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 system—razor-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.
Hospitals saw operating margins continue to erode in October, declining 12% from September under the weight of rising labor costs, according to a national median of more than 900 health systems calculated by Kaufman Hall. It was the second consecutive monthly drop and comes as facilities are preparing for the fast-spreading omicron variant of the coronavirus.
Although expenses remained highly elevated, patient days and average length of stay fell for the first time in months in October, likely reflecting lower hospitalization rates as the pressure of treating large numbers of COVID cases began to ease, Kaufman Hall said in its latest report.
At the same time, operating room minutes rose 6.8% from September, pointing to renewed patient interest in elective procedures.
Doctors and nurses have barely caught a breath from the most recent surge in inpatient volumes driven by the delta variant. Now, hospitals face the possibility of a fresh wave of cases led by omicron.
“Performance could continue to suffer in the coming months as hospitals face sustained labor increases and the uncertainties of the emerging omicron variant,” according to the Kaufman Hall report.
Scientists are scrambling to understand the characteristics of the omicron variant. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, told a White House press briefing Tuesday that omicron’s mutation profile points to “increased transmissibility and immune evasion.” But it is too soon to tell whether omicron will cause more severe disease than other COVID-19 variants, or how well current vaccines and treatments work against it, Fauci said.
Moderna CEO Stéphane Bancel told the Financial Times he thought existing vaccines would be less effective against omicron than earlier variants. Moderna, Pfizer, Johnson & Johnson and other manufacturers are already working to adapt their vaccines to combat the new threat, first reported by South African scientists on Nov. 24.
Regeneron also said its COVID-19 antibody drug, the top-selling treatment in the U.S., might be less effective against omicron. The company said it is now conducting tests to determine how the variant affects its drug.
The median hospital operating margin, not including federal Coronavirus Aid, Relief, and Economic Security Act funding, was down 31.5% in October, compared to pre-pandemic levels in the same month of 2019, according to Kaufman Hall’s snapshot. Hospitals in the West, South and Midwest that were hardest hit by the delta variant saw year-over-year margin declines.
Total labor expenses rose nearly 3% from September to October, 12.6% compared to October 2020 and 14.8% compared to October 2019, Kaufman Hall said. Full-time equivalents per adjusted occupied bed decreased 4.5% versus 2020 and 4% versus 2019, suggesting higher salaries due to nationwide labor shortages, rather than increased staffing levels, are driving up labor expenses.
Total non-labor expenses, however, decreased 1% in October from September for supplies, drugs and purchased services, following months of increases.
“Broader economic trends such as U.S. labor shortages are adding to the extreme pressures of the pandemic. Hospitals face greater uncertainties in the coming months as a result, as COVID-19 cases and hospitalizations appear to once again be on the upswing before many have even had a chance to recover from the last surge,” Erik Swanson, a senior vice president of data and analytics at Kaufman Hall said.
Under the new deal announced Monday, Tenet will acquire SCD’s ownership interests in 92 ambulatory surgery centers and other support services in 21 states.
In addition to the acquisition, USPI and SCD plan to enter into a five-year partnership and development agreement in which SCD will help facilitate “continuity and support for SCD’s facilities and physician partners.” USPI will also have exclusivity on developing new projects with SCD during the five-year agreement.
Despite being a legacy hospital operator, Tenet’s outpatient surgery business is key to its long-term strategy.
After the latest deal closes, USPI will operate 440 surgery centers in 35 states, Tenet said Tuesday. The acquisition will boost USPI’s footprint in existing markets, such as Florida where it already operates 47 centers and will gain an additional 15. USPI will also enter new markets, such as Michigan, with a sizable footprint at the outset, executives said Tuesday.
The deal includes 65 mature centers and 27 that have opened in the past year or will soon open and start performing their first cases. Tenet may also spend an additional $250 million to acquire equity interests from physician owners.
Tenet leaders touted SCD’s service line mix, pointing out that a significant portion of the cases performed by these centers are for musculoskeletal care, which includes total joint and spine procedures.
