Addressing the education pipeline is one thing that legislators could focus on to improve nurse and physician shortages, medical school and health system leaders said.
As the healthcare industry continues to face pandemic-driven workforce challenges, lawmakers are exploring ways to boost the number of clinicians practicing in the U.S.
“A shortage of healthcare personnel was a problem before the pandemic and now it has gotten worse,” Chairman Sen. Bernie Sanders I-Vt., said during a Thursday Senate HELP committee hearing. “Health care jobs have gotten more challenging and, in some cases, more dangerous,” he said.
Hospitals are currently facing shortages of registered nurses as burnout and other factors drive them to other roles.
For example, 47-hospital system Ochsner Health in New Orleans has about 1,200 open nursing positions, Chief Academic Officer Leonardo Seoane said at Thursday’s hearing.
The workforce shortaged led Ochsner to close about 100 beds across its system during the past six months, leading to it use already-constrained emergency departments as holding bays for patients, he said.
Like other systems, labor costs have also been a concern due to a continued reliance on temporary staff to fill gaps. Ochsner’s non-agency labor costs grew just under 60% since 2019, while its costs for contract staff grew nearly 900%, he said.
“Our country is perilously short of nurses, and those we do have are often not working in the settings that could provide the most value,” Sarah Szanton, dean of Johns Hopkins School of Nursing said.
“This was true before the pandemic and has become more acute,” she said.
While many nurses left permanent roles for higher-paying contract positions during the pandemic, others have turned to jobs at outpatient clinics, coinciding with a shift toward non-hospital based care.
Registered nurse employment is nearly 5% above where it was in 2019, with nearly all that growth occurring outside of hospitals, Douglas Staiger, a professor of economics at Dartmouth College, found in his research and said at the hearing.
One major concern: Driving current and projected shortages in hospitals that lawmakers can address is the educational pipeline, medical school and health system leaders said.
Educational programs for nurses and physicians face site shortages and educators who are often allured by other higher-paying jobs in the industry.
Supporting partnerships between universities and hospitals to create more training opportunities is another way Congress can help, along with addressing high costs of tuition, James Herbert, president of University of New England, said during the hearing.
“Scholarship and loan repayment programs are critical to make healthcare education more accessible for those who would otherwise find it out of reach,” Herbert said.
That includes expanding and improving Medicare-funded physician residencies, he said.
Creating a more diverse workforce that looks more like the population it serves is another important task, and one lawmakers can address by supporting historically black colleges and universities.
Federal funding could help improve classrooms and other infrastructure at HBCUs “that have been egregiously are underfunded for decades,” in addition to expanding Medicare-funded residencies for hospitals that train a large number of graduates for HBCU medical schools, said James Hildreth Sr., president and CEO at Meharry Medical College in Nashville.
The American Hospital Association submitted a statement to the HELP subcommittee and said it also supports increasing the number of residency slots eligible for Medicare funds and rejecting cuts to curb long-term physician shortages.
Other AHA supported policies to address current and long-term workforce shortages include better funding for nursing schools and supporting expedited visas for foreign-trained nurses.
AHA also asked lawmakers to look into travel nurse staffing agencies, reviving requests it made last year alleging that staffing companies engaged in price gouging during the pandemic.
It covers 589,901 healthcare workers and 166,087 registered nurses from 272 facilities and 32 states. Participants were asked to report data on turnover, retention, vacancy rates, recruitment metrics and staffing strategies from January to December 2021.
The survey found a wide range of helpful figures for understanding the financial fallout of one of healthcare’s hardest labor disruptions:
The average hospital lost $7.1 million in 2021 to higher turnover rates.
The average hospital loses $5.2 to $9 million on RN turnover yearly.
The average turnover cost for a staff RN is $46,100, up more than 15 percent from the 2020 average.
The average hospital can save $262,300 per year for each percentage point it drops from its RN turnover rate.
To improve margins, hospitals need to control labor costs by decreasing dependence on travel and agency staff, but only 22.7 percent anticipate being able to do so.
For every 20 travel RNs eliminated, a hospital can save $4.2 million on average.
In the past 5 years, the average hospital turned over 100.5 percent of its workforce:
In 2021, hospitals set a goal of reducing turnover by 4.8 percent. Instead, it increased 6.4 percent and ranged from 5.1 percent to 40.8 percent. The current average hospital turnover rate nationally is 25.9 percent, according to the report.
While 72.6 percent of hospitals have a formal nurse retention strategy, less than half of those (44.5 percent) have a measurable goal.
Overall, 55.5 percent of hospitals do not have a measurable nurse retention goal.
Retirement is the number four reason staff RNs leave, and it is expected to remain a primary driver through 2030. More than half (52.8 percent) of hospitals today have a strategy to retain senior nurses. In 2018, only 21.6 percent had one.
