Many hospitals and health systems aim to recruit and retain permanent staff to replace contract labor positions, which have seen wages skyrocket because of staff shortages during the COVID-19 pandemic.
Hospitals across the country have relied on contract labor and temporary staffing agencies to support their clinical teams when many burned-out providers are exiting healthcare. An October survey conducted by Bain & Company found that 25 percent of physicians, advanced practice providers and nurses are considering changing careers. Eight-nine percent of the providers thinking about leaving the profession cited burnout as the driving force.
Staffing shortages are driving labor costs to an unsustainable level for hospitals operating on razor-thin margins and reducing temporary staffing costs is top of the agenda for many financial executives looking to reduce expenses in the coming quarters.
Here are 22 numbers that demonstrate the cost of contact labor for hospitals, according to reports from Kaufman Hall, Definitive Healthcare, Vaya Workforce and big hospital operators:
1. The demand for contract labor increased500 percent in fall 2021 compared with 2019, according to healthcare staffing services company Vaya Workforce. While demand has since decreased, it is still nearly triple pre-pandemic levels and is projected to remain as high as 20 percent above the 2019 baseline.
2. In 2020, the average amount hospitals spent on contract labor was $4.6 million, more than double the average expense of $2.2 million in 2011, according to a report from Definitive Healthcare, a data and analytics company.
3. Rochester, Minn.-based Mayo Clinic Hospital, Saint Mary’s Campus spent $286.8 million on contract labor in 2020, the most of any hospital in the country that year, according to Definitive Healthcare’s analysis of about 3,100 U.S. hospitals
4. From 2019 to 2022, the hourly wage rate for contract nurses increased106 percent, according to Kaufman Hall. Contract nurses are earning an average of $132an hour in 2022 versus $64an hour in 2019. At the height of the pandemic, some travel nurses earned up to $300 an hour, with rates as high as these placing immense pressure on hospital balance sheets.
5. The rise in contract labor from 2019 through March of 2022 led to a 37 percent increase in labor expenses per patient, equating to between $4,009 and $5,494 per adjusted discharge.
6. Hospitals with 25 beds or fewer spent about $460,000 on contract labor in 2020 compared to hospitals with more than 250 beds that spent almost $11 million on average, according to Definitive Healthcare.
7. Hospitals in the western U.S. have the highest contract labor expenses, with an average of $9.6 million reported in 2020. Large cities, high cost of living and high salary rates in the region contribute to this high average.
8. Labor costs were one of the core reasons Franklin, Tenn.-based Community Health Systems reported a net loss of $42 million in the third quarter, but CFO Kevin Hammons said he expects to see a 40 percent to 50 percent reduction in contract labor costs next year compared with 2022.
9. Nashville, Tenn.-based HCA Healthcare reported a 19 percent decrease in contract labor costs in the third quarter compared to the second quarter, allowing the system to absorb much of the market-based wage adjustment costs for its employee workforce, CFO Bill Rutherford said during an Oct. 21 earnings call.
10. According to Kaufman Hall’s “2022 State of Healthcare Performance Improvement” report, published Oct. 18, 46 percent of hospital and health system leaders identify labor costs as the greatest opportunity for cost reductions. This was significantly up from the 17 percent of respondents who noted labor costs as their greatest opportunity to cut costs last year.
11. There are some hopeful signs that the use of contract labor has stabilized and is steadily falling, according to Kaufman Hall: 44 percent of hospitals in its survey reported that their utilization of contract labor is declining while 29 percent said that it is holding steady.
The third quarter brought little relief to hospitals in what is shaping up to be one of their worst financial years.
Kaufman Hall’s October National Hospital Flash Report— based on data from more than 900 hospitals — found slightly lower hospital expenses in September did not outweigh lower revenue across the board, with decreases in discharges, inpatient minutes and operating minutes.
The median year-to-date operating margin index for hospitals was -0.1 percent in September, marking a ninth straight month of negative operating margins and a dimmer outlook for their climb back into the black by year’s end.
Kaufman Hall noted that expense pressures and volume and revenue declines could force hospitals to make “difficult decisions” about service reductions and cuts.
“Health systems are starting to get a clear picture of what service lines have a positive effect on their margins and which ones are weighing them down,” said Matthew Bates, managing director and Physician Enterprise service line lead with Kaufman Hall. “Without a positive margin there is no mission. Health systems must think carefully and strategically about what areas of care they invest in for the future.”
