When You Must Cut Workers’ Hours

Jim Barrett is facing some tough decisions. With recent threats of Medicare slashing its rates by 21 percent for 2010, amid one of the worst economic downturns in decades, the administrator at Orthopaedic Associates of Central New York in Syracuse says he’s exploring all possible solutions to keep costs under control and, above all else, avoid layoffs.

“We’re deciding what to do right now,” says Barrett. “Most other insurance companies pay based on a percent of Medicare, so we’re looking at an across-the-board cut in reimbursement. I’m talking with other administrators in this position to find out how their choices have impacted them.”

One practice, he says, is implementing six-hour shifts, allowing employees who work at least 32 hours a week to retain full benefits.

For his part, Barrett says his eight-physician practice, with three offices, is considering a salary freeze, along with bonus reductions and a hold on capital expenditures, including the new MRI machine they had planned to purchase this year. Pay cuts are also possible, given budgetary constraints, but “we’re hoping to hold off on that as long as possible,” he says.

Orthopaedic Associates is hardly alone.

Medical groups across the country are grappling with ways to balance reimbursement declines with rising costs - a financial challenge made harder still by the drop in patient volume (and revenue) many have experienced since the economic slump began. Payroll, the largest expense for most practices, is often first to fall under the cost cutting ax.

Handle with care

It’s never easy to tell your staff members they’ll have to take one for the team, of course, but how you tell them can make all the difference between mass mutiny and a shared sense of purpose.

Start with being open and honest about the financial position your practice is in, and back it up with performance data, says Russ Still, executive vice president of Medical Management Associates, an Atlanta-based consulting firm. (This works best, of course, if you’ve kept them in the loop all along.) “Communicate how things are different now in terms of percentage declines in net income and percentage gains in overhead costs. It validates your situation,” says Still, adding that too much financial detail can cloud the issue. Without supporting evidence, employees might presume you’re taking these steps “because you’re scared or you want the practice to make more money,” says Still - particularly if patient volume has remained steady and your staff is as busy as ever.

Tell them, too, about any and all steps you’ve taken to curb costs thus far, impress upon them their value to the practice, and get their input on the options on the table - from 401(k) matching freezes, to pay cuts and reduced hours, and even layoffs. If you need to save another $75,000 a year, for example, ask them to help you decide how best to solve your budget shortfall and save the most jobs, which helps inspire an all-for-one camaraderie. “If you determine that reducing salaries, cutting hours, or laying off an employee are equally effective, for example, let the staff decide,” says Still. “Give them an option. If they know that there’s a chance they’re going to be out of a job completely and have to find employment elsewhere in this economy, versus making some percentage less in pay, most employees will not want to take that risk,” he says.

It’s also important to clarify your expectations. If your policy is temporary, give some parameter or benchmark for when their compensation can be restored - say, when revenue climbs by 10 percent or patient volume grows by three additional visits per day. If you don’t expect things to improve, however, say that, too. “Be careful about setting false expectations,” says Still. “If your staff thinks their paychecks will go back up in six months and they’re still waiting at that point, they will become disenchanted.”

Finally, it goes without saying that physicians and administrative staff, those claiming the biggest piece of the payroll pie, should also be first in line for pay cuts - by at least the same percentage so everyone feels the pain. In one show of solidarity, hundreds of doctors from Beth Israel Deaconess Medical Center in Boston last spring sacrificed a portion of their salaries to help shore up a $20 million budget deficit and prevent 600 staff layoffs. The 13 department heads alone donated $27,000 from their annual pay prompting the 1,100 doctors affiliated with the hospital to take voluntary pay cuts of their own. All told, the hospital saved some $326,000 - and all but 70 jobs.

Legal landmines

Before you pull the trigger on payroll, however, there are a number of important points to consider. The first is any legal ramifications you may face. To avoid claims of discrimination, it’s best to distribute such cuts with an even hand, doling them out equally to all members of your team. But Robert Iwrey, a partner with The Health Law Partners law firm in Southfield, Mich., notes that may not be practical. “You may find there are certain positions that, despite your drop in patient volume, can’t be cut, or you may have an employee with a particular contract that makes it difficult to reduce her hours,” he says. If your policy affects only a select number of employees, you need to be able to make an effective case for why they were singled out.

Also, review any employee contracts you have, says Iwrey. That goes double for your employed physicians, who are more likely to have a contract than your hourly paid staff. “It’s good business to get them to agree to the new terms in writing as an amendment to their original contract,” says Iwrey, noting all employees should sign such an amendment. “Even if they don’t have an employee contract, they can still allege that your reduced hours are a breach of oral contract.”

At what cost?

Lastly, consider the impact that layoffs, pay cuts, or reduced hours will have on your practice’s performance. “Payroll is the biggest expense so it’s the easiest place to make cuts, but it may not be the smartest thing to do,” says Still. Quantify in advance what you’re likely to gain - and give up. “Cutting everyone’s hours by half a day, or four hours a week, might save you money, but it will also make you less efficient so you could actually lose revenue,” says Still. “Will your billing clerks be able to process claims and keep up with collections? If your medical assistants leave early, will the physicians be slowed down?”

If, after every effort to control costs is exhausted, you’re forced to decide between pay cuts and reduced hours, Still says it makes more sense to cut pay. Here’s why: A worker making $15 an hour earns $600 during a typical 40-hour week. If you reduce her hours to 36, she’ll make $540, saving your practice $60. But, your office will be less productive during the four hours each employee is off, and may even have to close early at times. By cutting the salary to $13.50 instead and retaining a 40-hour work week, the staffer will bring home the same $540, saving you the $60 per employee and allowing your practice to continue operating at maximum efficiency.

On the other hand, a single layoff might be best for morale. “As hard as it is, eliminating one staff member is going to have the same budgetary impact as taking everyone down to a 32-hour work week and it won’t kill the culture of your office,” says Nick Fabrizio, a consultant with the MGMA Health Care Consulting Group.

No matter how delicately you handle pay cuts, you risk losing your best and brightest at a time you can afford it least. If salaries aren’t restored, eventually you’ll be left with only your poorest performers, which will impact productivity long after the economy recovers. “Those workers you don’t want to lose will leave and your lower performers, who can’t find other jobs, will stick around,” says Fabrizio, who counseled two practices recently to avoid a reduced hour work week. (They both did it anyway.) “I just think it’s bad management to knock everyone down.”

Shelly K. Schwartz, a freelance writer in Maplewood, N.J., has covered personal finance, technology, and healthcare for more than 12 years. Her work has appeared on CNNMoney.com, Bankrate.com, and Healthy Family magazine. She can be reached via physicianspractice@cmpmedica.com.

This article originally appeared in the February 2010 issue of Physicians Practice.