The deal is expected to generate $175 million in EBITDA during the first year, executives said.
SVB Leerink analysts characterized the deal as savvy and said it will reshape the company’s earnings towards a “faster growing, higher margin, and improved capital return profile.”
Heading into 2021, Tenet had expected a greater share of its earnings power to come from its outpatient surgery business. This deal accelerates that aim over the long-term.
In 2014, Tenet’s ambulatory surgery business accounted for just 5% of the company’s overall earnings. Prior to this latest deal, Tenet expected the unit to account for 42% of its overall earnings in 2021.
This latest announcement follows Tenet’s deal in October with Compass Surgical Partners to acquire its ownership and management interests in nine ambulatory surgery centers located in Florida, North Carolina and Texas for an undisclosed sum.
Hospitals’ performances declined “by almost every metric” during September as volumes dropped, average patient stays rose and expenses increased “dramatically” due to labor and supply chain issues, Kaufman Hall wrote in its latest monthly report.
Although revenue increased compared to this time last year, the industry analyst said that these pressures have led median change in hospital operating margin to decline 18.2% from August to September, not including CARES act funding.
These declines were greatest across regions heavily affected by the recent delta surge, with the west part of the country seeing the largest year-over-year drop in its median change in operating EBITDA margin (38%), Kaufman Hall wrote.
Hospital size also played a role in margin performance, they wrote, with hospitals containing more than 500 beds seeing year-over-year declines of 36% while those with 25 or fewer beds actually seeing their margins increase year over year.
Adjusted discharges dropped 5.1% month over month but remained up 11.4% year over year. Patient days similarly dropped 1.4% month over month, “reflecting a decrease in COVID-19-related hospitalizations,” but are still up 11.4% year over year, according to the report. Notably, the average length of stay saw increases across the board—0.7% month over month and 4.8% year over year.
Expenses and revenues continued their hand-in-hand climb during September.
For the former, total expenses grew 2.2% month over month and 11.2% year over year. Labor expenses increased 1.4% month over month at the same time as workers per patient bed declined, the group wrote. Other non-labor expenses, including drugs and medical supplies, also saw a 1.3% month-over-month increase.
“Multiple factors are contributing to alarming and sustained increases in hospital expenses,” Erik Swanson, a senior vice president of data and analytics with Kaufman Hall. “Growth in labor expenses are outpacing increases in hours worked, suggesting hospitals are paying more due to nationwide labor shortages. Rising supply and drug expenses also point to worldwide supply chain issues.”
Hospital revenues saw their seventh consecutive month of year-to-date increases when compared to 2020 and 2019 alike, “due in part to yearly rate changes and the continued rise in higher acuity cases,” Kaufman Hall wrote. Specifically, gross operating revenues minus CARES grew 12.3% year over year from 2020 and 12.3% year over year from 2019, with inpatient revenue rising faster than outpatient revenue.
Month over month was a different story, however, with gross operating revenue without CARES dropping 1.4%. While inpatient revenue was up 1.5% from August, a 3.3% decline in outpatient revenue “suggests that consumer worries about accessing care during the recent delta surge have led to another downswing,” Kaufman Hall wrote.
Kaufman Hall’s reports incorporate data from more than 900 U.S. hospitals. The September numbers follow early warnings of delta-fueled recovery roadblocks from the group’s preceding monthly reports as well as recent hospital chain earnings calls highlighting high revenues, costs and COVID-19 patient counts.
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 andinto 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.
Nashville, Tenn.-based HCA Healthcare saw strong growth in revenue and profit in the third quarter of 2021 compared to the same period last year.
The 183-hospital system posted revenue of $15.3 billion in the quarter ended Sept. 30, up 14.8 percent from the $13.3 billion recorded in the third quarter of 2020.
Compared to the third quarter of 2020, HCA said same-facility admissions increased 6.8 percent; emergency room visits increased 31.2 percent; inpatient surgeries declined 4.9 percent; and same-facility outpatient surgeries increased 6.4 percent.
Revenue per equivalent admission increased 5.2 percent because of increases in the acuity of patients and favorable payer mix, HCA said.