Historically, RN turnover has trended below the hospital average across all staff. For the first time since conducting the survey, this is no longer true:
In the past five years, the average hospital turned over 95.7 percent of its RN workforce.
Close to a third (31.0 percent) of all newly hired RNs left within a year, with first year turnover accounting for 27.7 percent of all RN separations. Given the projected surge in retirements, expect to see the more tenured groups edge up creating an inverted bell curve.
Operating room RNs continue to be the toughest to recruit, while labor and delivery RNs are trending easier to recruit than in the year prior.
Hospitals are experiencing a dramatically higher RN vacancy rate (17 percent) compared to last year’s rate of 9.9 percent.
The vast majority (81.3 percent) reported a vacancy rate higher than 10 percent.
It’s been a difficult year for the hospital workforce, both here and around the world, as the effects of the pandemic, the economy, and the legacy of lean staffing models have combined to drive up vacancy rates and threaten the sustainability of hospital operations.
Everywhere we’ve gone in the past six months, workforce issues have overshadowed every other topic: how can hospitals attract and retain staff given the environment, how can they stabilize finances in the face of 15-20 percent increases in labor costs, how can they safeguard patient care with intense turbulence in the clinical workforce?
This week we heard yet another wrinkle to this problem, one that had not occurred to us but in retrospect is obvious. A system CFO was lamenting the fact that even with big salary increases, the hospital workforce remains unstable. “It’s like we’re not even getting credit for raising base salary 15 percent across the board and giving big retention bonuses.”
As to why—it’s a timing issue. Her system, like many, delivered pay raises back in the late winter and early spring, when staff were still recovering from the Omicron surge and the urgency of reducing reliance on expensive agency labor became clear. But economy-wide inflation had only then begun to spike, and has since continued to be stuck at high levels.
Staff don’t view the earlier salary increases as a response to inflation, but as predating it—and they’re asking for still more, to offset rising prices for food, transportation and housing. “I wish we’d waited to give the pay bump,” the CFO told us. “Even though our wage increases have outpaced inflation this year, the timing of events didn’t help us at all.”
With the hospitals operating near capacity, and a severe flu season impacting both patient volumes and staff availability, her sense is that the system is back to square one on staffing—and more difficult financial decisions lie ahead.
“A few months ago, I was confident we would be able to wean our system off travel nurses. But now I’m not so sure,” a chief nursing officer recently shared with us. Like most health systems, they had seen their use of agency nurses decline from peaks during the Delta and Omicron waves of the pandemic, and were encouraged by anecdotes of nurses returning to staff after stints as travelers. But today they remain “persistently stuck with a quarter of the agency nurses we needed at the peak”.
Seeing nurses returning from travel roles makes sense. It’s naturally a time-limited job—eventually the desire to be home wins out over the earning potential on the road. But another nursing leader shared his fear that a stint as a traveler could become an expected part of the arc of a nurse’s career. And from a hospital operations perspective, agency nursing needs are no longer connected to COVID, but are instead driven by general capacity needs in a tight labor market, keeping the operating rooms, emergency department, and ICUs open.
Health systems and physician groups continue to face labor costs that are up to 40 percent higher than 2019. A permanent need for agency nurses will frustrate efforts to rein in labor costs, through both the dollars spent on premium labor, and the resulting need to boost staff nurse salaries when a portion of their colleagues’ pay is anchored at the “traveling rate”.
Working as a travel nurse in the early days of the Covid pandemic was emotionally exhausting for Reese Brown — she was forced to leave her young daughter with her family as she moved from one gig to the next, and she watched too many of her intensive care patients die.
“It was a lot of loneliness,” Brown, 30, said. “I’m a single mom, I just wanted to have my daughter, her hugs, and see her face and not just through FaceTime.”
But the money was too good to say no. In July 2020, she had started earning $5,000 or more a week, almost triple her pre-pandemic pay. That was the year the money was so enticing that thousands of hospital staffers quit their jobs and hit the road as travel nurses as the pandemic raged.
Two years later, the gold rush is over. Brown is home in Louisiana with her daughter and turning down work. The highest paid travel gigs she’s offered are $2,200 weekly, a rate that would have thrilled her pre-pandemic. But after two “traumatic” years of tending to Covid patients, she said, it doesn’t feel worth it.
“I think it’s disgusting because we went from being praised to literally, two years later, our rates dropped,” she said. “People are still sick, and people are still dying.”
The drop in pay doesn’t mean, however, that travel nurses are going to head back to staff jobs. The short-lived travel nurse boom was a temporary fix for a long-term decline in the profession that predates the pandemic. According to a report from McKinsey & Co., the United States may see a shortage of up to 450,000 registered nurses within three years barring aggressive action by health care providers and the government to recruit new people. Nurses are quitting, and hospitals are struggling to field enough staff to cover shifts.
