Massive Growth in Expenses and Rising Inflation Fuel Continued Financial Challenges for America’s Hospitals and Health Systems

https://www.aha.org/costsofcaring

Hospitals are experiencing significant increases in expenses for workforce, drugs and medical supplies

Introduction

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:

  1. Workforce and contract labor expenses
  2. Drug expenses
  3. Medical supply and PPE expenses
  4. Rising economy-wide inflation

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.8 This 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.9 Staffing 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 2020.13 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.

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 $3,12024Remdesivir’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

Conclusion

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.36 As 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.

Stanford Health Care to nurses: No pay for those who strike

Stanford Health Care and Lucile Packard Children’s Hospital administrators have notified union leaders that its nurse members who strike later in April risk losing pay and health benefits, according to Palo Alto Weekly.

The Committee for Recognition of Nursing Achievement, a union at Stanford Health Care and Stanford Children’s Health that represents about 5,000 nurses, has scheduled a strike to begin April 25. The nurses’ contract expired March 31.

If the strike moves forward, Stanford Health Care and the Lucile Packard Children’s Hospital, both based in Palo Alto, Calif., are prepared to continue to provide safe, quality healthcare, according to a statement from Dale Beatty, DNP, RN, chief nurse executive and vice president of patient care services for Stanford Health Care, and Jesus Cepero, PhD, RN, senior vice president of patient care and chief nursing officer for Stanford Children’s Health.

But the statement, which was shared with Becker’s, said nurses who choose to strike will not be paid for shifts they miss.

“In addition, employer-paid health benefits will cease on May 1 for nurses who go out on strike and remain out through the end of the month in which the strike begins,” Drs. Beatty and Cepero said.

The leaders quoted from Committee for Recognition of Nursing Achievement’s “contingency manual” that the union provided to nurses: “If a strike lasts beyond the end of the month in which it begins and the hospitals discontinue medical coverage, you will have the option to pay for continued coverage.”

Drs. Beatty and Cepero said nurses who strike may pay to continue their health coverage through the Consolidated Omnibus Budget Reconciliation Act.

In a separate statement shared with Becker’s, Committee for Recognition of Nursing Achievement President Colleen Borges called Stanford and Packard management’s move regarding nurses’ health benefits “cruel” and “immoral.”

“Health benefits should not be used against workers, especially against the very healthcare professionals who have made Stanford a world-class health system,” said Ms. Borges, who is also a pediatric oncology nurse at Lucile Packard Children’s Hospital. “We have spent our careers caring for others and putting others first — now more than ever we need solutions that will ensure sustainability, safe staffing and strong benefits to retain nurses. But instead of taking our proposals seriously, hospitals are spending their time and energy weaponizing our medical benefits. We refuse to be intimidated from standing up for the fair contracts that we need in order to continue delivering world-class patient care.”

The union has organized a petition to tell Stanford not to cut off medical benefits for nurses and their families during the strike. As of April 19, the petition had more than 25,150 signatures.

Don’t pin your hopes on the “Great Regret”

Businesses who suffered from the Great Resignation, in which large numbers of workers voluntarily resigned during the pandemic looking for more fulfilling work or higher wages, are now hoping the “Great Regret” might bring workers back. According to recent surveys, over 70 percent of workers who switched employment during the pandemic found that their new jobs didn’t live up to their expectations, and nearly half wish they had their old job back.

After scores of nurses left hospital positions for travel roles, health system leaders are seeing some nurses return. One physician told us about a favorite nurse on his oncology unit who returned from over a year as a traveler, ready to settle down and be closer to family.

A chief nursing officer relayed that her system was seeing nurses who took agency positions to work toward personal financial goals, like earning a down payment for a house, wanting to come back now that they’ve reached it: “Travel roles are intense, and most nurses can’t do them forever”.

But other nursing leaders caution that they’re preparing for agency nurses to become a permanent fixture in the workforce: “More nurses will see travel as an option for different points in their career, when they have personal flexibility or need the extra money”.

The “Great Regret” might help some hospitals lessen their reliance on agency nursing in the short-term. But building a stable clinical workforce will require addressing underlying structural challenges, through changes in education, rethinking job roles and care models, and finding ways to build individualized job flexibility and customization.   

Why don’t hospitals just pay full-time nurses more?

Hospitals’ reliance on travel workers is nothing new. The pandemic intensified it and highlighted the gap between full-time workers’ pay and lucrative temporary contracts. 