After factoring in expenses and nonoperating items, HCA’s net income totaled $2.3 billion in the third quarter of 2021, more than triple the $688 million recorded in the third quarter last year.
HCA said the results of the third quarter include more than $1 billion in gains on the sale of four hospitals in Georgia and other money from investments.
For the nine months ending Sept. 30, HCA recorded a net income of $5.1 billion on $43.6 billion in revenue. In the same nine-month period in 2020, HCA saw a net income of $2.3 billion on $37.2 billion in revenue.
“During the third quarter we experienced the most intense surge yet of the pandemic, and our colleagues and physicians delivered record levels of patient care to meet the demand caused by the delta variant,” said Sam Hazen, CEO of HCA Healthcare. “Once again, the disciplined operating culture and strong execution by our teams were on display. I want to thank them for their tremendous work and dedication to serving others.”
The delta variant of the coronavirus continues to pile on staffing challenges for hospitals as they spend more resources on recruiting and retaining employees, jack up benefit options and offer steep sign-on bonuses, according to a Tuesday report from Moody’s Investors Service.
Those expenses will strain hospital profitability at a time when lucrative non-emergency procedures are on hold in some areas to handle incoming COVID-19 inpatients. Moody’s expects the weight on hospital budgets to continue through next year.
Although demand for temporary nursing staff dipped last week, it is still well beyond pre-pandemic levels, according to data gathered by Jefferies analysts. Crisis jobs — those that are rapid response or bill more than $100 an hour — represent more than three quarters of staffing firm Aya Healthcare’s openings, the third highest percentage Jefferies has recorded.
The highly contagious delta variant is wreaking havoc on the U.S. healthcare system as mostly unvaccinated people are filling ICUs more than a year and half into the pandemic. Clinicians who have throughout that time been stressed working long and difficult hours are reporting intense burnout as some mull leaving the profession altogether.
Meanwhile, vaccine mandates have gone into effect for many hospitals. Although they report that the vast majority of employees are complying, even the small losses of those who refuse can take a hit to staffing resources. This need has driven increases to the salaries nurses can command, as well as to benefit packages, sign-on bonuses and the offer of services like child care, Moody’s said.
The report also noted that the current shortage — unlike previous ones — also includes nonclinical staff such as dietary and environmental services workers.
While Moody’s focuses on nonprofit operators, expense challenges will be an important metric to watch during the upcoming earnings season. Although all major for-profit hospital operators beat Wall Street expectations on earnings and revenue in Q2 and most posted profit increases, expenses were a rising line item.
Hospital labor expenses rise
For-profit health systems’ labor costs year over yearhttps://datawrapper.dwcdn.net/G7DCw/2/
As the Biden administration works to encourage more vaccinations through a combination of carrots and sticks, it remains unclear when delta may peak and what future variants could bring. Even after hospitals are on more stable ground in terms of capacity, further challenges will remain as patients return for care they deferred earlier.
And there are more long-term concerns as well. “Even after the pandemic, competition for labor is likely to continue as the population ages — a key social risk — and demand for services increases,” according to the Moody’s report.
Jefferies analysts agreed, saying the demand for temp nurses will go down but remain elevated. “Additionally, the fundamental demand drivers for nurses that existed even before COVID (i.e., nurse population demographics) have been boosted by the lingering effects of the pandemic on the profession and are likely to boost demand for temp staffing post-2022,” they wrote in the Wednesday note.
n addition to treating an influx of Covid-19 patients, many hospitals are struggling with what one administrator calls a “triple whammy” of financial burdens—stemming from plummeting revenue, higher labor costs, and reduced relief funds, Christopher Rowland reports for the Washington Post.
Hospitals in less-vaccinated areas face spiking labor costs
In areas with low vaccination rates, particularly in southern and rural communities, hospitals have been overwhelmed with Covid-19 patients, exacerbating labor shortages as workers burn out or leave for more lucrative positions, Rowland reports.