Nine nurses around the country, including Brown, told NBC News they are considering alternate career paths, studying for advanced degrees or exiting the profession altogether.
“We’re burned out, tired nurses working for $2,200 a week,” Brown said. People are leaving the field, she said, “because there’s no point in staying in nursing if we’re expendable.”
$124.96 an hour
Travel nursing seems to have started as a profession, industry experts say, in the late 1970s in New Orleans, where hospitals needed to add temporary staff to care for sick tourists during Mardi Gras. In the 1980s and the 1990s, travel nurses were often covering for staff nurses who were on maternity leave, meaning that 13-week contracts become common.
By 2000, over a hundred agencies provided travel contracts, a number that quadrupled by the end of the decade. It had become a lucrative business for the agencies, given the generous commissions that hospitals pay them. A fee of 40 percent on top of the nurse’s contracted salary is not unheard of, according to a spokesperson for the American Health Care Association, which represents long-term care providers.
Just before the pandemic, in January 2020, there were about 50,000 travel nurses in the U.S., or about 1.5 percent of the nation’s registered nurses, according to Timothy Landhuis, vice president of research at Staffing Industry Analysts, an industry research firm. That pool doubled in size to at least 100,000 as Covid spread, and he says the actual number at the peak of the pandemic may have far exceeded that estimate.
By 2021, travel nurses were earning an average of $124.96 an hour, according to the research firm — three times the hourly rate of staff nurses, according to federal statistics.
That year, according to the 2022 National Health Care Retention & RN Staffing Report from Nursing Solutions Inc., a nurse recruiting firm, the travel pay available to registered nurses contributed to 2.47% of them leaving hospital staff jobs.
But then, as the rate of deaths and hospitalizations from Covid waned, the demand for travel nurses fell hard, according to industry statistics, as did the pay.
Demand dropped 42 percent from January to July this year, according to Aya Healthcare, one of the largest staffing firms in the country.
That doesn’t mean the travel nurses are going back to staff jobs.
Brown said she’s now thinking about leaving the nursing field altogether and has started her own business. Natalie Smith of Michigan, who became a travel nurse during the pandemic, says she intends to pursue an advanced degree in nursing but possibly outside of bedside nursing.
Pamela Esmond of northern Illinois, who also became a travel nurse during the pandemic, said she’ll keep working as a travel nurse, but only because she needs the money to retire by 65. She’s now 59.
“The reality is they don’t pay staff nurses enough, and if they would pay staff nurses enough, we wouldn’t have this problem,” she said. “I would love to go back to staff nursing, but on my staff job, I would never be able to retire.”
The coronavirus exacerbated issues that were already driving health care workers out of their professions, Landhuis said. “A nursing shortage was on the horizon before the pandemic,” he said.
According to this year’s Nursing Solutions staffing report, nurses are exiting the bedside at “an alarming rate” because of rising patient ratios, and their own fatigue and burnout. The average hospital has turned over 100.5% of its workforce in the past five years, according to the report, and the annual turnover rate has now hit 25.9%, exceeding every previous survey.
There are now more than 203,000 open registered nurse positions nationwide, more than twice the number just before the pandemic in January 2020, according to Aya Healthcare.
An obvious short-term solution would be to keep using travel nurses. Even with salaries falling, however, the cost of hiring them is punishing.
LaNelle Weems, executive director of Mississippi Hospital Association’s Center for Quality and Workforce, said hospitals can’t keep spending like they did during the peak of the pandemic.
“Hospitals cannot sustain paying these exorbitant labor costs,” Weems said. “One nuance that I want to make sure you understand is that what a travel agency charges the hospitals is not what is paid to the nurse.”
Ultimately, it’s the patients who will suffer from the shortage of nurses, whether they are staff or gig workers.
“Each patient added to a hospital nurse’s workload is associated with a 7%-12% increase in hospital mortality,” said Linda Aiken, founding director of the University of Pennsylvania’s Center for Health Outcomes and Policy Research.
Nurses across the country told NBC News that they chose the profession because they cared about patient safety and wanted to be at the bedside in the first line of care.
“People say it’s burnout but it’s not,” Esmond said about why nurses are quitting. “It’s the moral injury of watching patients not being taken care of on a day-to-day basis. You just can’t take it anymore.”
The COVID-19 pandemic intensified hospitals’ reliance on travel nurses to address staffing shortages and highlighted the gap between full-time workers’ pay and lucrative temporary contracts. In the third year of the pandemic, hospitals continue to rely on travel nurses and grapple with workforce shortages for a variety of reasons. However, some organizations have reduced their reliance on travel nurses, and pay overall is lower compared to certain points of the pandemic, experts told Becker’s.
