Week 5

Analysis/Planning/ Outsourcing/
Mergers/Layoffs
25 CASE
Employee Layoffs at St. Mary’s Hospital
St. Mary’s Hospital is a mediwn-sized, 400-bed hospital in a northwestern city. It was
established in 1908 by the Sisters of the Sacred Heart, an order of Catholic sisters. The
facility has grown gradually over the years and is now the third largest hospital in the city. It
is entirely nonunion and has never experienced an employee layoff since its inception.
Robert Barry has been the CEO of the hospital for 11 years. Eight years ago, he hired
Sharon Osgood as director of Hwnan Resources. Osgood has an MA in Hwnan Resource
Management and has been instrwnental in formalizing the institution’s hwnan resources’
policies and procedures.
Occupancy rates in the hospital had run between 76 and 82 percent from 1990 to 2002.
However, since then, occupancy has fallen to 57 percent. This decline has been experienced
throughout the industry and is the result of changing reimbursement policies, emphasis on
outpatient services, increasing competition, and the financial meltdown of 2008-2010. The
declining occupancy rate has affected this hospital’s revenues to such an extent that it ran
a deficit for the first time last year. The only response to these changes thus far has been a
tightening of requirements for equipment or supply purchases.
At the most recent quarterly meeting of the Board of Directors, Barry presented the
rather bleak financial picture. The projected deficit for the coming year was $3,865,000, unless
some additional revenue sources were identified or some additional savings were found. The
Board’s recommendation, based on the immediate crisis and the need to generate short-term
savings, was to lay off employees. They recommended that Barry consider laying off up to
10 percent of the hospital’s employees with an emphasis on those in “nonessential” areas.
Barry responded that the hospital’s employees had never been laid off in the history of
the institution. Moreover, he viewed the employees as “family” and would have great
difficulty implementing such a layoff. Nevertheless, since he had no realistic short-term
alternative for closing the “revenue gap,” Barry reluctantly agreed to implement a layoff
policy that would be as fair as possible to all employees, provide a guarantee of reemployment
for those laid off, and find additional revenue sources so that layoffs would be unnecessary in
the future.
Barry then called Sharon Osgood into his office the next morning, shared his concerns,
and asked her to prepare both a short-term plan to save $3 million over the next year through
staff layoffs, as well as a long-term plan to avoid layoffs in the future. Osgood’s concerns were
that the layoffs themselves might be costly in terms of lost investment in some of the laid-off
employees, higher turnover costs, lost efficiency, potential lawsuits, and lower morale. She was
concerned that the criteria for the layoffs not only be equitable, but also appear to be equitable
to the employees. She also wanted to make sure that those being laid off received “adequate”
notice so they could make alternative plans or so the hospital could assist them with finding
alternative employment. Since the hospital had no previous experience with employee layoffs
Cme 25 • Employee Layoffs at St. Mary’s Hospital 83
and no union contract constraints, her feeling was that both seniority and job performance
should be considered in determining who would be laid off.
Osgood knew the hospital’s performance appraisal system was inadequate and needed to
be revamped. While this task was high on her “to do” list, she also knew she had to move
ahead with her recommendations on layoffs immediately. The present performance appraisal
system uses a traditional checklist rating scale with a summary rating. Since there is no forced
distribution, the average ratings of employees in different departments vary widely.
Exhibit 2.1 shows the summary ratings of employees in each department. Most supervisors across all departments rate many of their subordinates either “satisfactory” or “outstanding.” Osgood has done a quick review of those employees whose overall ratings were
“unsatisfactory” or “questionable.” Most are employees with less than three years of
seniority, whereas the “satisfactory” employees have worked an average of seven years for
St. Mary’s Hospital. Osgood is preparing to submit her recommendations to Barry and has
come to you for advice. Exhibit 2.2 provides a summary of the distribution of employees and
payroll expense by department for the most recent year.
QUESTIONS
1. Identify the major problem or problems at St. Mary’s Hospital and the causes.
2. What are some alternatives for dealing with these problems? For example, is it possible to
avoid employee layoffs through the use of attrition?
3. Develop a plan for implementing employee layoffs over the next year that will generate
$3 million in savings. Give specific details concerning departments affected, the use of
seniority versus merit, the amount of notice, and out-placement activities. What additional information (if any) will you need? Provide a rationale for each recommendation,
together with reasons why other alternatives were not chosen.
4. What might be the effects of a layoff plan on “survivors” in terms of morale, job security,
organizational commitment, productivity, and career planning? How could you avoid or
minimize any potential problems in these areas?
5. What long-term solutions do you see for St. Mary’s Hospital once it gets its cash flow
problems under control and eliminates its deficit? What can it do to increase revenue so
that future layoffs will not be necessary?
6. What difficulties exist in using performance as a criterion for layoffs? How can such
difficulties be overcome?
84 Part 2 • Meeting Human Resource Requirements
EXHIBIT 2.1 Percentage Distribution of Performance Appraisal Summary Ratings by Department at
St. Mary’s Hospital
Outstanding:
Unsatisfactory: Questionable: Satisfactory: Substantially
Needs to Improve Needs Some Meets Normal Exceeds
Department Substantially Improvement Expectations Norms
Nursing 6.4 6.4 54.2 33.0
Allied Health 5.7 6.2 47.8 40.3
Central Administration 2.7 3.1 67.5 26.7
Dietetics/Nutrition 2.1 6.2 68.3 23.4
Housekeeping/Maintenance 7.8 12.4 54.6 25.2
Medical Staff 1.1 6.2 63.8 28.9
EXHIBIT 2.2 The Distribution of Employment and Payroll Expenditures at St. Mary’s Hospital
Department Number ofl Employees Payroll ($) Annual Turnover Rates (%)*
Nursing 6f}2 $15,050,000 12.2
Allied Health Departments 261 5,742,000 8.7
Central Administration 164 6,160,000 3.5
Dietetics/Nutrition p5 1,430,000 7.3
Housekeeping and Maintenance
Medical Staff –+k540,000
1,680,000
8.4
2.1
— TOTAL 1,150 $30,602,000 9.5*
*Represents weighted average turnover for all employees.
Case 25 • Employee Layoffs at St Mary’s Hospjtal 85