Management of Labor in Trying Financial Circumstances

Posted on by • Posted in Cost Management, Cost Reduction, Cost Structure, Employee Layoffs, Labor Spend Management, Leadership, Leadership Implementation, Operating Expense Reduction, Operating Expenses, Operating Income, Operating Margin, Operating Performance, Reduction in Force • Leave a comment

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Peter Drucker, the hall of fame management guru, once famously said that the hardest business organization to run in America was a hospital. If that comment was true so many years ago, imagine what Drucker would have to say about the difficulty of hospital management right now.

Hospital financial performance suffered significantly in 2022 and recovery during 2023 has been quite slow. This trend suggests the question, “What steps are hospital C-suites taking to recover pre-Covid financial stability?”

Erik Swanson manages all analyses for our monthly Kaufman Hall Flash Report and he and I speculated that an industry-wide hospital recovery could not be achieved without reductions in force across the hospital ecosystem.

Some research on our part determined that no official organization tracks hospital layoffs over time but we wondered if we could use our Flash Report data, which is provided to us by Syntellis Performance Solutions, to reach an informed conclusion.

What we were able to do was prepare three types of charts, as follows:

The first chart measures net employee percentage change by month. This chart shows whether overall hospital employment is increasing or decreasing over time and by how much.

The second chart attempts to establish the median turnover for hospitals over an annual period and then measure the deviation from that turnover rate. A greater deviation from what might be termed “normal turnover” suggests that an increasing number of hospitals are using reductions in force to more quickly reduce the cost of doing business.

The third chart shows average FTEs per occupied bed on a comparative basis looking at month-to-month and year-to-year statistics.

The first chart, Net Employee Percentage Change by Month, begins at January 1, 2018, and continues to March 1, 2023 (Figure 1). Overall additions to hospital employment remained generally positive through January 1, 2020. Overall hospital employment then went generally negative from March 2020 (the onset of Covid restrictions) to March 2022. The reductions in hospital employees during this period were likely the result of the “great resignation” during the worst of the Covid pandemic. But then, from July 2022 to March 2023, overall hospital employees demonstrated by the Flash Report dropped dramatically with an overall 2% decrease at the March 2023 date. This statistic suggests more than simply increased hospital turnover, but rather a formal layoff process initiated across many hospital organizations, along with aggressive management of contract labor.

Figure 1: Net Employee Percentage Change by Month

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Figure 1: Net Employee Percentage Change by Month


The second chart demonstrates the deviation from expected turnover at levels of 2x, 3x, 4x, and 5x by number of hospitals (Figure 2). No matter which measure you examine, the deviation of employees from expected turnover spiked significantly in April 2023 and even more so in May 2023. This again suggests the aggressive management of labor costs that likely could not occur without the intentional reduction of actual positions and/or the cost of these positions. 

Figure 2: Number of Hospitals with Deviations from Expected Turnover at 2x, 3x, 4x, and 5x the Median

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Figure 2: Number of Hospitals with Deviations from Expected Turnover at 2x, 3x, 4x, and 5x the Median


The last chart provides a remarkable set of observations (Figure 3). FTEs per adjusted occupied bed (AOB) declined by 8.3% between June 2023 and July 2023. The year-over-year variation for July 2023 was a decline of 11.01%. Our data further reveals that the FTE per AOB statistic has declined in five of the past six months on a month-over-month basis.

Figure 3: Median Change in FTEs per Adjusted Occupied Bed by Month

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Figure 3: Median Change in FTEs per Adjusted Occupied Bed by Month


The conclusion here is that the return of the hospital industry to pre-Covid financial results has been no walk in the park. 2022 was, of course, a dismal financial year for the hospital industry. And while 2023 has shown improvement, the usual management steps to recovery have been only moderately effective. The data and analysis above demonstrate that C-suites across America are moving to stronger measures to assure the financial survivability and competitiveness of their organizations.

There is no revenue solve here, or at least not in the current environment: costs must come down and they must come down materially. From the sense and the trend of the data it would seem that hospital executive teams get the joke.