While the average salary for a travel nurse can vary based on location, regional demand, hospital type and specialty, the compensation for a travel nurse has increased significantly compared to pre-pandemic, Bill Morgan, president of the Orlando, Fla.-based travel nurse staffing firm Jackson Nurse Professionals, told Becker’s in September. 

Meanwhile, hospitals and health systems have offered bonuses, increased wages and made other investments in employee retention for their staff workers. Still, the compensation gap between hospital employed nurses and travel or agency nurses remains stark. 

The gap poses the seemingly simple question: Why aren’t hospitals paying full-time staff more instead of paying higher prices for travel workers? 

Travel nursing’s start 

Taking a look back at the history of why hospitals started using travel nurses in the first place helps answer that question, said Kathy Sanford, DBA, RN, chief nursing officer at Chicago-based CommonSpirit Health. 

Dr. Sanford recalls first using local agencies and travel nurses in the 1980s as a cost-effective staffing strategy for periods when the patient census fluctuates, such as during flu epidemics. 

“When you have those fluctuations, you need to have a staffing strategy of what you want to do when the census goes up higher than we are staffed for, but it’s only going to last maybe a month, or a little longer,” she told Becker’s. “Because of the fluctuations, our nursing strategy for staffing was to use these non-employed nurses to fill in when there were gaps.” 

The COVID-19 pandemic, however, has created a situation where volumes are consistently higher than normal. And while rates for a travel or agency nurse have traditionally been higher than those of a hospital staff nurse, the current demand has pushed travel rates to record highs. 

Rising rates

Pittsburgh-based UPMC, for example, paid an estimated $85 an hour for a traveling nurse or a nurse from an agency before the pandemic. The health system is now experiencing rates between $225 and $250 an hour. Such rates have made nurses who may not have considered traveling before take the leap. 

“And the nurses are making more, and we don’t fault the nurses for taking advantage of that opportunity. But … now not only are nurses making more, but the agencies have taken the opportunity to triple their profits … and it shouldn’t be permitted during a pandemic, just like we don’t permit building companies to triple the price of lumber after a hurricane. It just shouldn’t be allowed,” said John Galley, chief human resource officer at UPMC. 

“Hospitals are all trying to fill the positions that need to be filled to help us get through this crisis with travel nurses, but because there aren’t enough, it becomes a cycle of bidding of who will pay me the most to travel,” Dr. Sanford said. Because of that, many nurses who may have never considered traveling before are now choosing to do so and leaving hospitals in areas of the country with a lower wage index, she said. 

Pay for travel nurses has always been higher for the same reasons hospitals pay float pool nurses more, Dr. Sanford explained. 

“Nurses are specialists and they work on a particular type of unit, and sometimes one unit’s census will be down and another unit’s census will be up,” she said. Float pool nurses are willing to shift to different units that need help “and it’s not a favorite thing for nurses to do,” Dr. Sanford said. “You have to pay them a little extra to be willing to learn different types of nursing and be willing to float.” 

The same line of thinking applies to agency or travel nurses. Travelers don’t have the perks that come with a full-time job, like job security and benefits. That coupled with the burden of travel itself and short-term assignments was the initial justification for why travel nurses had higher rates. 

Simply put, hospitals can’t afford to pay full-time staff wages that were meant for temporary assignments. 

“The bottom line is it would not be sustainable for hospitals to pay the kind of dollars that they’re paying right now for travel nurses in the long run. Because nurses are our backbone … they’re our heart, but they’re also our backbone. They’re the majority of our staff.” Dr. Sanford said. 

Mr. Galley of UPMC echoed that sentiment, noting that salaries and benefits make up about 50 percent of a health system’s entire expenses. “If you were to double a good portion of that — the nursing salaries — you’d completely wipe out any operating margin. Then you wouldn’t be able to invest in anything to keep the hospitals going,” he said. 

And healthcare has a lot of costly demands that would go unaddressed if such rates became the expectation for staff nurses. 

“There are a lot of needs that healthcare has in technology, and making sure that we have the equipment to take care of patients, and that we can do programs for the poor and vulnerable that we wouldn’t be able to afford if we pay these non-sustainable prices forever,” Dr. Sanford of CommonSpirit said. 

The value of in-house agencies

To combat skyrocketing travel nursing costs, some health systems have introduced their own travel agencies, including CommonSpirit and UPMC, where travel nurses work within the system.

