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Are Hospitals Cutting Costs and Losing More?

Are Hospitals Cutting Costs and Losing More?

by Robert Nielsen

Healthcare professionals know that cutting costs is just part of the business. Recent media reports citing renewed increases in U.S. healthcare costs indicate that, for the foreseeable future, this issue is not going away. An increasingly competitive environment; higher prices for drugs and medical equipment, new and expanded requirements imposed by regulatory agencies, and myriad other imposed costs; have left many executives at the provider level with few viable cost-reduction options. One of them is staff reduction.

I have two sons, one born in 1968, and one in 1970. During my wife's hospitalizations for these births, she had a registered nurse, a licensed practical nurse and a student nurse at her beck and call for each of the six days that she was hospitalized for each birth. When it came time for her to check out of the hospital, she frankly did not want to go home. It would not have taken a very creative healthcare executive to find a few opportunities to reduce staff and cut a few costs during these two procedures. But that was a different era. Today, cost control requires hospital executives do all that is possible to maximize staff productivity.

At Gallup, our research has led to three important discoveries related to the topic of employee productivity:

  1. High patient and physician loyalty correlates to higher margins per admission.
  2. High patient and physician loyalty is directly related to employees who engage in proactive behaviors that meet patient or physician needs.
  3. For employees to be able to engage in proactive behaviors, they must have the raw talent to do it, they must be engaged in their work and they must be sufficient in number.

Hospitals whose loyalty scores from both patients and physicians are in the top quartile of Gallup's database have approximately 80% higher Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) per admission than those hospitals in the bottom quartile. Loyalty from physicians and patients is achieved only when they report having the highest level of satisfaction. Employees who engage in proactive behaviors create this high satisfaction level. Nurse response to the call button in a short period of time is not the secret; that is a reactive, not proactive, behavior (see "Is the Focus of Healthcare Quality Too Narrow?" in Related Items). Proactive behaviors require the employee to have the talent and ability to anticipate patients' or physicians' needs before those needs are ever expressed.

Employees will not manifest proactive behaviors if they are not truly engaged in their work. Employee engagement -- the state in which employees take strong psychological ownership for their work -- requires both good managers and sufficient staffing.

In an analysis of staffing level and its relationship to profitability, Gallup found that hospitals in the top quartile of staff to beds (i.e., the highest numbers of employees per bed) had lower profits than hospitals in the second quartile. The second quartile hospitals, in turn, had lower profits than those hospitals in the third quartile. But the fourth quartile hospitals went the other direction. Instead of achieving the highest profitability with the lowest number of employees per beds, fourth quartile hospitals had worse profitability than either the second or third quartile group. The implication is that at some point, the reduction in the ratio of staff members to patients reaches critical mass and becomes counterproductive to profitability. This critical point occurs when staff members are spread so thin that they are not able to engage in the proactive behaviors necessary to create loyalty.

Insufficient staffing means that employees can, at best, only react to requests, as there is not enough time for them to anticipate needs. Those institutions that have too few staff members, poorly managed staff, or staff members who aren't engaged or talented are vulnerable to decreased margins on every admission.

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