Here are seven travel nurse pay trends for healthcare leaders to know, per Vivian Health, a national healthcare hiring marketplace used by about 800,000 clinicians, and AMN Healthcare, a medical staffing firm based in Coppell, Texas:
1. The average weekly travel nurse pay in July in the U.S. was $2,997, up 12 percent from $2,681 during the same time in 2021, according to a report from Vivian Health. The report, which was shared with Becker’s, is based on proprietary data of job postings on Vivian Health in July.
2. Among states, Alaska saw thelargest average increase to travel nurse pay in July compared to the same time in 2021, according to the Vivian Health report. Florida saw the largest average decrease.
3. When taking a month-over-month view of 2022, average travel nurse pay is declining and coming back to last year’s levels, according to Vivian Health. The company cited several factors for this trend, such as a shift away from travel roles and toward permanent nursing roles as well as less federal money being shifted toward hospitals for large travel contracts.
4. Rishabh Parmar, head of strategy and operations at Vivian Health, told Becker’s: “Compared with July 2021, we still see that travel rates are higher [year over year] — close to around 12 percent to 15 percent — but it seems to be stabilized. Now, in terms of the demand, there’s still a lot of demand out there.”
5. Mr. Parmar estimated that available travel nurse jobs on Vivian Health’s platform doubled in July 2021 compared to pre-pandemic numbers in March 2020. As of July 2022, they were at 2.7 times the rate of March 2020 job numbers.
6. AMN Healthcare also reported lower rates. “According to a recent earnings call, AMN Healthcare expects the company will exit 2022 with travel nurse and allied healthcare professional bill rates at approximately 30 percent lower than first-quarter levels,” the company told Becker’s. “Though demand for travel nurses and allied professionals has declined from an all-time high in Q1, the company expects persistent vacancies and labor shortages to continue.”
7. Some hospitals “are saying, ‘We need to use travel nurses, we just have to use [travel contracts] at lower rates,'” Mr. Parmar said. Some organizations are also offering internal travel programs amid an opportunity to attract workers while decreasing contract labor expenses.
The rise of ubiquitous self-testing and the paucity of accurate, timely data from the CDC on COVID numbers has left us feeling our way in the dark in terms of the current state of the pandemic. Clearly there’s a new surge underway, driven by the BA.5 variant. What we can report from our experiences on the road over the past few weeks is that the wave is significant.
We’re hearing from our health system members that inpatient COVID volumes and COVID-related ED visits are significantly up again—often double or more what they were just two months ago, although still well below levels of past surges. Length of stay for COVID inpatients is shorter, with fewer ICU visits than during the Delta surge—about the same intensity, proportionally, as during Omicron.
But COVID-related staffing shortages are once again having a real impact on hospitals’ ability to deliver care—clinical and non-clinical staff callouts are at high levels again, as during Omicron.
One piece of good news: masking is back in vogue among many health system executive teams, likely in response to a number of “superspreader” events: gatherings of hospital staff over the past few weeks that resulted in clusters of cases. One system described an all-hands session for anesthesiologists that resulted in more than a dozen cases across the next week—forcing the hospital to cancel procedures.
We’re worried that this BA.5 surge is just getting started, and with booster uptake stagnating and masking all but nonexistent in the general population, the late summer and early autumn situation could be significantly worse.
The popularity of travel nursing is leaving healthcare facilities and the companies serving them susceptible to misclassification accusations and joint-employer disputes, Bloomberg Law reported June 14.
Providers should read contracts to understand who is liable if a travel nurse sues a healthcare facility and staffing company, according to the report. Even if agreements state that a hospital is not a temporary employee’s employer, courts may decide it’s a joint employer. If they are a joint employer, they may have to pay legal fees if a staffing agency is sued.
If classified as an employer, healthcare facilities may be bound by labor laws that didn’t apply to independent contractors. In California, for example, employers are required to pay part of a worker’s cell phone bill if a phone is needed for the job.
“Given the already serious issues with many of these healthcare workers feeling overwhelmed and underpaid, they’re going to turn these questions not just to the individual hospitals, but potentially also to the companies that are hosting these platforms,” Sonya Rosenberg, a labor and employment partner at Neal Gerber Eisenberg, told Bloomberg Law.
Hospitals are experiencing significant increases in expenses for workforce, drugs and medical supplies
For over two years since the outset of the COVID-19 pandemic, America’s hospitals and health systems have been on the front lines caring for patients, comforting families and protecting communities.
With over 80 million cases1, nearly 1 million deaths2, and over 4.6 million hospitalizations3, the pandemic has taken a significant toll on hospitals and health systems and placed enormous strain on the nation’s health care workforce. During this unprecedented public health crisis, hospitals and health systems have confronted many challenges, including historic volume and revenue losses, as well as skyrocketing expenses (See Figure #1).