Mr. Galley said UPMC started the agency for its 40-hospital system not only to combat the nursing shortage — and attract back nurses the health system has lost to outside travel agencies — but also to address increased rates from outside travel agencies. 

Nurses and surgical techs who qualify for UPMC’s in-house agency will earn $85 an hour and $63 an hour, respectively, in addition to a $2,880 stipend at the beginning of each six-week assignment.

Compensation for travel nurses at UPMC is still higher than full-time employees because the job comes with its own set of challenges. While full-time nurses get to know their facilities and have a more regular schedule, travel nurses are constantly on the move.

“They’re going to have assignments for a few weeks at a time at a particular location, then we’re going to pick them up and move them somewhere else, so they’re going to be constantly traveling, living out of a suitcase, and that’s what external travelers do, so we want to be just like the market, create roles like that and pay like that,” Mr. Galley said. “I think our employees understand the difference between that kind of a lifestyle that goes along with the higher salary.”

CommonSpirit’s internal agency plans to start traveling in the early spring and is in the process of hiring a national director for the program. The system’s goal is to have 500 nurses.

Dr. Sanford said the program will be beneficial because it will bring down competition, and people who want to travel can still be employees within the health system.

“It gives nurses who are our employees a choice if they want to be travelers or if they want to do it part time and then come back to a job within one of our hospitals or in one of our clinics. … They won’t lose their benefits, they won’t lose their seniority. They’ll be our employees,” Dr. Sanford said.

Other systems are exploring similar programs, such as Charlotte, N.C.-based Atrium Health, which recently ran a pilot in-house traveler program. The health system has also used outside agencies, which cost about triple compared to pre-pandemic.

This program was very successful, less expensive than using an external travel agency and worked really well across our large health system that covers multiple states,” said Patricia Mook, MSN, RN, vice president of nursing operations at Atrium Health.

But internal travel programs may not be easy for other health systems to mimic, especially smaller ones. Hospitals have to be of a certain size for an internal travel program to work, meaning an individual hospital wouldn’t be able to have one, Mr. Galley said.

More than that, it’s a complex undertaking, he said. 

“It’s not without its challenges,” Mr. Galley said. “I just think it’s something that takes the resources and thought leadership to be able to do. But you’re not going to find independent hospitals being able to mirror this.”

Dr. Sanford also recommends having a few different strategies in place to combat nurse shortages.

“Don’t make it your only strategy because there are so many issues that we could do better with our nursing staff. … You need to be looking at all of the different things that give nurses voice in your organization,” Dr. Sanford said.

More than 4K Stanford nurses vote to strike in California

UPDATE: April 14, 2022: Nurses will begin striking April 25 if they are unable to reach a deal with the system by then, according to a Wednesday statement from the union. The two sides have met with a federal mediator three times, and the strike would be open-ended.

Dive Brief:

  • Unionized nurses at Stanford hospitals in California voted in favor of authorizing a strike Thursday, meaning more than 4,500 nurses could walk off the job in a bid for better staffing, wages and mental health measures in new contracts.
  • Some 93% of nurses represented by the Committee for Recognition of Nursing Achievement voted in favor of the work stoppage, though the union did not set a date, according to a union release. It must give the hospitals 10 days notice before going on strike.
  • Nurses’ contracts expired March 31 and the union and hospital have engaged in more than 30 bargaining sessions over the past three months, including with a federal mediator, according to the union.

Dive Insight:

As the COVID-19 pandemic has worsened working conditions for nurses, some unions have made negotiating contracts a priority. Better staffing is key, along with higher wages and other benefits to help attract and retain employees amid ongoing shortages.

The California nurses’ demands in new contracts focus heavily on recruitment and retention of nursing staff “amid an industry-wide shortage and nurses being exhausted after working through the pandemic, many in short-staffed units,” the union said in the release.

They’re also asking for improved access to time off and more mental health support.

Nurses say their working conditions are becoming untenable and relying on travel staff and overtime shifts is not sustainable, according to the release.

The hospitals are taking precautionary steps to prepare for a potential strike and will resume negotiations with the union and a federal mediator Tuesday, according to a statement from Stanford.

But according to CRONA, nurses have filed significantly more assignment despite objections documents from 2020 to 2021 — forms that notify hospital supervisors of assignments nurses take despite personal objections around lacking resources, training or staff.