There are an estimated 19,000 full-time job vacancies across Massachusetts acute care hospitals, according to a survey published Oct. 31 by the Massachusetts Health & Hospital Association.
Hospitals are working to address backlogs and transfer patients to post-acute care settings while skyrocketing labor costs — including a projected $1 billion in travel labor costs this year — are compounding healthcare facilities’ financial woes, according to the report. These challenges are hampering hospital operations as well as leading to care delays and reduced access to care.
Fewer workers mean that fewer beds are available for patients, while the demand for care increases due to deferred care throughout the COVID-19 pandemic, the behavioral health crisis and reduced access to community-based services continue to challenge hospitals throughout the state. At any given time, more than 1,500 patients are in acute hospital beds awaiting placement to a specialized behavioral health bed or post-acute care, according to the MHA.
“Our healthcare system has never been more fragile, and its leaders have never been more concerned about what’s to come in months ahead,” Steve Walsh, president and CEO of the MHA, said in an Oct. 31 news release shared with Becker’s Hospital Review. “They are exhausting every option within their control to confront these challenges, but this is an unsustainable reality and providers are in dire need of support.”
In response to the survey, 37 hospitals — representing 70 percent of the state’s total hospital employment — reported 6,650 vacancies among 47 positions critical to hospital operations and clinical care. The positions range from direct care nurses to lab personnel and clinical support staff. Eighteen of the 47 positions have a vacancy rate greater than 20 percent.
At a 56 percent vacancy rate, licensed practical nurses is the most in-demand position, while home health aides (34 percent), mental health workers (32 percent), infection control nurses (26 percent) and CRNAs (24 percent) are also highly sought after.
Survey respondents identified 6,650 vacancies. The 47 positions included in the survey, which was conducted this summer, account for less than half of all hospital roles. The MHA said it extrapolated that across all positions and hospitals to arrive at an estimated 19,000 vacancies across the state.
Staffing shortages are driving labor costs to an unsustainable level for many hospitals already grappling with margins close to zero or in the red. Hospitals have relied on high-cost temporary staffing to fill critical positions during the pandemic, resulting in average hourly wage rates for travel nurses increasing 90 percent since 2019, according to the report. Massachusetts hospitals reported spending $445 million on temporary registered nurse staffing halfway through the fiscal year, with temporary RN staffing costs increasing 234 percent from fiscal year 2019 to March 2022.
If urgent steps are not taken to address healthcare’s staffing shortage, hospitals will continue to face capacity challenges and overpay for labor, which will lead to fiscal instability, according to Mr. Walsh.
The MHA urged providers, payers, public officials and government agencies to address the workforce crisis by investing in training and education, expanding the workforce pipeline, providing financial support to hospitals and advancing new models of care such as telehealth and at-home care.
Hospitals in the United States are on track for their worst financial year in decades. According to a recent report, median hospital operating margins were cumulatively negative through the first eight months of 2022. For context, in 2020, despite unprecedented losses during the initial months of COVID-19, hospitals still reported median eight-month operating margins of 2 percent—although these were in large part buoyed by federal aid from the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The recent, historically poor financial performance is the result of significant pressures on multiple fronts. Labor shortages and supply-chain disruptions have fueled a dramatic rise in expenses, which, due to the annually fixed nature of payment rates, hospitals have thus far been unable to pass through to payers. At the same time, diminished patient volumes—especially in more profitable service lines—have constrained revenues, and declining markets have generated substantial investment losses.
While it’s tempting to view these challenges as transient shocks, a rapid recovery seems unlikely for a number of reasons. Thus, hospitals will be forced to take aggressive cost-cutting measures to stabilize balance sheets. For some, this will include department or service line closures; for others, closing altogether. As these scenarios unfold, ultimately, the costs will be borne by patients, in one form or another.
Hospitals Face A Difficult Road To Financial Recovery
There are several factors that suggest hospital margins will face continued headwinds in the coming years. First, the primary driver of rising hospital expenses is a shortage of labor—in particular, nursing labor—which will likely worsen in the future. Since the start of the pandemic, hospitals have lost a total of 105,000 employees, and nursing vacancieshave more than doubled. In response, hospitals have relied on expensive contract nurses and extended overtime hours, resulting in surging wage costs. While this issue was exacerbated by the pandemic, the national nursing shortage is a decades-old problem that—with a substantial portion of the labor force approaching retirement and an insufficient supply of new nurses to replace them—is projected to reach 450,000 by 2025.