Hospitals and health systems have been nimble in responding to surges in COVID-19 cases throughout the pandemic by expanding treatment capacity, hiring staff to meet demand, acquiring and maintaining adequate supplies and personal protective equipment (PPE) to protect patients and staff and ensuring that critical services and programs remain available to the patients and communities they serve. However, these and other factors have led to billions of dollars in losses over the last two years for hospitals, and over 33% of hospitals are operating on negative margins.
The most recent surges triggered by the delta and omicron variants have added even more pressure to hospitals. During these surges, hospitals saw the number of COVID-19 infected patients rise while other patient volumes fell, and patient acuity increased. This drove up expenses and added significant financial pressure for hospitals. Moreover, hospitals did not receive any government assistance through the COVID-19 Provider Relief Fund (PRF) to help mitigate rising expenses and lost revenues during the delta and omicron surges. This is despite the fact that more than half of COVID-19 hospitalizations have occurred since July 1, 2021, during these two most recent COVID-19 surges.
At the same time, patient acuity has increased, as measured by how long patients need to stay in the hospital. The increase in acuity is a result of the complexity of COVID-19 care, as well as treatment for patients who may have put off care during the pandemic. The average length of a patient stay increased 9.9% by the end of 2021 compared to pre-pandemic levels in 2019.4
As hospitals treat sicker patients requiring more intensive treatment, they also must ensure that sufficient staffing levels are available to care for these patients, and must acquire the necessary expensive drugs and medical supplies to provide high-quality care. As a result, overall hospital expenses have experienced considerable growth.
Data from Kaufman Hall, a consulting firm that tracks hospital financial metrics, shows that by the end of 2021, total hospital expenses were up 11% compared to pre-pandemic levels in 2019. Even after accounting for changes in volume that occurred during the pandemic, hospital expenses per patient increased significantly from pre-pandemic levels across every category. (See Figure #1)
The pandemic has strained hospitals’ and health systems’ finances. Many hospitals operate on razorthin margins, so even slight increases in expenses can have dramatic negative effects on operating margins, which can jeopardize their ability to care for patients. These expense increases have been more challenging to withstand in light of rising inflation and growth in input prices. In fact, despite modest growth in revenues compared to pre-pandemic levels, median hospital operating margins were down 3.8% by the end of 2021 compared to pre-pandemic levels, according to Kaufman Hall. 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% increase in their Medicare inpatient payment rate, while hospital labor rates increased 6.5%.5
These levels of increased expenses and declines in operating margins are not sustainable. This report highlights key pressures currently facing hospitals and health systems, including:
Each of these issues separately presents significant challenges to the hospital field. Taken together, they represent conditions that would be potentially catastrophic for most organizations, institutions and industries. However, the fact that the nation’s hospitals and health systems continue to serve on the front lines of the ongoing pandemic is a testament to their resiliency and steadfast commitment to their mission to serve patients and communities around the country.
Hospitals and health systems are the cornerstones of their communities. Their patients depend on them for access to care 24 hours a day, seven days a week. Hospitals are often the largest employers in their community, and large purchasers of local services and goods. Additional support is needed to help ensure hospitals have the adequate resources to care for their communities.
I. Workforce and Contract Labor Expenses
The hospital workforce is central to the care process and often the largest expense for hospitals. It is no surprise then that even before the pandemic, labor costs — which include costs associated with recruiting and retaining employed staff, benefits and incentives — accounted for more than 50% of hospitals’ total expenses. Therefore, even a slight increase in these costs can have significant impacts on a hospital’s total expenses and operating margins.
As the pandemic has persisted for over two years, the toll on the health care workforce has been immense. A recent survey of health care workers found that approximately half of respondents felt “burned out” and nearly a quarter of respondents said they anticipated leaving the health care field.6
This has been mirrored by a significant and sustained decline in hospital employment, down approximately 100,000 employees from pre-pandemic levels.7 At the height of the omicron surge, approximately 1,400 hospitals or 30% of all U.S. hospitals reporting data to the government, indicated that they anticipated a critical staffing shortage within the week.8This high percentage of hospitals reporting a critical staffing shortage stayed relatively consistent throughout the delta and omicron surges.
The combination of employee burnout, fewer available staff, increased patient acuity and higher demand for care especially during the delta and omicron surges, has forced hospitals to turn to contract staffing firms to help address staffing shortages.
Though hospitals have long worked with contract staffing firms to bridge temporary gaps in staffing, the pandemic-driven-staffing-shortage has created an expanded reliance on contract staff, especially contract or travel registered nurses. Travel nurses are in particularly high demand because they serve a critical role in delivering care for both COVID-19 and non-COVID-19 patients and allow the hospital to meet the demand for care, especially during pandemic surges.