And a survey of CRONA nurses conducted in November 2021 founds that as many as 45% were considering quitting their jobs, according to the union.

That’s in line with other national surveys, including one from staffing firm Incredible Health released in March that found more than a third of nurses said they plan to leave their current jobs by the end of this year.

The CRONA nurses “readiness to strike demonstrates the urgency of the great professional and personal crisis they are facing and the solutions they are demanding from hospital executives,” the union said in the release.

No major strikes among healthcare workers have occurred so far this year, though several happened in 2021 and in 2020, the first year of the pandemic.

Rising turnover, agency costs compound hospital labor problems

Even as COVID admissions continue to wane, hospitals report that workforce shortages persist. The impact on hospital finances is stark: as shown in the graphic above, there has been an eight percent increase in clinical labor costs per patient day since the start of the pandemic, amounting to an additional $17M annually for an average 500-bed hospital. 

Two of the primary factors driving this increase—higher turnover among clinical staff and a continued reliance on travel nurses—are mutually reinforcing. 

Quarterly turnover rates for some nursing positions doubled from Q4 2019 to Q2 2021, as hospitals turned to expensive agency labor to fill resulting vacancies. Spiking demand for travel nurses, still running nearly three times higher than the pre-pandemic baseline, fueled more turnover, as more nurses left for these lucrative roles. 

It’s unclear how long increased labor costs will persist

Some HR tactics, like signing and retention bonuses, are one-time expenditures. But total hospital employment is still down two percent from pre-pandemic levels, pointing to a diminished healthcare labor supply. 

Permanent wage increases may end up being unavoidable, especially for lower-wage jobs, where a new compensation baseline for talent is being set by the market, both inside and outside the healthcare industry. 

Understanding the implications of using agency nurses

The Great Nursing Resignation, and hospitals’ growing reliance on expensive agency labor (a.k.a. “travelers”) has grabbed headlines, for good reason. But lately we’ve heard a couple of anecdotes from health system leaders about the second-order impacts of the phenomenon that are worth considering as well.

First, as the ranks of agency nurses at hospitals have swelled, full-time employed nurses’ morale has plummeted—tenured nurses are having to orient their new temporary co-workers, then watch them earn up to three times as much money for the same work.

At the same time, willingness to work overtime among employed nurses has dropped. That’s not just because of burnout—it turns out that the nurses who were most likely to take overtime shifts are also more likely to have chosen to leave full-time employment to become travelers, where they are even more richly rewarded for working extra shifts. So, the “productivity” of the remaining corps of staff nurses has dropped, even as caseloads have increased.

One other implication we’ve heard about recently: the economic impact of “observation” cases, where patients are held in a staffed bed but not admitted—already a bad bargain for hospitals—has gotten worse. That’s because the cost of deploying staff to care for those patients has gone up, due to wage inflation and use of travelers. It’s hard to overstate the level of staffing crisis at most hospitals today, and the rapid growth in reliance on temporary staff will have consequences lasting well beyond the current surge.

Facing a “new normal” of higher labor costs

https://mailchi.mp/161df0ae5149/the-weekly-gist-december-10-2021?e=d1e747d2d8

The price of higher labor costs in the consumer discretionary sector -  AlphaSense

Attending a recent executive retreat with one of our member health systems, we heard the CEO make a statement that really resonated with us. Referring to the current workforce crisis—pervasive shortages, pressure to increase compensation, outsized reliance on contract labor to fill critical gaps—the CEO made the assertion that this situation isn’t temporary. Rather, it’s the “new normal”, at least for the next several years.

The Great Resignation that’s swept across the American economy in the wake of COVID has not spared healthcare; every system we talk to is facing alarmingly high vacancy rates as nurses, technicians, and other staff head for the exits. The CEO made a compelling case that the labor cost structure of the system has reset at a level between 20 and 30 percent more expensive than before the pandemic, and executives should begin to turn attention away from stop-gap measures (retention bonuses and the like) to more permanent solutions (rethinking care models, adjusting staffing ratios upward, implementing process automation).

That seemed like an important insight to us. It’s increasingly clear as we approach a third year of the pandemic: there is no “post-COVID world” in which things will go back to normal. Rather, we’ll have to learn to live in the “new normal,” revisiting basic assumptions about how, where, and by whom care is delivered.