“The workforce issue is just dire,” Stacey Hughes, EVP of government relations and policy for the American Hospital Association (AHA), said. “The delta variant has wreaked significant havoc on hospitals and health systems.”
In Louisiana, Mary Ellen Pratt, CEO of St. James Parish Hospital, said many nurses quit due to the grueling conditions as Covid-19 cases spiked. “I didn’t have any extra money to incentivize my staff to pick up additional shifts,” she said. “This is coming out of bottom-line money I don’t have.”
Separately, Lisa Smithgall, SVP and chief nursing executive at Ballad Health, said the health system—which has 21 hospitals in eastern Tennessee and southwestern Virginia—has faced similar problems retaining staff amid Covid-19 surges.
“We knew we were at risk in our region because of where we live and because of our vaccination rate being so poor,” Smithgall said. “At one point, we were seeing four or five nurse resignations per week. They couldn’t do it again; they emotionally didn’t have it. They were so upset with our community.”
To fill in these growing gaps in their workforce, many hospitals have had to turn to costly contract workers, Rowland reports—a significant financial burden that further strains hospitals’ resources.
For example, Ballad Health went from hiring fewer than 75 contract nurses before the pandemic to 150 in August 2020 and 450 in August 2021. Moreover, according to Smithgall, contract nurses previously made double or triple what permanent staff nurses made, but now Ballad sometimes has to pay up to seven times as much for contract nurses as hospitals compete for workers to fill shifts.
Many hospitals, including those in areas with high vaccination rates, have delayed elective surgeries, a crucial source of revenue, amid nationwide surges in Covid-19 cases, Rowland reports—further compounding financial struggles for many organizations.
On Aug. 26, Ballad Health postponed a long list of elective surgeries—including hernia repair, cardiac and interventional radiology procedures, joint replacements, and nonessential spine surgery—to preserve space in its hospitals and conserve workers. Ballad is now allowing elective surgeries again, but only for a limited number of procedures that do not require overnight stays.
Similarly, St. Charles Health System in Oregon postponed elective surgeries in August “while we responded to a surge that was significantly greater and much more sudden than the surge in 2020,” Matt Swafford, the health system’s VP and CFO, said.
According to Swafford, the health system lost $5 million a week through August and September, around $1 million of which was repayment of emergency advances on Medicare reimbursements from last year.
“I don’t think anybody saw this level of surge coming in 2021 after what we saw in 2020,” he said. “We’re just not equipped to be able to simultaneously respond to the urgent needs of the community [for more typical surgeries and care] at the same time that a third of our beds are occupied by highly infective Covid patients.”
Many hospitals likely to end the year at a deficit
Further compounding the issue, according to Moody’s Investors Service, is that the provider relief funds that previously made up 43% of operating cash flow at nonprofit and government-run hospitals in the United States are now dwindling down.
In addition, the latest portion of provider relief funds to be distributed must be based on expenses incurred by hospitals before March 31, 2021, which don’t account for months of the delta surge, Rowland reports.
Premier, a group purchasing and technology company serving more than 4,000 hospitals and health systems, analyzed payroll data of 650 hospitals and found that U.S. hospitals have spent a total of $24 billion a year during the pandemic to cover excess labor costs, primarily for overtime and contract nurses. This was an increase of 63% from October 2019 to July 2021, Rowland reports, with hospitals in the Upper Midwest and across the South seeing the largest increases.
“It’s going to leave them huge deficits that they are going to have to work out of for years to come,” Michael Alkire, Premier’s CEO, said.
Here are 14 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings, Moody’s Investors Service and S&P Global Ratings.
1. Advocate Aurora Health has an “Aa3” rating and positive outlook with Moody’s. The health system, which has dual headquarters in Milwaukee and Downers Grove, Ill., has a leading market share in two regions and strong financial discipline, Moody’s said. The credit rating agency said it expects Advocate Aurora Health’s operating cash flow margins to return to pre-pandemic levels.