According to a survey by AMN Healthcare, one of the nation’s largest health care staffing agencies, 95% of health care facilities reported hiring nurse staff from contract labor firms during the pandemic.9Staffing firms have increased their recruitment of contract or travel nurses, illustrating the significant growth in their demand. According to data from EMSI/Burning Glass, there has been a nearly 120% increase in job postings for contract or travel nurses from pre-pandemic levels in January 2019 to January 2022. (See Figure #2)
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% in January 2019 to 23.4% in January 2022, according to data from Syntellis Performance Solutions. (See Figure #3) In fact, a quarter of hospitals have experienced nearly a third of their total nurse hours accounted for by contract or travel nurses.
As the share of contract travel nurse hours has grown significantly compared to before the pandemic, so too have the costs of employing travel nurses compared to pre-pandemic levels. In 2019, hospitals spent a median of 4.7% of their total nurse labor expenses for contract travel nurses, which skyrocketed to a median of 38.6% in January 2022. (See Figure #3) A quarter of hospitals — those who have had to rely disproportionately on contract travel nurses — saw their costs for contract travel nurses account for over 50% of their total nurse labor expenses. In fact, while contract travel nurses accounted for 23.4% of total nurse hours in January 2022, they accounted for nearly 40% of the labor expenses for nurses. (See Figure #3) This difference has grown considerably compared to pre-pandemic levels in 2019, suggesting that the exorbitant prices charged by staffing companies are a primary driver of higher labor expenses for hospitals.
Data from Syntellis Performance Solutions show a 213% increase in hourly rates charged to hospitals by staffing companies for travel nurses in January 2022 compared to pre-pandemic levels in January 2019. This is because staffing agencies have exploited the situation by increasing the hourly rates billed to hospitals for contract travel nurses more than the hourly rates they pay to travel nurses. This is effectively the “margin” retained by the staffing agencies. During pre-pandemic levels in 2019, the average “margin” retained by staffing agencies for travel nurses was about 15%. As of January 2022, the average “margin” has grown to an astounding 62%. (See Figure #4)
These high “margins” have fueled massive growth in the revenues and profits of health care staffing companies. Several staffing firms have reported significant growth in their revenues to as high as $1.1 billion in just the fourth quarter of 202110, tripling their revenues and net income compared to 2020 levels.11
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 36.9% higher than pre-pandemic levels, and increased to 57% at the height of the omicron surge in January 2022.12 A study looking at hospitals in New Jersey found that the increased labor expenses for contract staff amounted to $670 million in 2021 alone, which was more than triple what their hospitals spent in 2020.13High 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.
II. Drug Expenses
Prescription drug spending in the U.S. has grown significantly since the pandemic. In 2021, drug spending (including spending in both retail and non-retail settings) increased 7.7%14, which was on top of an increase of 4.9%15 in 2020. While some of this growth can be attributed to increased utilization as patient acuity increased during the pandemic, a significant driver has been the continued increase in prices of existing drugs as well as the introduction of new products at very high prices. A study by GoodRx found that in January 2022 alone, drug companies increased the price of about 810 brand and generic drugs that they reviewed by an average of 5.1%.16 These price increases followed massive price hikes for certain drugs often used in the hospital such as Hydromorphone (107%), Mitomycin (99%), and Vasopressin (97%).17 For another example, the drug manufacturer of Humira, one of the most popular brand drugs used to treat rheumatoid arthritis, increased the price of the drug by 21% between 2019 and 2021.18 A study by the Kaiser Family Foundation found that in Medicare Part B and D markets, half of all drugs in each market experienced price increases above the rate of inflation between 2019 and 2020 – in fact, a third of these drugs experienced price increases of greater than 7.5%.19 At the same time, according to a report by the Institute for Clinical and Economic Review (ICER), eight drugs with unsupported U.S. drug price increases between 2019 and 2020 alone accounted for an additional $1.67 billion in drug spending, further illustrating that drug companies’ decisions to raise the prices of their drugs are simply an unsustainable practice.20
As hospitals have worked to treat sicker patients during the pandemic, they have been forced to contend with sky-high prices for drugs, many of which are critical and lifesaving for their patients. For example, in 2020, 16 of the top 25 drugs by spending in Medicare Part B (hospital outpatient settings) had price increases greater than inflation — two of the top three drugs, Keytruda and Prolia — experienced price increases of 3.3% and 4.1%, respectively.21
As a result of these price increases, hospital drug expenses have skyrocketed. By the end of 2021, total drug expenses were 28.2% higher than pre-pandemic levels.22 When taken as a share of all non-labor expenses, drug expenses have grown from approximately 8.2% in January 2019, to 9.3% in January 2021, and to 10.6% in January 2022. (See Figure #5) Even when considering changes in volume during the pandemic, drug expenses per patient compared to pre-pandemic levels in 2019 saw significant increases, with a 36.9% increase through 2021.