If hospital labor costs have indeed permanently reset at a higher level, that implies the need for a radical restructuring of the fundamental economic model of the health systemrazor-thin margins won’t allow for business to continue as usual. Long overdue, perhaps, and a painful evolution for sure—but one that could bring the industry closer to the vision of “right care, right place, right time” promised by population health advocates for over a decade.

How much nurse pay is rising—and why

Travel Nurse Guaranteed Pay: The Truth - The Gypsy Nurse

Amid a nationwide staffing shortage, rising demand for nurses has led hospitals to increase salaries and other benefits to attract and retain workers, Melanie Evans reports for the Wall Street Journal.

Hospitals increase salaries, benefits to keep up with nursing demand

Hospitals across the country have been struggling amid staffing shortages, particularly of nurses, Evans reports. According to health care consultancy Premier, nurse turnover rates have increased to around 22% this year, up from the annual rate of about 18% in 2019.

“We are employing more nurses now than we ever have, and we also have more vacancies than we ever had,” said Greg Till, chief people officer at Providence Health & Services.

To retain their current nurses and attract new staff, many hospitals have increased their nurses’ salaries to remain competitive in the job market, Evans reports.

For example, HCA Healthcare, one of the largest hospital chains in the country, said it increased nurse pay this year to keep up with Covid-19 surges and compete with rivals also trying to fill vacant positions.

Similarly, Jefferson Health in May raised salaries for its nearly 10,000 nurses by 10% after the system discovered that rivals had increased their compensation. “The circumstances required it,” said Kate Fitzpatrick, Jefferson’s chief nurse executive.

In addition, Citizens Memorial Hospital in Bolivar, Mo., this month raised its nurses’ salaries by up to 5% after rivals in other nearby cities increased their workers’ wages. Sarah Hanak, Citizen Memorial’s CNO, said the hospital also increased the hourly wages of nurses working overnight shifts by around 15% to ensure sufficient staffing for those shifts.

“We were forced to,” Hanak said. “We absolutely have to stay competitive.”

Overall, the average annual salary for RNs, not including bonus pay, grew to $81,376, according to Premier—a 4% increase across the first nine months of the year. This is larger than the 3.3% increase in the average annual nurse salary for 2020 and the 2.6% increase in 2019, Evans writes.

In addition to salary increases, some organizations, such as Providence, are also offering other benefits to attract and retain nurses, such as more time off, greater schedule flexibility, and new career development opportunities. Many hospitals are also hiring new graduates to work in specialized roles in ORs and other areas, allowing them to advance their careers more quickly than they would have before.

Overall, this rising demand for nurses has allowed those entering the workforce to negotiate higher salaries, more flexible working hours, and other benefits, Evans writes.

“I think you get to write your ticket,” said Tessa Johnson, president of the North Dakota Nurses Association.

Nurse compensation increases were inevitable—here’s why

It was inevitable that we would get to this point: baseline nurse compensation on a clear upward trajectory. Inevitable because this boils down to laws of supply and demand. Amid a clear nursing shortage, organizations are being forced to raise baseline compensation to compete for increasingly scarce qualified nurses. This is true in nearly every market, even for those considered to be ‘destination employers.’

If anything, what’s most surprising in the data from Premier is the moderated increase of around 4%. From a worker’s perspective, that’s not even covering cost of living increases due to inflation. However, amid this new data, it’s important to keep two things in mind:

Two considerations for health care leaders

  1. New data only captures baseline compensation.Differentials—which organizations must standardize and expand across shifts, specialties, and even settings—plus overtime put baseline compensation much higher. Not to mention lucrative sign-on bonuses, that members tell us are increasingly table stakes in their markets. In general, we don’t recommend this type of incentive that does nothing for retention. You’re better off investing those resources in baseline compensation as well as beefing up your RN bonus plan to incentivize retention.
  2. There is a new floor for wages (and it’s only going up from here).

Open questions (and important indicators) we are assessing

  • What happens to wages for entry-level clinical roles? As the shortage of RNs persists, organizations will need to make a shift to team-based models of care, and those are only possible with a stable workforce of entry-level personnel. Right now, that part of the health care workforce is anything but stable. When you consider their work and their wages in comparison to out-of-industry players that pay the same or better, that’s a clear area where investment is required. 
  • Will the share of nurses working permanently with travel agencies return to pre-pandemic levels? That’s to say, what will those RNs who experienced the traveler lifestyle and pay value more moving forward: the flexibility and premium pay or stability of permanent employment? Even if this number stabilizes a couple percentage points above pre-pandemic levels, that will aggravate provider’s sense of shortage.

