The majority of hospitals are predicted to have negative margins in 2022, marking the worst year financially for hospitals since the beginning of the Covid-19 pandemic.
In Part 1 of Radio Advisory’s Hospital of the Future series, host Rachel (Rae) Woods invites Advisory Board experts Monica Westhead, Colin Gelbaugh, and Aaron Mauck to discuss why factors like workforce shortages, post-acute financial instability, and growing competition are contributing to this troubling financial landscape and how hospitals are tackling these problems.
As we emerge from the global pandemic, health care is restructuring. What decisions should you be making, and what do you need to know to make them? Explore the state of the health care industry and its outlook for next year by visiting advisory.com/HealthCare2023.
Livonia, Mich.-based Trinity Health is experimenting with paying its employees by the day in a bid to recruit and retain staff, according to a Dec. 13Grand Rapids Business Journal report.
Trinity, which will initially roll out the initiative at Trinity Health Grand Rapids, Trinity Health Medical Group and several locations outside Michigan, is partnering with financial services company DailyPay to provide earned wage access (EWA) to its employees, the report said.
Through EWA, employees can access their pay on a daily basis, allowing them to pay bills, for example, without having to wait for the more traditional payday and therefore avoiding the possibility of overdue fees. Employees would pay $2.99 to gain such early access.
The pay model, which will be available for all pay scales across Trinity except for the highest earners, was piloted across select Trinity locations about four months ago. It will eventually be rolled out to all Trinity locations over the next few years, with all West Michigan employees signed up by 2025, the report said.
The long hours, stressful conditions, and labor shortages brought on by the pandemic have done serious harm to the physician workforce. The graphic above tracks physician burnout, a combination of emotional exhaustion, loss of agency, and depersonalization that has become the primary measure of the pandemic’s toll on workers, to reveal that physicians are demoralized like never before.
Physician burnout levels had been decreasing since 2014, in part due to practice consolidation and the expansion of team-based care models. Burnout reached its lowest levels in 2020—perhaps explained by a pandemic-induced sense of purpose—but 2021 then saw a dramatic spike in every measure of physician dissatisfaction, as the heroic glow of the early pandemic faded, and an overtaxed and understaffed delivery system became the new norm.
In explaining how the pandemic has impacted their career decisions, surveyed physicians list unsustainable burnout and stress as their top concern, and 11 percent say they have exited the profession, either for retirement or a non-clinical job, in the past two years.Four in ten surveyed physicians report changing jobs since 2020, mainly within similar or different practice settings, citing a desire for better work-life balance as their primary motivation. (It should be caveated that these data are from a smaller survey of 534 physicians, 40 percent of whom identified as “early career”.)
While the solutions here aren’t new, they are challenging: we must continue to implement team-based care models that provide physicians top-of-license practice and improved work-life balance, remove administrative tasks wherever possible, and ensure that we are communicating and engaging physicians—employed and independent alike—in organizational strategy and decision-making.
There’s an old trope among human resources leaders that people don’t quit companies, they quit managers. There’s certainly truth to it. If an employee has a difficult or inattentive boss, they are at much greater risk of leaving for another opportunity. But a “bad” manager is not always someone lacking in the skills necessary to engage employees; sometimes the problem is that their own roles are structured in ways that make it nearly impossible to succeed.
We’ve recently heard stories from leaders at several health systems describing the untenable management scope for many of their mid-level nursing leaders. It’s common to hear that nurse managers have dozens of direct reports, and a few systems reported that some of their managers have well over a hundred individuals reporting to them. With that scope, it’s impossible to develop relationships with everyone on the team, much less be able to customize roles, or provide tailored feedback and support.
For younger workers, the manager relationship is critical for engagement, skill development, and building loyalty.
Given today’s intense margin pressures, it’s tempting to cut clinical managers and increase the span of control for those who remain—but underinvestment here is short-sighted, and will surely exacerbate challenges maintaining critical capacity in the near-term, as well as building the foundation for future growth.
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.
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.
Healthcare costs are expected to jump 6.0% next year. CFOs must prepare accordingly, advises WTW’s Tim Stawicki.
CFOs need to be prepared for a “higher tail” of medical inflation — even if general inflation eases in the near future, Tim Stawicki, chief actuary, North America health & benefits of Willis Towers Watson (WTW) told CFO Dive.
“CFOS need to be prepared for the case that if general inflation eases, there may be two or three more years where they need to think about how they are managing the costs of health care plans,” he said in an interview.
Inflation, which can more immediately impact consumer prices, works somewhat differently when it comes to costs of medical care. “Employers are paying healthcare costs based on contracts that their insurer has with providers, which are multiple years in length. So if a deal with the hospital or contract does not come up until 2023, then that provider has the opportunity to renegotiate higher prices for three years,” said Stawicki.
The recent Best Practices in Healthcare Survey by WTW consisting of 455 U.S. employers found that employers project their healthcare costs will jump 6.0% next year compared with an average 5.0% increase expected by the end of this year.
