, but they're not a good fix." If St. Boniface laid off employees, he expects that they would have to increase staff levels in the future, anyway, due to an aging population. He says, "It's a bit ridiculous to reduce the workforce" when facing future manpower shortages and increased demand for care.

Avoiding layoffs ensures staff engagement

Another organization that engaged employees, or "colleagues," as they call them, rather than resorting to layoffs is IU Health System Goshen (Indiana) Hospital. Under the leadership of former CEO Jim Dague, the hospital has avoided layoffs for more than 17 years.  As quoted by Becker's Hospital Review, Mr. Dague explained the importance of maintaining employment in a small town, saying, "If I do layoffs here, I might be laying off a neighbor or a relative." In 2009, the hospital was facing a budget shortfall, so Mr. Dague stood in front of an all-hands meeting and promised to shave his head if colleagues generated ideas that saved $3.5 million. They more than doubled the savings goal by finding many instances of small cost reductions that didn’t harm the patient experience. And, yes, he shaved his head.

ThedaCare in Appleton, Wis., is often considered one of the world's leaders in the application of Lean management practices, as fully described in the book "On the Mend" by their CEO emeritus John Toussaint, MD. The system has adhered to what current CEO Dean Gruner, MD, calls a no-layoffs "philosophy," as opposed to a hard-set policy. Dr. Gruner explains, "That means to me that it would absolutely be the last resort, but there is no guarantee that it might not ever happen. Hopefully never on my watch!" ThedaCare, like Goshen Hospital, engages staff members and leaders at all levels to find ideas through their "daily continuous improvement" approach. Dr. Gruner was quoted in the Milwaukee Journal-Sentinal as saying, "Nobody would get very enthusiastic about improvement in that world [where employees lost their jobs after finding ways to improve efficiency]."

Akron (Ohio) Children's Hospital uses both Lean management and a related approach, Six Sigma, in their continuous improvement efforts. Walt Schwoeble, vice president of human resources, says the hospital is committed to its employees and "to creating an environment whereby our employees are empowered everyday to be problem solvers." As at ThedaCare, Akron Children's Hospital realizes that they must make a commitment to employees who participate in improvement. Mr. Schwoeble says, "In order to establish the environment whereby employees feel safe at gaining efficiencies, we verbalize that we are committed to no employee losing their job as the result of a Lean Six Sigma performance improvement effort."

Jobs are Protected, but Roles Might Change

As at many other hospitals, avoiding layoffs often means that people must accept new roles, with the opportunity to receive new training and skills. Mr. Schwoeble says that Akron Children’s Hospital is "committed to retraining individuals whose work is impacted by our process improvement activities." Fred Sluecka, COO at Avera Health, based in Sioux Falls, S.D., says the system is "still doing Lean and still avoiding layoffs" (after earlier reporting on their policy) and that "anyone displaced goes into a transition pool where we retrain and reassign" staff. Mr. Slunecka says that rarely happens, as Lean improvements are usually an alternative to a department wanting to hire additional staff and that "Lean allows us to handle the new volumes or work requirements without adding staff."

Lisa K. Olenski, director of transformation support at St. Louis-based BJC Healthcare, says "redeployment and cross-training are the options of choice" in their system, even though the system does not have an "official" no layoff policy. Olenski adds that avoiding layoffs "has been adopted as a leadership practice given the negative consequences associated with linking Lean and lay-offs."

Layoffs due to productivity improvement or business conditions?

While most organizations would prefer to avoid layoffs, some draw a distinction, with their staff, between layoffs that are the result of Lean or productivity improvements versus those driven by outside factors and general business conditions. Hospitals might reduce staffing levels if patient volumes drop dramatically and permanently or if they choose to exit a particular line of service or to close a clinic in a particular town.

At MemorialCare Health System in Laguna Hills, Calif., Brian Stuckman, vice president of material and lean resources, says that they have a staff redeployment process, and "there have not been layoffs related to Lean improvement, but there have been business decisions to reduce programs or the workforce for strategic reasons."

Cara Bailey, vice president of continuous performance improvement at Seattle Children's Hospital, says, "Especially in economic times like these, reassuring staff that we won't lay them off as a result of improvement activities, while drawing a distinction in this practice for dire market conditions can seem hollow and disingenuous." She adds, "It is counterproductive to the staff engagement we're trying to build." She believes that "the no layoffs philosophy puts the onus on us as leaders to intensify our improvement efforts, create additional capacity with existing resources, and ultimately avoid having to make that distinction to an anxious workforce."


Many hospitals across the United States and Canada are demonstrating that, even in challenging financial times, there are indeed alternatives to mass layoffs. Healthcare executives have a choice between short-term cost reductions — that don't always result in long-term cost savings — and approaches that better preserve employee morale. Considering the correlations between staff morale and patient satisfaction and quality outcomes, Lean management allows healthcare organizations to engage their employees rather than getting rid of them. Following the lead of Toyota, lean hospitals must make decisions based on the long-term good of the organization, "even at the expense of short-term financial goals." By working together and engaging everyone in the Lean improvement process, we can improve quality, service and productivity — and even lower costs.

More Articles by Mark Graban:

3 Best Practices for Implementing Lean Processes at Your Hospital With the Author of Lean Hospitals
5 Key Principles for Hospitals From Toyota's Lean Production System

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