Layoffs an Effective Strategy for Economic Crisis, But Beware the Downstream Costs

The last two years of deep recession have forced many executives in the healthcare sector to take drastic steps to curb costs. Even though healthcare is one of the few sectors in the overall economy to see job growth, hospitals have not been immune to layoffs and other staff reductions.

While the job cuts may have an immediate effect on cost containment, other downstream costs should be considered.

The new HealthLeaders Media Industry Survey 2010 found that 38% of hospital CEOs and 46% of CFOs found layoffs and staff reductions to be an effective strategy when dealing with an economic crisis, while 37% and 35% of CEOs and CFOs, respectively, remained neutral about the idea. Only 25% of CEOs and 19% of CFOs found layoffs to be ineffective. [See Question 13.]

When C-suite denizens are asked in the survey to gauge the impact of healthcare trends on their hospitals in the next three years, their responses provide an interesting contrast. For example, 51% of CEOs say the nursing shortage will negatively impact their operations, and 53% say organized labor will negatively impact their organizations. [See Question 6.]

So, on the one hand, 75% or more of senior hospital executives either support or are neutral on the idea that layoffs are effective, while half of those same executives say they're apprehensive about workforce shortages and unions.

Here's the problem: Cutting staff–regardless of the motive–will save money short term, but it also will exacerbate future workforce shortages when it's time to start hiring again, and push remaining employees–fearful of job security–into the welcoming arms of organized labor.

Is there disconnect here?

Not entirely, but there is some static on the line.

To be fair, these executives in the survey aren't necessarily saying they're in favor of layoffs. They're saying that layoffs are an effective short-term strategy to deal with the worst economic crisis since the Great Depression. Many healthcare executives probably view layoffs as a regrettable last resort.

"I can't envision a scenario where a staff reduction is really an effective long-term strategy. It really falls much more closely along the lines of a short-term tactical response to a financial situation," says Bernie Becker, vice president/CHRO at Stormont-Vail HealthCare in Topeka, KS. "If you look at it strategically, unless you are eliminating programs and services and the people that are needed to deliver those programs and services, when business rebounds you are going to have to staff back up.

Most of the time, you are going to have higher labor costs than if you had left those people in place. It's always more expensive to hire people than it is to keep them." Chris Roederer, vice president of HR at Tampa General Hospital, concedes that layoffs are effective at containing costs. However, he says, hospitals that conduct layoffs risk losing long-term credibility with remaining employees.

"Many organizations that conduct layoffs feel the pain for years to come. Employees do not forget," he says. "With proper planning, organizations would be better served by meeting staffing reductions via attrition. That avoids the negative employee relations impact, potential negative impact on long-term recruitment, and severance and unemployment expense."

Lose employees' confidence and you also lose critical allies in the fight to identify and contain costs. "If employees trust and respect leadership, they will typically understand and even assist leadership in eliminating other expenses to avoid layoffs such as minimizing overtime, special pay practices, or modified shifts," Roederer says.

Once those employees are laid off, Becker says, there is very little chance that they will return, especially if they are skilled clinicians. "They are going to go somewhere where there is work. And, there is work. They may have to move, but we are dealing with a much more mobile workforce than we were 10 or 20 years ago. Our Gen X and Y folks don't have anywhere near the geographic restrictions that their predecessors did, and there is no sense of organizational loyalty. That is not in their blood. They think short term rather than long term anyway."

Becker recommends changing the cost-cutting focus from numbers of employees to payroll costs. "There is a bit of a knee-jerk reaction when an organization is faced with some serious financial obstacles that says ‘We have to let people go,'" he says. "Merely reducing head counts may not be the most effective or efficient way of achieving those targets. The organization is probably better served at looking at total payroll costs without necessarily letting people go. Maybe you examine some of your pay methodologies. Maybe you look at your overtime utilization, or your call pay utilization. Maybe look at benefit redesigns. There are ways to reduce the total labor costs without necessarily reducing head count."

The healthcare workforce shortage is not a threat to the future of healthcare delivery, because it's already upon us. It's not going to get better as our nation ages and requires more medical care and the people tasked with that care age along with us.

We often hear employers saying that "employees are our greatest asset." Why would anybody cut their greatest asset at a time of greatest need?