Further, employers see little relief in sight — seven in 10 (71%) expect moderate to significant increases in costs over the next three years. Additionally, over half of respondents (54%) expect their costs will be over budget this year.
Balancing talent retention and healthcare costs
Talent retention has also remained an entrenched challenge for CFOs over recent months and continues to be top of mind.
Given inflationary pressures and a potential looming recession, employers are having trouble finding the workers they need to run their businesses. A rise in healthcare benefit costs will make this all the more challenging, said Stawicki. “Employers are looking around and saying ‘I need to find talent to help me run my business and I can’t do that if I have an ineffective program in healthcare benefits,’” he said.
There is a direct link between business outcomes and in particular employee productivity and employees’ ability to manage their health and financial environment, according to WTW’s Global Benefits Attitude Survey. “Losing the ability to offer programs and benefits that meet employee needs is impacting business,” said Stawicki.
It comes down to finding the balance between cost management in an environment where talent is hard to come by, he said. In order for CFOs to be successful in financing benefit programs they need to look at finding ways to partner with their counterparts in human resources, said Stawicki.
Sixty-seven percent of employers said that managing company costs was a top priority in the company’s August Best Practices in Healthcare Survey, versus the 42% who said that achieving affordability for employees was a top priority. In the near future, CFOs need to establish a relationship with HR counterparts that can facilitate “ways to manage company costs without shifting it to employees,” said Stawicki.
Ultimately, company costs remain paramount for employers but running a successful business will also require keeping employee affordability top of mind.
CFOs looking to attract and retain the right kind of talent amidst inflationary pressures, rising interest rates and other economic tensions need to “double down on recognition and meaningful work for employees,” said Jessica Bier, managing director of Deloitte Consulting, in an interview.
In order to attract and retain viable talent to keep business afloat, 71% of CFOs indicated that a flexible workplace environment was their approach, 63% said clarity around career development and growth opportunities and 62% pointed to increased salaries, per the second wave of data in the Q3 CFO Signals report.
The report also revealed that CFOs who took steps to alter, reduce or streamline the type of work their finance organizations performed saw several benefits throughout the enterprise — 78% said one benefit was more time spent on higher-value activities and 71% indicated greater use of technology was another. Contrastingly, only 20% saw talent retention as a benefit, and even less (10%) saw higher quality talent as one.
The managers and workforce of financial departments are looking for five main things, said Bier, per the report — those being work environment flexibility, career growth and development, salaries, meaningful work and recognition, she said.
“As we think about the workforce experience, every CFO is also the chief talent officer,” Bier said. “Your HR business partner can support you but at the end of the day the way your managers work and the way you connect people to the work that they’re doing — that’s the CFO’s job to set that tone.”
One misconception, Bier said, is that a recession means workers will be happy just to have a job. “The people in the workforce who are the ones you want to keep, are the ones who are always going to have options,” she said.
Talent retention continues to be a multifaceted challenge for CFOs and remains top of mind. Over half of CFOs (54%) cited hiring and retaining staff as the most difficult task over the next 12 months, according to a July Gartner study.
As we’ve beendiscussing, the COVID pandemic and ensuing economic environment have driven health system job vacancies and attrition rates to all-time highs. Right now, for myriad reasons, many hospital workers are deciding that the financial, emotional, and professional benefits of working for a hospital are outweighed by the toll working in a hospital takes on them personally.
Health systems are responding to this challenge with a wide variety of discrete measures—including hiring and retention bonuses, incentive pay, employee wellbeing initiatives, and expanded professional development opportunities— that target specific groups of employees, but don’t form a long-term solution to workforce instability.
To rebuild a stable and committed workforce, health systems must create, and then communicate, a compelling employee value proposition—a concise statement highlighting why employees should work for them.
The graphic above shows what we believe are the key components of a successful employee value proposition, which must have a clear vision and focus on the things most important to employee needs: compensation, work-life balance, and career support. Systems can use the guiding questions listed in each column to craft a value proposition that is differentiated in their local labor market, informed by their level of resources, and undergirded by their own culture and values.
The pressure is on for boards to hold onto chief financial officers as firms face the prospect of an economic slowdown and intense competition for talent.
Demand for finance chiefs continues to be high in U.S. businesses, according to a July 4 report from The Wall Street Journal. Data from Russell Reynolds Associates indicates that CFO turnover at companies in the S&P 500 rose to 18 percent in 2021, compared to 15 percent in 2020 and 14 percent in 2019.
Some new strategies call for broadening CFO responsibilities or elevating their positions altogether to retain top executives, according to Joel von Ranson, head of recruitment firm Spencer Stuart’s global functional practices.
“Companies create these broader roles and titles to engage and recognize and motivate the very best of the best,” Mr. von Ranson said.
CFOs at companies in the S&P 500 and Fortune 500 average about five years in their job, according to executive search firm Crist Kolder Associates. Expanding the CFO role allows organizations to create opportunities to retain key talent past the five-year mark.
In 2021, just under 8 percent of chief executive officers at companies in the S&P 500 and Fortune 500 came from the CFO seat.