“Culture Eats Strategy for Breakfast” But Probably Not Right Now

Posted on by • Posted in Board, Culture, Differentiation, Growth, Growth Strategy, Key Metrics, Key Performance Indicators, Leadership, Leadership Culture, Leadership Vision, Strategic Relevance, Strategic Workstreams, Strategy, Transformation, Transformation Strategy • Leave a comment

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2022 and 2023 have been particularly difficult operating years for hospital providers. The financial challenges stand out but as we concluded in the August 7, 2023, blog, strategic planning and vision issues may be more compelling over the long term.

We previously identified two strategic issues that need to be reckoned with:

  1. Strategic Relevance. Has everything changed organizationally post-Covid or does it just feel that way? If your strategy still seems dynamic and relevant, how do you capitalize on that? If your strategy feels entirely lost, how do you recapture organizational excitement and enthusiasm?
  2. Vision. How important is organizational vision right now? You know the old saying, “a camel is a horse designed by a committee.” And many vision statements wind up looking more like that camel than like that desired horse. But be that as it may: Covid has been so disruptive to the organizational momentum of hospitals that finding a relevant and executable vision should be top of mind right now.

Given circumstances, one obvious conclusion is that any strategic exercise undertaken in the current moment needs to be well accomplished. Executive teams, clinicians, and Boards are simply too distracted or too tired to spend time on planning processes that are not well thought out and highly directed. This immediate observation next demands a discussion that outlines post-Covid strategic principles, definitions, and the creation of a vision that relates immediately to actionable strategy. It would be an understatement to note that for hospitals there is no “strategic time” to waste.

Start the post-Covid planning process with four very clear strategic definitions:

  1. Vision: A time-bounded view of the future destination of your business.
  2. Strategic Workstreams: The ways you devise to achieve the strategic vision.
  3. Goals: Goals are the lag outcomes that you seek to achieve for your customers.
  4. Metrics: Metrics measure the progress toward the goals.

Working from these definitions then allows you to move toward an organizationally appropriate vision and an actionable strategy that efficiently supports that vision as follows:

  1. The vision should drive growth. Many hospital organizations have stopped growing organically. No growth is harmful financially, clinically, intellectually, and creatively.
  2. The vision should differentiate the business from that of competitors. Everybody and everything competes with hospitals these days: other hospitals, pharmacy companies, insurers, private equity. It has no end.
  3. The vision should endeavor to solve a basic customer problem or problems. The problem list is pretty apparent. The list of helpful solutions has been harder to come by.
  4. The vision should be either incremental or transformational. In all candor, most hospitals’ post-Covid vision is going to be incremental. It takes considerable financial and capital capacity to move toward a transformational vision. That kind of capacity is available at only a small minority of hospitals nationwide.
  5. Recognize that a transformational vision will require active management of culture and stakeholders. If you pivot to a transformational vision, you are likely to upset certain stakeholders and your existing culture may need to also adjust to the transformation.
  6. Be prepared to modify or improve upon the vision, workstreams, and/or goals as you get ongoing feedback during the planning and execution process. Under any circumstances you need to be open to learning all along the way. For this to happen, your organization needs to be a listening organization and a learning organization. Not all hospitals and health systems are.

Does all this sound hard? It should sound hard because it is hard. Leading the hospital back to financial stability while finding a relevant post-Covid vison that proves to be competitive and, at the same time, energizes your team to find renewed purpose in your hospital’s work; that is unforgivably hard.

As Piet Hein, the Danish mathematician, profoundly said, “Problems worthy of attack prove their worth by fighting back.” And fighting back is the hospital job of the moment.

Note: “Culture eats strategy for breakfast” is a quote attributed to management consultant and writer Peter Drucker.

Is there a silver lining for the systems who had the highest contract labor use?