While continued drug price increases by drug companies have been a major driver of the growth in overall hospital drug expenses, there also are other important driving factors to consider:
Drug Treatments for COVID-19 Patients:Remdesivir, one of the primary drugs used to treat COVID-19 patients in the hospital, has become the top spend drug for most hospitals since the pandemic. This drug alone accounted for over $1 billion in sales in the fourth quarter of 2021.23 Priced at an average of $3,12024, Remdesivir’s cost was initially covered by the federal government. However, hospitals must now purchase the drug directly.
Limitation of 340B Contract Pharmacies: The 340B program allows eligible providers, including hospitals that treat many low-income patients or treat certain patient populations like children and cancer patients, to buy certain outpatient drugs at discounted prices and use those savings to provide more comprehensive services to the patients and communities they serve. Since July 2020, several of the largest drug manufacturers have denied 340B pricing to eligible hospitals through pharmacies with whom they contract, despite calls from the Department of Health and Human Services that such actions are illegal. Because of these actions, many 340B hospitals, especially rural hospitals who disproportionately rely on contract pharmacies to ensure access to drugs for their patients, have lost millions in 340B drug savings.25 In addition, these manufacturers have required claim-level data submissions as a condition of receiving 340B discounts, which has increased costs to deliver the data as well as staff time and expense to manage that process. The loss of 340B savings coupled with increased burden of providing detailed data to drug companies have contributed to increasing drug expenses.
Health Plans’/Pharmacy Benefit Managers’ (PBMs’) “White Bagging” Policies: Health plans and PBMs have engaged in a tactic that steers hospital patients to third-party specialty pharmacies to acquire medication necessary for clinician-administered treatments, known as “white-bagging.” This practice disallows the hospital from procuring and managing the handling of a drug — typically drugs that are infused or injected requiring a clinician to administer in a hospital or clinic setting — used in patient care. These policies not only create serious patient safety concerns, but create delays and risks in patient care; add to administration, storage and handling costs; and create important liability issues for hospitals.
Taken together, these factors increase both drug expenses and overall hospital expenses.
III. Medical Supply and PPE Expenses
The U.S., like most countries in the world, relies on global supply chains for goods and services. This is especially true for medical supplies used at hospitals and other health care settings. Everything from the masks and gloves worn by staff to medical devices used in patient care come from a large network of global suppliers. Prior to the global pandemic, hospitals had established relationships with distributors and other vendors in the global health care supply chain to deliver goods as necessitated by demand. After the pandemic hit, many factories, distributors and other vendors shut down their operations, leaving hospitals, which were on the front lines facing surging demand, to fend for themselves. In fact, supply chain disruptions across industries, including health care, increased by 67% in 2020 alone.26
As a result, hospitals turned to local suppliers and non-traditional suppliers, often paying significantly higher rates than they did prior to the pandemic. Between fall 2020 and early 2022 costs for energy, resins, cotton and most metals surged in excess of 30%; these all are critical elements in the manufacturing of medical supplies and devices used every day in hospitals.27 As COVID-19 cases surged, demand for hospital PPE, such as N95 masks, gloves, eye protection and surgical gowns, increased dramatically causing hospitals to invest in acquiring and maintaining reserves of these supplies. Further, downstream effects from other global events such as the war in Ukraine and the energy crisis in China, as well as domestic issues, such as labor shortages and rising fuel and transportation costs, have all contributed to drive up even higher overall medical supply expenses for hospitals in the U.S.28 For instance, according to the Health Industry Distributors Association, transportation times for medical supplies are 440% longer than pre-pandemic times resulting in massive delays.29
Compared to 2019 levels, supply expenses for hospitals were up 15.9%30 through the end of 2021. When focusing on hospital departments involved most directly in care for COVID-19 patients − primarily hospital intensive care units (ICUs) and respiratory care departments − the increase in expenses is significantly higher. Medical supply expenses in ICUs and respiratory care departments increased 31.5% and 22.3%, respectively. Further, accounting for changes in volume during surge and non-surge periods of the pandemic, medical supply expenses per patient in ICUs and respiratory care departments were 31.8% and 25.9% higher, respectively. (See Figure #6) These numbers help illustrate the magnitude of the impact that increases in supply costs have had on hospital finances during the pandemic.
IV. Impact of Rising Inflation
Higher economy-wide costs have serious implications for hospitals and health systems, increasing the pressures of higher labor, supply, and acquisition costs; and potentially lower consumer demand. Inflation is defined as the general increase in prices and the decrease in purchasing power. It is measured by the Consumer Price Index (CPI-U). In April 2021, the Bureau of Labor Statistics (BLS) reported that the CPI-U had the largest 12-month increase since September 2008. The CPI-U hit 40-year highs in February 2022.31 Overall, consumer prices rose by a historic 8.5% on an annualized basis in March 2022 alone.32
As inflation measured by consumer prices is at record highs, below are key considerations on the potential impact of higher general inflation on hospital prices:
Labor Costs and Retention: Labor costs represent a significant portion of hospital costs (typically more than 50% of hospital expenses are related to labor costs). As the cost-of-living increases, employees generally demand higher wages/total compensation packages to offset those costs. This is especially true in the health care sector, where labor demands are already high, and labor supply is low.
