It’s reported that Catholic Health Initiatives will lay off up to 1,500 employees by the end of January 2015. To read full story click here. Unfortunately, payroll costs are the first target when operating margin is in the red.

But actually, that’s No. 1 on the list of how not to cut healthcare costs according to a pair of Harvard academics.Writing in the November 2014 Harvard Business Review, Robert Kaplan and Derek Haas said their research indicates that “disproportionately cutting staff can be shortsighted when it lowers clinicians’ productivity and raises the cost of treating patients’ conditions.”

In an article aptly named, “How Not to Cut Healthcare Costs,” Kaplan and Haas wrote that “arbitrary constraints or cuts in personnel spending uninformed by an awareness of the underlying clinical and staff resources needed to deliver high-quality outcomes for a variety of medical conditions, can lead to long treatment delays, worse care and outcomes, and overstressed, frustrated caregivers.”

In other words, it’s the Law of Diminishing Returns, only in reverse.

That fundamental law of economics states that when all other factors remain fixed in a production process, an increase in one factor – more workers, for example – will eventually diminish the increase in productivity.

In healthcare, the ‘product’ is a good patient outcome, and one might assume that reducing staff will diminish the likelihood of  that outcome.

“The first port of call in a cost-cutting exercise is often the payroll,” say Kaplan and Haas, “which accounts for about two-thirds of a typical provider organization’s costs.”

The authors claim the main effect of such “top-down spending mandates” is to aggravate the already tense margin vs. mission tug-of-war between financial and clinical types.

To balance the books, some hospitals shut down entire wards, diminishing their ability to provide needed services to their communities.  The ‘hidden costs’ of such actions are reduced competitiveness, loss of community goodwill, the loyalty of remaining staff members, and ultimately the real and perceived quality of care offered.

Another mistake, according to Kaplan and Haas, is understanding the value of space.  Hospital leaders often conclude that idle space and equipment are much less expensive than idle clinicians and technicians.  But by under-investing in space and equipment, they lower the productivity of their most expensive resource.

“Some orthopedic surgeons perform seven to 10 joint replacements a day, while others do just two or three – even though the duration of the actual surgical procedure does not vary greatly between the two groups.”  The difference in productivity results from the number of operating rooms available.”

The authors argue that adding an OR would be less expensive in the long run than allowing surgical talent to remain idle.  They make the same case for diagnostic equipment, siting the time lost during peak demand when not enough equipment is available.

The crux of their argument is that “providers do not conduct the benefits analysis that would show” that increased spending on equipment (or space) could be paid for by the savings from reducing the idle time of expensive staff members.

Kaplan, the Baker Foundation Professor at Harvard Business School, and Haas, an HBS fellow, are urging hospital leaders to consider the value of time in healthcare.  That’s something TeleTracking has been talking about for quite some time.  Our reason for being is to remove wasted time and resources from healthcare in order to cut costs and increase revenue To read our white paper, The Value of Time, click here to download it now.

By taking the time lags out of daily operations, we calculate that automated processes can remove $100 billion from U.S. healthcare every year.

Isn’t that worth a little time to consider before making cuts that may diminish the quality of care to be delivered?

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