Second, while payment rates will eventually adjust to rising costs, this is likely to occur slowly and unevenly. Medicare rates, which are adjusted annually based on an inflation projection, are already set to undershoot hospital costs. Given that Medicare doesn’t issue retrospective corrections, this underadjustment will become baked into Medicare prices for the foreseeable future, widening the gap between costs and payments.
This leaves commercial payers to make up the difference. Commercial rates are typically negotiated in three- to five-year contract cycles, so hospitals on the early side of a new contract may be forced to wait until renegotiation for more substantial pricing adjustments. “Negotiation” is also the operative term here, as payers are under no obligation to offset rising costs. Instead, it is likely that the speed and degree of price adjustments will be dictated by provider market share, leaving smaller hospitals at a further disadvantage. This trend was exemplified during the 2008 financial crisis, in which only the most prestigious hospitals were able to significantly adjust pricing in response to historic investment losses.
Finally, economic uncertainty and the threat of recession will create continued disruptions in patient volumes, particularly with elective procedures. Although health care has historically been referred to as “recession-proof,” the growing prevalence of high-deductible health plans (HDHPs) and more aggressive cost-sharing mechanisms have left patients more exposed to health care costs and more likely to weigh these costs against other household expenditures when budgets get tight. While this consumerist response is not new—research on previous recessions has identified direct correlations between economic strength and surgical volumes—the degree of cost exposure for patients is historically high. Since 2008, enrollment in HDHPs has increased nearly four-fold, now representing 28 percent of all employer-sponsored enrollments. There’s evidence that this exposure is already impacting patient decisions. Recently, one in five adults reported delaying or forgoing treatment in response to general inflation.
Taken together, these factors suggest that the current financial pressures are unlikely to resolve in the short term. As losses mount and cash reserves dwindle, hospitals will ultimately need to cut costs to stem the bleeding—which presents both challenges and opportunities.
Direct And Indirect Consequences For Cost, Quality, And Access To Care
Inevitably, as rising costs become baked into commercial pricing, patients will face dramatic premium hikes. As discussed above, this process is likely to occur slowly over the next few years. In the meantime, the current challenges and the manner in which hospitals respond will have lasting implications on quality and access to care, particularly among the most vulnerable populations.
Likely Effects On Patient Experience And Quality Of Care
Insufficient staffing has already created substantial bottlenecks in outpatient and acute-care facilities, resulting in increased wait times, delayed procedures, and, in extreme cases, hospitals diverting patients altogether. During the Omicron surge, 52 of 62 hospitals in Los Angeles, California, were reportedly diverting patients due to insufficient beds and staffing.
The challenges with nursing labor will have direct consequences for clinical quality. Persistent nursing shortages will force hospitals to increase patient loads and expand overtime hours, measures that have been repeatedly linked to longer hospital stays, more clinical errors, and worse patient outcomes. Additionally, the wave of experienced nurses exiting the workforce will accelerate an already growing divide between average nursing experience and the complexity of care they are asked to provide. This trend, referred to as the “Experience-Complexity Gap,” will only worsen in the coming years as a significant portion of the nursing workforce reaches retirement age. In addition to the clinical quality implications, the exodus of experienced nurses—many of whom serve in crucial nurse educator and mentorship roles—also has feedback effects on the training and supply of new nurses.
Staffing impacts on quality of care are not limited to clinical staff. During the initial months of the pandemic, hospitals laid off or furloughed hundreds of thousands of nonclinical staff, a common target for short-term payroll reductions. While these staff do not directly impact patient care (or billed charges), they can have a significant impact on patient experience and satisfaction. Additionally, downsizing support staff can negatively impact physician productivity and time spent with patients, which can have downstream effects on cost and quality of care.
Disproportionate Impacts On Underserved Communities
Reduced access to care will be felt most acutely in rural regions. A recent report found that more than 30 percent of rural hospitals were at risk of closure within the next six years, placing the affected communities—statistically older, sicker, and poorer than average—at higher risk for adverse health outcomes. When rural hospitals close, local residents are forced to travel more than 20 miles further to access inpatient or emergency care. For patients with life-threatening conditions, this increased travel has been linked to a 5–10 percent increase in risk of mortality.
Rural closures also have downstream effects that further deteriorate patient use and access to care. Rural hospitals often employ the majority of local physicians, many of whom leave the community when these facilities close. Access to complex specialty care and diagnostic testing is also diminished, as many of these services are provided by vendors or provider groups within hospital facilities. Thus, when rural hospitals close, the surrounding communities lose access to the entire care continuum. As a result, individuals within these communities are more likely to forgo treatment, testing, or routine preventive services, further exacerbating existing health disparities.