Supply Chain Costs: Medical supplies account for approximately 20% of hospital expenses, on average. As input/raw good costs increase due to general inflation, hospital supplies and medical device costs increase as well. Furthermore, shortages of raw materials, including those used to manufacture drugs, could stress supply chains (i.e., medical supply shortages), which may result in changes in care patterns and add further burden on staff to implement work arounds.
Capital Investment Costs: Capital investments also may be strained, especially as hospitals have already invested heavily in expanding capacity to treat patients during the pandemic (e.g., constructing spaces for testing and isolation of COVID-19 patients). One of the areas that has seen the largest increase in prices/shortages is building materials (e.g., lumber). Additionally, a historically large increase in inflation has resulted in increases in interest rates, which may hamper borrowing options and add to overall costs.
Consumer Demand: Higher inflation also may result in decreases in demand for health care services, specifically if inflation exceeds wage growth. Specifically, higher costs for necessities (food, transportation, etc.) could push down demand for health care services and, in turn, dampen hospital volumes and revenues in the long run.
Health care and hospital prices are not driving recent overall inflation increases. The BLS has cited increases in the indices for gasoline, shelter and food as the largest contributors to the seasonally adjusted all items increase. The CPI-U increased 0.8% in February on a seasonally adjusted basis, whereas the medical care index rose 0.2% in February. The index for prescription drugs rose 0.3%, but the hospital index for hospital services declined 0.1%.33
This is consistent with pre-pandemic trends. Despite persistent cost pressures, hospital prices have seen consistently modest growth in recent years. According to BLS data, hospital prices have grown an average 2.1% per year over the last decade, about half the average annual increase in health insurance premiums. (See Figure #7) More recently, hospital prices have grown much more slowly than the overall rate of inflation. In the 12 months ending in February 2022, hospital prices increased 2.1%. In fact, even when excluding the artificially low rates paid to hospitals by Medicare and Medicaid, average annual price growth has still been below 3% in recent years.34
While we hope that our nation is rounding the corner in the battle against COVID-19, it is clear that the pandemic is not over. During the week of April 11, there have been an average of over 33,000 cases per day35 and reports suggest that a new subvariant of the virus (Omicron BA.2) is now the dominant strain in the U.S.36As a result, the challenges hospitals and health systems are currently facing are bound to last much longer.
As COVID-19 infections and hospitalizations are decreasing in some parts of the U.S. and increasing in others, hospitals and health systems continue to care for COVID-19 and non-COVID-19 patients. With additional surges potentially on the horizon, the massive growth in expenses is unsustainable. Most of the nation’s hospitals were operating on razor thin margins prior to the pandemic; and now, many of these hospitals are in an even more precarious financial situation. Regardless of potential new surges of COVID-19, hospitals and health systems continue to face workforce retention and recruitment challenges, supply chain disruptions and exorbitant expenses as outlined in this report.
Hospitals appreciate the support and resources that Congress has provided throughout the pandemic; however, additional support is needed now to keep hospitals strong so they can continue to provide care to patients and communities.
Hospitals and health systems have lost billions over the last two years, leaving more than 33 percent of them with negative margins, according to an April 25 report by the American Hospital Association.
1. Employment is down by 100,000 jobs compared to pre-pandemic levels, the U.S. Bureau of Labor Statistics found. But at a time when hospitals are desperately trying to fill positions, labor expenses per patient were 19.1 percent higher in 2021 than in 2019. Labor expenses are more than 50 percent of hospitals’ total expenses, meaning a small increase in labor costs can have a major effect on hospital’s total expenses and operating margins.
2. The report attributed the increase in labor expenses to hospitals’ dependence on contract staff, specifically nurses. In 2019, travel nurses accounted for a median of 4.7 percent of hospitals’ total nurse labor expenses, compared to a median of 38.6 percent in January.
3. Hourly billing rates for contract employees rose 213 percent compared to pre-pandemic levels. This created a 62 percent profit margin for staff agencies.
4. Drug expenses soared by 36.9 percent per patient compared to pre-pandemic levels.
5. Medical supply expenses also rose through 2021, by 20.6 percent, compared to pre-pandemic levels. For intensive care units and respiratory care departments — which were most involved in COVID-19 care — medical supply expenses grew 31.5 percent and 22.3 percent, respectively.
6. Economywide, the consumer price index saw major increases, the Bureau of Labor Statistics found. Meanwhile, hospital prices rose modestly, by an average of 2.1 percent per year in the last decade, about half the average annual increase in health insurance premiums.