Exclusive: Texas Children's Hospital is laying off 5% of its workforce due to financial challenges

Texas Children’s Hospital said Tuesday it is laying off 5% of its workforce amid a series of financial challenges for the nation’s largest children’s hospital.

The hospital declined to provide a specific number of employees being affected by layoffs, but Executive Vice President and Chief Human Resources officer Linda Aldred said in an interview that Texas Children’s has approximately 20,000 employees across 120 locations in Houston, across Texas and around the world. A 5% reduction in that workforce would cut roughly 1,000 jobs.

Multiple factors, including lower patient volumes in Houston and a two-week delay in the opening of the new Austin campus, contributed to the hospital reporting an operating income loss of nearly $200 million through the first six months of its current fiscal year.

Aldred said the layoffs are the result of what she characterized as “historic financial challenges” within the health care industry. She said Texas Children’s took other measures before determining layoffs were necessary; for example, the hospital has reduced the size of its executive leadership team and plans to cut executives' compensation this year.

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“This has been so challenging and so difficult for us to get here. We have been really thoughtful about it,” Aldred said. “We plan to communicate these changes (Tuesday), and we do not plan to have additional cuts or job eliminations.”

Aldred said Texas Children's does not anticipate the cuts will affect patient care.

The layoffs come about one month after Fitch Ratings, one of the three major credit rating agencies, downgraded Texas Children’s bond rating to AA- from AA after the hospital reported operating income losses of $198.1 million through the first six months of fiscal year 2024.  

Texas Children’s issued bonds to fund its growth and facility renovation projects, including construction at the new $450 million Austin campus and an expansion in women’s services. The hospital previously announced a $245 million expansion of its Pavilion for Women in the Texas Medical Center. 

In its analysis, Fitch said multiple factors contributed to the downgrade, including lower-than-expected patient volumes in the Houston market, a two-week delay in the opening of the new Austin campus and enrollment drops in the Texas Children’s Health Plan. Higher-than-expected losses in medical costs also played a role, Fitch said.

Fitch is owned by The Hearst Corp., also the parent company of the Houston Chronicle.

The AA- bond rating still represents high credit quality, according to Fitch officials, and Texas Children’s maintains a stable credit outlook. Kevin Holloran, a senior director at Fitch, described the factors that led to the downgrade as a “perfect storm.”

“It's a downgrade, but it's not the signal of something long-term dire or anything along those lines,” he told the Chronicle.

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Texas Children’s is among dozens of hospitals and health systems across the U.S. to announce layoffs so far this year, according to Becker’s Hospital Review. Some of the biggest cuts occurred at the University of Pittsburgh Medical Center (1,000 layoffs), Oregon Health and Science University (500) and University Hospitals in Cleveland (300).

Aldred characterized Texas Children’s financial challenges as being due to changes in the health care industry, some related to the COVID-19 pandemic. They include rising costs for both supplies and labor and the end of pandemic-era public health emergency declarations.

“Hospitals and health care facilities across the country, they're making this challenging decision. And that's where we really found ourselves,” Aldred said. “This has been such a hard decision for us.”

The hospital began cutting costs six to nine months ago by examining its executive leadership team, Aldred said. The hospital has reduced the size of the team by about 10% by opting not to fill positions that have been vacated and instead reassigning duties to other executives. Executives will also take a pay cut this fiscal year, she said.   

“Our executive team will be at lower levels of compensation,” Aldred said. “We always start with leadership, and that's true here as well.”

What it means for employees

Aldred said cuts are being made to all types of employees, from frontline health care workers to leadership. Both clinical and nonclinical employees are affected. Some of the employees are recent hires while others have been with Texas Children’s for more than 20 years, she said.

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Affected employees will continue to receive pay and benefits for an unspecified period, Aldred said. Texas Children’s also plans to set up an employee support center to assist affected employees with resume writing, interview skills and career advice.

Employees will also be eligible to apply to be rehired in another role within the hospital, Aldred said.

Texas Children’s conducted a department-by-department review to determine which employees would be affected by the layoffs. The hospital focused on how it could continue offering the same level of services with fewer employees, Aldred said.

The hospital does not anticipate the reduced workforce will lead to a higher workload or longer hours for remaining employees, Aldred said.

“Some areas may have one or two people (laid off), other areas may have more, but they redesigned their work as they went through this assessment,” she said. “It won’t be an overwhelming burden.”

Financial challenges

Fitch acknowledged that the lower patient volumes are partly due to fewer patients with respiratory viruses, such as COVID-19, in fiscal 2024.  But the credit rating agency said a decline in the daily average census in the hospital’s neonatal intensive care unit is notable given its “historically consistent volumes.”

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The credit rating agency also noted that Medicaid was responsible for approximately 56% of the hospital’s gross revenues in fiscal 2023, but the program is subject to potential funding cuts at the federal and state levels.

While the hospital’s financial outlook is expected to improve in the coming years, nationwide increase in labor costs and “modest profitability” from health plan enrollment could slow the recovery, Fitch said in its analysis. 

The Texas Children's Health Plan, a separate nonprofit entity, recently lost about 30% of its membership when Texas purged Medicaid rolls as pandemic-era coverage expired. The health plan laid off a “few hundred” employees earlier this year. Aldred said the health plan's struggles did not contribute to the layoffs announced Tuesday.

The health plan could still absorb a more devastating financial blow in the next year if it loses a contract it has held for more than 20 years to provide Medicaid coverage mostly for children in low-income families and pregnant women. The 25-year-old plan exclusively serves Medicaid and CHIP recipients.

A contract loss would upend coverage for its roughly 450,000 members in the southeast Texas region and threaten the sustainability of the organization, a nonprofit that drew $2.9 million in revenue in fiscal 2022, according to the most recent public tax filings.

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The Texas Health and Human Services Commission launched a new contract procurement process in 2022 with a new set of criteria to evaluate prospective Medicaid providers. In addition to Texas Children’s, two other children’s hospital plans were notified that the state would not award them a contract under the new criteria, which measures cost efficiency and quality of care. All three children’s hospitals protested, citing a flawed bidding process.

The protests were denied earlier this year, according to the Texas Tribune, and the hospitals appealed. If the state upholds its decision, contracts are expected to be officially awarded in the first quarter of 2025, according to Texas HHSC.