Mellon: Cost Containment, Staff Shortages Top Health-Care's Challenges

October 28, 2003 ( - Containing costs and staffing shortages once again dominate the strategic challenges integrated health-care organizations say they will face in the next three to five years.

These two issues dominated the challenges ahead for health-care organizations (82.1% and 79.5%, respectively), compared with numbers three, four and five: improving services to patients, decreasing revenue and costs of drugs and services (48.7%, 35.9%, 25.6%, respectively). However, as these organizations have been battling the same challenges since the economic downturn began in 2001, evidence is now there that a turnaround is on the horizon, according to Mellon Financial Corporation’s Human Resources & Investor Solutions (HR&IS) sector study Total Compensation in Integrated Healthcare Systems: 2003.

The study finds this in 50% of participating systems believing they will exceed their 2003 business and profitability goals, compared to less than 10% on the 2002 survey. Further, while 43% in the 2002 survey said they failed to achieve their goals, 2003’s numbers show that figure declined to just 18% in this year’s study.

“The health-care industry has been combating costs, revenues, quality and staffing – the basics of their business – for the past three years,” said Tom Flannery, a principal and Healthcare Compensation Industry Leader with HR&IS. “Their success is the result of perseverance in applying basic approaches like re-engineering business processes, integrating computer systems and outsourcing certain non-core functions.”

Additionally, health-care organizations see potential for increasing or maintaining revenue in improved coding, billing and/or collections (64.1%), revising or renegotiating managed care contracts (46.2%), entering into new managed care contracts (33.3%) and an expanded physician recruitment program (33.3%).

In a similar vein, survey participants also indicate they are looking to contain expense through:

  • re-engineering business processes (76.9%)
  • increasing computer/integration of systems (48.7%)
  • total quality management initiatives (23.1%)
  • mandating overtime and time off (12.8%).

Further, Flannery points to an increase in the use of outsource across the industry over the past year; now be utilized by 31% of the participants, up from last year’s 24%.

“We expect this trend to continue,” he said. “Health-care providers are increasingly concentrating on their core competencies, and every non-core function is fair game for outsourcing. Whole departments of staff services, like benefits administration, employee information systems and other human resources functions, are the next wave of opportunity for this industry.”

Largest among outsourced services were dietary/food service, occurring at 28.2% of health-care organizations. Followed by:

  • laundry (20.5%)
  • housekeeping (17.9%)
  • information technology (17.9%)
  • security (7.7%)
  • general maintenance (5.1%).

Surprisingly perhaps, was that cost pressures were extremely prevalent in the rising cost of health services as these issues led the initiatives survey respondents were undertaking to contain compensation expenses. Leading the list were increasing employee contributions to group insurance plans (56.4%) followed by increasing co payment for group insurance plans (30.8%) and increased deductibles for group insurance plans (28.2%).

Challenges Still

Despite the economic sunshine, dark clouds still persist for health-care organizations. Most notably, the perennial shortage of key staff continued, with nearly all participants (96.8%) reporting a critical shortage of nurses and another 29% citing shortages of technicians, particularly radiology. Overall, this shortage, combined with a turnover percentage that came in at 16.7% in 2002 equaled an average replacement cost of 0.5 times to 3 times the employee’s salary.

The turnover numbers though were encouraging in their downward trend from the 22.4% the year before even though Flannery cautions that the industry should not take too much comfort from this improvement. “Hospitals, like many industries, are benefiting from the slow job market and the absence of employment alternatives,” he said. “Complacency would be a mistake, and employers need to take steps now to ensure that key contributors will not be tempted to leave as soon as the economy improves.”

This has too do with what Flannery sees as the continued main vulnerability of the industry: retaining the key people that will contribute to the gradual recovery. “The top priority for many healthcare institutions is to ensure that executives and key leaders who have contributed to their survival and current success stay with them during the next upturn,” Flannery said. “This has become a high-pressure, high-risk industry over the past few decades, and it is vital that talented people continue to see it as a desirable place to dedicate their careers. More sophisticated reward programs are a key factor in creating an attractive employment environment.”

A copy of the report is available for purchase by contacting Shawn Garcia at (203) 352-1630.