In areas not affected by hospital closures, access will be more selectively impacted. After the 2008 financial crisis, the most common cost-shifting response from hospitals was to reduce unprofitable service offerings. Historically, these measures have disproportionately impacted minority and low-income patients, as they tend to include services with high Medicaid populations (for example, psychiatric and addiction care) and crucial services such as obstetrics and trauma care, which are already underprovided in these communities. Since 2020, dozens of hospitals, both urban and rural, have closed or suspended maternity care. Similar to closure of rural hospitals, these closures have downstream effects on local access to physicians or other health services.
Potential For Productive Cost Reduction And The Need For A Measured Policy Response
Despite the doom-and-gloom scenario presented above, the focus on hospital costs is not entirely negative. Cost-cutting measures will inevitably yield efficiencies in a notoriously inefficient industry. Additionally, not all facility closures negatively impact care. While rural facility closures can have dire consequences in health emergencies, studies have found that outcomes for non-urgent conditions remained similar or actually improved.
Historically, attempts to rein in health care spending have focused on the demand side (that is, use) or on negotiated prices. These measures ignore the impact of hospital costs, which have historically outpaced inflation and contributed directly to rising prices. Thus, the current situation presents a brief window of opportunity in which hospital incentives are aligned with the broader policy goals of lowering costs. Capitalizing on this opportunity will require a careful balancing act from policy makers.
In response to the current challenges, the American Hospital Association has already appealed to Congress to extend federal aid programs created in the CARES Act. While this would help to mitigate losses in the short term, it would also undermine any positive gains in cost efficiency. Instead of a broad-spectrum bailout, policy makers should consider a more targeted approach that supports crucial community and rural services without continuing to fund broader health system inefficiencies.
The establishment of Rural Emergency Hospitals beginning in 2023 represents one such approach to eliminating excess costs while preventing negative patient consequences. This rule provides financial incentives for struggling critical access and rural hospitals to convert to standalone emergency departments instead of outright closing. If effective, this policy would ensure that affected communities maintain crucial access to emergency care while reducing overall costs attributed to low-volume, financially unviable services.
Policies can also help promote efficiencies by improving coverage for digital and telehealth services—long touted as potential solutions to rural health care deserts—or easing regulations to encourage more effective use of mid-level providers.
Conclusion
The financial challenges facing hospitals are substantial and likely to persist in the coming years. As a result, health systems will be forced to take drastic measures to reduce costs and stabilize profit margins. The existing challenges and the manner in which hospitals respond will have long-term implications for cost, quality, and access to care, especially within historically underserved communities. As with any crisis, though, they also present an opportunity to address industrywide inefficiencies. By relying on targeted, evidence-based policies, policy makers can mitigate the negative consequences and allow for a more efficient and effective system to emerge.
Several hospitals and health systems are trimming their workforces or jobs due to financial and operational challenges.
Below are workforce reduction efforts or job eliminations that were announced within the past month and/or take effect over the next month.
1. Fayetteville, N.C.-based Cape Fear Valley Health is eliminating 200 positions. The decision affects 42 employees in non-direct patient care positions. The other 158 positions were unfilled positions. Employees were informed of the changes Oct. 27.
2. Sioux Falls, S.D.-based Sanford Healthannounced layoffs affecting an undisclosed number of staff on Oct. 19, a decision its CEO said was made “to streamline leadership structure and simplify operations” in certain areas. The layoffs primarily affect nonclinical areas.
3. University Hospitalsannounced efforts to reduce system expenses by $100 million Oct. 12, including the elimination of 326 vacant jobs and layoffs affecting 117 administrative employees. None of the employees affected by job cuts or layoffs provide direct patient care. The workforce reduction comes as the 21-hospital system faces a net operating loss of $184.6 million from the first eight months of 2022.
4. Ascension is closingAscension St. Vincent Dunn, a critical access hospital in Bedford, Ind., and nine medical practices in December, a move that will affect 133 employees. Affected employees who do not secure another position within the health system will be offered severance and outplacement services.
5. Quincy, Ill.-based Blessing Health Systemclosed its hospital in Keokuk, Iowa, Sept. 30. The closure affected 151 workers. The layoffs take effect Nov. 4. The employees will do on-site work or be placed on administrative leave until the layoff date, Blessing Health said.