2. Pinehurst, N.C.-based FirstHealth of the Carolinas has an “AA” rating and stable outlook with Fitch. The health system has a strong financial profile and stable operating performance, despite disruption from the COVID-19 pandemic, Fitch said. The health system’s revenue in the first quarter of fiscal 2021 rebounded to levels close to historical trends, according to the credit rating agency.
3. Indianapolis-based Indiana University Health has an “Aa2” rating and stable outlook with Moody’s and an “AA” rating and positive outlook with Fitch. Cost controls and patient volume will help the system sustain strong margins and liquidity, Moody’s said.
4. Rapid City, S.D.-based Monument Health has an “AA-” rating and stable outlook with Fitch. The health system has solid operating margins that Fitch expects to remain stable over the near term. Monument Health’s operating margins will continue to support liquidity growth and capital spending levels, the credit rating agency said.
5. Chicago-based Northwestern Medicine has an “Aa2” rating and stable outlook with Moody’s, and an “AA+” rating and stable outlook with S&P. The system’s consolidated operating model will allow it to maintain a strong financial position while effectively executing strategies, Moody’s said. The credit rating agency expects Northwestern Medicine to expand its prominent market position in the broader Chicago region because of its strong brand and affiliation with Northwestern University’s Feinberg School of Medicine.
6. Renton, Wash.-based Providence has an “AA-” rating and stable outlook with Fitch and an “Aa3” rating and stable outlook with Moody’s. Fitch said Providence has a long-term strategic advantage over most of its peers because it has invested heavily in developing technology in recent years, and the system’s plan to transform healthcare delivery through the use of data and technology has been undeterred through the COVID-19 pandemic. Fitch said it expects Providence’s cash flow margins to be close to 7 percent in the coming years.
7. Livingston, N.J.-based RWJBarnabas Health has an “Aa3” rating and stable outlook with Moody’s. Moody’s said it expects RWJBarnabas, the largest integrated academic health system in New Jersey, to see near-term revenue growth and to execute on several strategic fronts while achieving targeted financial performance.
8. Broomfield, Colo.-based SCL Health has an “AA-” rating and stable outlook with Fitch and an “Aa3” rating and stable outlook with Moody’s. The health system has consistently improved its liquidity levels and has a long track record of exceptional operations, Fitch said. SCL Health is well positioned for change in the healthcare sector because it has built up cash reserves over time, according to the credit rating agency.
9. San Diego-based Scripps Health has an “Aa3” rating and stable outlook with Moody’s. The health system has ample liquidity coverage, an extensive footprint and strong brand and market share within San Diego County, Moody’s said. The credit rating agency said it expects Scripps to weather current operating challenges and to grow operating cash flow over the long term.
10. Norfolk, Va.-based Sentara Healthcare has an “Aa2” rating and stable outlook with Moody’s. The health system has strong margins, and Moody’s said it expects the system to maintain a strong financial position and balance sheet.
11. Arlington-based Texas Health Resources has an “Aa2” rating and stable outlook with Moody’s. The health system has a strong cash position, which will be boosted by favorable investment gains and bond proceeds, Moody’s said. Based on performance in the second quarter of this year, Moody’s expects Texas Health Resources’ patient volume and operating cash flow margins to recover to pre-COVID-19 levels.
12. Iowa City-based University of Iowa Hospitals & Clinics has an “Aa2” rating and stable outlook with Moody’s. The credit rating agency said it expects the system to maintain strong operating performance and cash flow. The system benefits as the only academic medical center in Iowa, according to Moody’s.
13. Des Moines, Iowa-based UnityPoint Health has an “AA-” rating and stable outlook with Fitch. The system has strong leverage metrics, and it benefited from strong market returns during the pandemic. The system’s days with cash on-hand increased to 285 days at the end of 2020, up from 231 days at the end of 2019, according to the credit rating agency.
14. Kansas City-based University of Kansas Health System has an “AA-” rating and stable outlook with Fitch. The health system has solid operating results and has sustained significant revenue growth, Fitch said. The system’s profitability dipped in fiscal year 2020 because of the COVID-19 pandemic, but its profitability rebounded in fiscal year 2021, according to the credit rating agency.