Moody’s: Rising costs will slow hospitals rebuilding margins to pre-COVID-19 levels

https://www.healthcarefinancenews.com/news/rising-costs-will-make-it-difficult-hospitals-rebuild-margins-pre-covid-levels-moodys-says

Operating cash flow margins for nonprofit hospitals fell to a median 7% in 2020.

A shortage of nurses and other workers will continue to erode hospital financial performance into 2022, according to a new Healthcare Quarterly report from Moody’s.

A rise in COVID-19 cases in various regions of the United States has contributed to a wave of nurses, often burned out, resigning to take care of family, to work in less acute healthcare settings such as ambulatory care or to pursue higher-paying contract opportunities, such as becoming a travel nurse.

Hospitals are also having difficulty finding other types of healthcare workers, such as respiratory therapists and imaging technicians, as well as nonclinical workers in areas such as dietary, housekeeping and environmental services.

WHY THIS MATTERS

The report holds no surprises for hospital executives, who already know the financial affect labor shortages are having on revenue. But Moody’s confirms projections that rising costs will make it difficult for hospitals to rebuild margins to pre-COVID-19 levels. 

Labor shortages are driving up costs and also may be limiting the number of lucrative elective procedures, resulting in lost revenue. Not-for-profit hospitals saw operating cash flow margins fall to a median 7% in 2020, from 8.3% in the three prior years, according to Moody’s median data.

Hospitals using contract nurses report that hourly wages are very high, in some cases higher now with the Delta variant than during earlier COVID-19 surges. Many hospitals and health systems have also increased minimum wages for nonclinical workers and are finding they must compete with other service sectors, such as the food industry, to attract nonclinical staff.

Given their substantial reliance on government reimbursement from Medicare and Medicaid, most healthcare providers maintain limited pricing flexibility to offset the costs of higher wages. While there are opportunities for more lucrative commercial insurance contracts, rates are the subject of intense negotiations, limiting providers’ pricing power, Moody’s said. 

Providers with strong liquidity and diversified cash flow will remain better positioned to manage stress from cost constraints. Hospitals are taking steps to retain nurses, including developing “float pools” of nurses who can work in multiple departments, increasing retention and merit pay, and expanding healthcare benefits such as mental health and child care services. 

LifeBridge Health, a not-for-profit health system operating in Baltimore and Carroll County, Maryland, paid its nursing staff retention bonuses in December 2020 as the labor market tightened. To recruit nurses, many systems are offering signing bonuses in exchange for multi-year work commitments as well as scholarship and loan forgiveness programs with local nursing schools.

While these strategies will ease the effect of labor shortages over the long term, they will cause hospitals’ costs to increase in 2022 as salaries and benefits typically represent at least half of a hospital’s expenses. Labor shortages will also likely spark an increase in unionization efforts or lead to more difficult negotiations between unions and providers, potentially increasing costs via new contracts.

THE LARGER TREND

The quarterly report focused on the impact of labor shortages and cost pressures for various sectors, including hospitals, insurers, pharmaceuticals, healthcare services such as staffing firms and health insurers.

Health insurers are less affected by labor shortages, wage pressure and potentially burgeoning inflation than many other healthcare sectors, Moody’s said. Insurers reset premiums each year, which helps them to offset inflation. But if the government does not keep up with payment, providers will look to insurers to make up the shortfall. 

Large physician staffing companies, such as Envision Healthcare Corporation and Team Health Holdings, will experience pressure on their profitability as it becomes harder and more expensive to fill open positions as burnout and retirements decrease the number of doctors available to work.

Travel nurse staffing has higher profit margin resilience compared to physician staffing, the report said. 

For real estate investment trusts, worker shortages are slowing net operating income growth for REITs to invest in senior housing and skilled nursing facilities.

Growth in salaries and benefits has exceeded hospitals’ expense growth, a trend likely to continue for the remainder of 2021 and into 2022, Moody’s said in an earlier October report.

In one bright spot in the earlier report, Moody’s noted recent rises in nursing school enrollment indicating a more robust long-term staffing pipeline. However, the aging population, combined with a healthcare workforce that may be retiring from their jobs or quitting due to burnout, represent long-term healthcare staffing challenges nationwide.