June 8, 2022

As promised in last week’s article, we want to conclude our two-part examination of hospital expenses by looking specifically at labor costs in today’s alert.  According to the extensive article published by the American Hospital Association (AHA) last month, which we referenced last week, labor costs are outpacing revenue increases.  The report notes that, despite modest growth in revenues compared to pre-pandemic levels, median hospital operating margins were down 3.8 percent by the end of 2021 compared to pre-pandemic levels.  The report went on to state that:

Further exacerbating the problem for hospitals are Medicare sequestration cuts and payment increases that are well below increases in costs. For example, an analysis by PINC found that for fiscal year 2022, hospitals received a 2.4 percent increase in their Medicare inpatient payment rate, while hospital labor rates increased 6.5 percent.

Based on the above, it is already clear that hospitals are facing financial challenges that are directly related to hiring, training, contracting and compensating staff essential for healthcare operations.  Let us now take a deeper dive into specific metrics dealing with hospital labor costs.

The Shortage Continues

According to the AHA report, labor costs account for more than 50 percent of a facility’s total expenses.  It goes without saying, then, that any sizeable increase in the percentage of these costs can have a deleterious effect on the facility’s plans for improvement.  That is, rising labor costs will have a major impact on the hospital’s ability to carry out new investments in infrastructure, plant expansion and equipment upgrades. 

It is interesting to note that, with increased costs in labor, there has been a “significant and sustained decline in hospital employment.”  According to the AHA report, American hospitals have lost in the region of some 100,000 employees when compared with pre-pandemic levels.  Is this an indication that, due to rising wage rates, hospitals are letting staff go or not replacing those who have left, or is this interesting dynamic a result of a shrinkage of the overall healthcare workforce?  From all the reports we have seen over the last several months, it is clear that clinical staff members are leaving in large numbers, either due to burnout as a result of the pandemic or due to hospital policies associated with the pandemic.  The bottom line is that there are less bodies available to staff critical positions, and that has an effect on costs.

An Aphorism of Economics

As we all know, suppressed supply leads to higher prices; and so we must acknowledge that with a shrinking pool of healthcare staff, hospitals must offer higher salaries and larger signing bonuses to lure qualified individuals and appropriately staff their vital departments.  The following chart illustrates the position in which many hospitals find themselves as it concerns the nursing shortage, in particular.

Number of Unique Job Postings for Travel Nurses

According to a survey by one of the nation’s largest healthcare staffing agencies, 95 percent of healthcare facilities reported hiring nursing staff from contract labor firms during the pandemic.  Similarly, the hours worked by contract or travel nurses as a percentage of total hours worked by nurses in hospitals has grown from 3.9 percent in January 2019 to 23.4 percent in January 2022.  Indeed, for a quarter of American hospitals, contract/travel nurses account for nearly a third of their total nurse hours. 

The real problem is that the cost of contracting with these nurses has exploded in recent months.  In 2019, hospitals spent a median of 4.7 percent of their total nurse labor expenses for contract/travel nurses, which then drastically rose to a median of 38.6 percent in January 2022. For a quarter of American hospitals, costs for contract travel nurses account for over 50 percent of total nurse labor expenses.  While we’re crunching the numbers, here’s another sobering statistic for hospital accountants to consider: contract/travel nurses accounted for 23.4 percent of total nurse hours in January 2022, but they accounted for nearly 40 percent of total nurse expenses.

The Primary Driver

The data indicate that the growth in labor expenses for hospitals and health systems was in large part due to the exorbitant rates charged by contract staffing firms.  By the end of 2021, hospital labor expenses per patient were 19.1 percent higher than pre-pandemic levels and increased to 57 percent in January 2022.  A study of New Jersey hospitals found that the increased labor expenses for contract staff amounted to $670 million in 2021, which was more than triple what their hospitals spent in 2020. 

The AHA report concludes by asserting that “high reliance on contract or travel staff prevents hospitals and health systems from investing those costs into their existing employees, leading to low morale and high turnover, which further exacerbates the challenges hospitals and health systems have been facing.” 

If you have questions about this alert or want to know more about our hospital-specific business services, please go to info@miramedgs.com.