6. St. Vincent Charity Medical Center in Cleveland will lay off 978 workers when it ends many services in November. The hospital, part of Sisters of Charity Health System, is ending inpatient care and most other services in November. After the transition, the facility will offer outpatient behavioral health, urgent care and primary care.
7. Commonwealth Health, part of Franklin, Tenn.-based Community Health Systems, will lay off 245 employees when it closes facilities at the end of October. The health system is closing First Hospital, a psychiatric hospital in Kingston, Pa., and its various outpatient centers on Oct. 30. Affected workers are encouraged to apply for open positions they’re qualified for at other Commonwealth Health facilities, a system spokesperson told Becker’s.
8. Yale New Haven (Conn.) Healtheliminated 155 management positions from its nearly 30,000-person workforce. The health system laid off 72 employees and eliminated 83 vacant positions, a spokesperson told Becker’s Hospital Review in September. The cuts were attributed to financial pressures.
9. Citing financial pressures, BHSH System — now named Corewell Health — cut about 400 positions from its 64,000-member workforce in September. The 22-hospital organization was formed by the February merger of Grand Rapids, Mich.-based Spectrum Health with Southfield, Mich.-based Beaumont Health.
10. Bakersfield (Calif.) Heart Hospital is laying off 114 employees. Affected employees were told in September that they no longer had to report to work, but they will continue to receive full pay and benefits through Nov. 5. The layoffs are an effort to optimize operations and to free up resources for patient care and specialized surgery, the hospital said.
Fall is typically a period of increased CFO turnover as hospitals and health systems begin searches for new executives for the beginning of the following year, but the pressures associated with high inflation, a projected recession and the continued effects of the pandemic have led to more churn than usual for top financial positions, The Wall Street Journal reported Oct. 23
Many economists and financial experts are expecting a recession to hit the U.S. in early- to mid-2023. This is pushing some executives to switch roles now before the labor market changes. Many healthcare organizations are also preparing for a potential economic downturn by searching for CFOs who are experienced in cutting costs or restructuring operations, according to the report.
Recession planning in healthcare is challenging because it can have both negative (payer mix, patient volume) and positive effects (decrease in labor and supply inflation) on financial performance, according to Daniel Morash, senior vice president of finance and CFO for Boston-based Brigham and Women’s Hospital.
“The best advice I would give is that hospitals need to consider recession scenarios when making long-term commitments on wage increases, capital expenditures and planning for capacity for patient access,” Mr. Morash told Becker’s Hospital Review. “Most of our focus needs to be on the acute challenges we are facing. Still, it’s important to be careful not to overreact or overcommit financially when a recession could change a number of trends we’re seeing now.”
Employers face a brutal increase in health-insurance premiums for 2023, Axios’ Arielle Dreher writes from a Kaiser Family Foundation report out this morning.
Why it matters: Premiums stayed relatively flat this year, even as wages and inflation surged. That reprieve was because many 2022 premiums were finalized last fall, before inflation took off.
“Employers are already concerned about what they pay for health premiums,” KFF president and CEO Drew Altman said.
“[B]ut this could be the calm before the storm … Given the tight labor market and rising wages, it will be tough for employers to shift costs onto workers when costs spike.”
🧠 What’s happening: Nearly 159 million Americans get health coverage through work — and coverage costs and benefits have become a critical factor in a tight labor market.
Nonprofit hospitals are bracing for a challenging few months as healthcare and social assistance job vacancies remain high against a backdrop of low unemployment, Fitch Ratings said in an Oct. 25 update.
Healthcare and social assistance job openings fell for two consecutive months to 7.7 percent as of August, but the number of openings remains above the highest level recorded before the COVID-19 pandemic.
One encouraging sign is the slowly declining number of quits — 2.3 percent (486,000 quits) in August 2022 compared with a peak of 3.1 percent (626,000 quits) in November 2021. However, current quit rates remain high and are on track to exceed last year, according to Fitch.
“[not-for-profit] hospital quits will need to normalize to well below pre-pandemic levels in order to reduce staffing shortages and a reliance on contract/temporary labor,” Fitch Director Richard Park said in the news release.
The labor shortage saw hospital employees’ average weekly earnings increase 21.1 percent since February, significantly higher than the 13.6 percent earnings growth of overall private sector employees, according to Fitch. But ambulatory healthcare services employees’ earnings increased by only 12.6 percent over the same period.
“Wage increases and employee recruitment challenges may amplify the role of ambulatory care in the overall healthcare sector and continue the acceleration of inpatient care to outpatient settings,” Mr. Park said.
HENRY KOTULA 