Rising salary demands require a dose of creativity and reality


Originally published in Fierce Healthcare

By Tony Colarossi

Ask any health system administrator what’s giving them work-related heartburn, and most will mention their struggles to hire and retain the best clinical staff.

A combination of macroeconomic factors and industry-specific challenges has created a perfect storm for hospital staffing, which accounts for more than half the operating costs of running a health system.

The U.S. unemployment rate has hovered around 4% for over a year, and only a small fraction of those looking for work are likely skilled staff such as clinicians. And it makes sense that doctors and nurses are in short supply because of a rapidly aging population and the growing need for chronic disease management.

So getting and keeping talented doctors and other skilled staff is a big deal. There’s not a lot of money to spread around, what with the small margins hospitals operate under, rising drug costs, declining reimbursement rates for services, and a growing problem with patient payments as a result of high-deductible insurance plans.

With a predicted nursing shortage through 2025, hospital administrators feel pressure to take steps to either contain rising salary costs or to find ways to cut expenses elsewhere to pay for those staffing costs.

Complicating all of this is the fact that there is little room to maneuver. Compensation-related incentives are tough for a variety of reasons. If administrators increase paid time off, they have to backstop those gaps with agency temps or hire more people, exacerbating budget strains.

Since health systems tend to have excellent insurance benefits, not much can be done there to attract and retain staff. Likewise, pension benefits are typically standard-issue 401(k) or 401(b) plans. And raising compensation enough to materially make a difference to most clinicians is out of the question in light of declining reimbursements.

This may sound counterintuitive, but hospitals instead need to focus on intangibles, especially improving their culture. In other words, hospitals can try to develop a professionally rewarding workplace. Daniel Pink in his celebrated book “Drive” talks about rewards other than money that can make a workplace special—offering staff greater independence and promoting the highest standards. The goal is to convince doctors and other skilled staff that they’re working with the best clinicians and therefore have the best patient outcomes. People want to be a part of a winning team.

Part of that winning culture is caring for staff, whether that’s encouraging teamwork, positive conflict resolution or promoting a work-life balance. Finally, health systems can promote their culture as a meaningful part of the broader community.

If that sounds touchy-feely, it is to a certain extent. Improving culture is worthwhile and certainly can pay dividends over the longer term, but many administrators will want a faster fix to the problems being caused by staffing and compensation pressures.

Alternatively, administrators can embark on cost-cutting to raise resources for raises and increased hiring. For example, health systems might consider consolidating services at a variety of locations into a single center of excellence that serves a larger geographic area.

Consolidating facilities is one variable where most health systems can capture significant savings. Most hospitals today treat a growing number of cases that were once in-patients as outpatients but have yet to overhaul their buildings and facilities to reflect this new patient mix.

Similarly, supply-chain costs can be trimmed by doing such things as optimizing laboratory costs and setting more rigid workflows in places like operating rooms and emergency departments to reduce the waste of supplies. Waste can be as high as 30% for hospitals.

Administrators could also identify services that lose money, from behavioral health to laboratory services, and then work with other health systems to share that cost and reduce its drag on margins by setting up a joint venture. Administrators can bring in consultants to help build a case with payers to renegotiate contracts.   

Finally, administrators can seek out efficiencies large and small across their health system to improve margins. That involves embracing the principles of lean management that were popularized in the manufacturing sector: seeking out small, continuous improvements in efficiency and quality that can significantly improve margins over time.

That starts by gathering a multidisciplinary team to identify problems and discuss potential solutions. Once areas for improvement are agreed upon with buy-in from management, administrators can tag each one as a Rapid Improvement Event (RIE): something that can be fixed in 1-5 days and then monitored and refined over a 60-day period. The idea is to take one small issue at a time and then improve that process, following up with monitoring to track progress against targets.

While compensation concerns are very real, there’s plenty of room to improve. Taking an RIE approach—a U.S. version of the Japanese philosophy of kaizen, or continuous improvement—administrators can target a 15% to 20% reduction in operations costs by applying these lean management principles.

As Mark Twain once said, “Continuous improvement is better than delayed perfection.”

Tony Colarossi leads acute health-care consulting at Plante Moran.