Posted on by • Posted in Cost Management, Cost Reduction, Cost Structure, Cost-Effective, Flexibility, Health System, Hospital, Hospital Industry, Labor Cost Structure, Labor Shortages, Labor Spend Management, Labor Temporary, Nurse Agency Staffing, Nurse Travelers, Nurses Compensation, Silver Lining • Leave a comment

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Across the hospital industry, heavy reliance on contract labor in 2021 and 2022 caused a significant challenge for profitability.

However, a chief financial officer recently posited that his system’s large contract labor load has had unexpected benefits.

“Other hospitals [in our market] thought we were crazy to keep staffing with high contract rates until recently,” he shared. “But by keeping the agency nurses around a little longer, we were able to avert raising base salaries quite as much, and are in a better place today now that the labor market has softened.” It’s a story we’ve heard several times now.

While market rates for nursing and other clinical labor have undoubtedly been rebased, salary increases are sticky—it’s hard to adjust wages downward when the labor market loosens. 

Systems who were able to avert large wage increases by increasing bonuses and other non-salary benefits, or forestalled permanent hiring at higher salaries by extending contract labor, now find themselves with more flexibility and potentially lower staffing costs in the long-term.

Private equity-backed practices flexing market share muscle 

Posted on by • Posted in Antitrust, Federal Trade Commission, Federal Trade Commission (FTC), High Prices, Market Consolidation, Market Power, Market Trends, Mergers & Acquisitions, Physician, Physician Acquisition, Physician Aggregator, Physician Employment, Physician Practice Acquisition, Physician Specialist, Physician Staffing - Private Equity Backed, Private Equity • Leave a comment

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This week we showcase data from a recent American Antitrust Institute study on the growth of private equity (PE)-backed physician practices, and the impact of this growth on market competition and healthcare prices. 

From 2012 to 2021, the annual number of practice acquisitions by private equity groups increased six-fold, especially in high-margin specialties. During this same time period, the number of metropolitan areas in which a single PE-backed practice held over 30 percent market share rose to cover over one quarter of the country. 

These “hyper-concentrated” markets are especially prevalent in less-regulated states with fast-growing senior populations, like Arizona, Texas, and Florida. 

The study also found an association between PE practice acquisitions and higher healthcare prices. In highly concentrated markets, certain specialties, like gastroenterology, were able to raise prices rise by as much as 18 percent. 

While new Federal Trade Commission proposals demonstrate the government’s renewed interest in antitrust enforcement, it may be too little, too late to mitigate the impact of specialist concentration in many states.  

An unexpected reprieve from Medicare cost growth

Posted on by • Posted in ACA, Center for Medicare and Medicaid Services (CMS), Cost Curve, Cost Management, Flattening the Cost Curve, Health Policy, Medicare • Leave a comment

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A piece published this week in the New York Times documents how Medicare spending per beneficiary has flattened since the early 2010s, coming in below projections by nearly $4T. 

While the authors run through possible explanations, including changes made by the Affordable Care Act and to the Medicare Advantage program, the proliferation of effective cholesterol and blood-pressure medications, and fewer breakthroughs in new, expensive drug classes, they acknowledge that scholars have not reached a consensus on the primary drivers of this trend.

Beyond academic debate, there is also no agreement on how long the flattened spending pattern will hold—or what factors might reignite rapid cost growth.

The Gist: 

Whatever the causes of this phenomenon, it has helped avert the kind of Medicare austerity measures that dominated political debates on the program in past decades. 

We assume some of this flattening has to do with the fact that the average age of Medicare beneficiaries has dropped as Baby Boomers have entered the program in droves, given that younger beneficiaries are much less costly to insure.

 In coming decades, the average age of Medicare beneficiaries will increase, along with their care costs, and the total number of Medicare beneficiaries will continue to rise. 

By 2053, seniors will make up over 22 percent of the population and over 40 percent of the projected federal budget will be spent on programs for them.

Biden admin proposes new staffing minimums for long-term care facilities

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Last Friday, CMS released a proposed rule that would require nursing homes and other long-term care facilities to provide a minimum 2.5 hours of care per patient per day from nursing aides and 33 minutes of care from registered nurses, at least one of whom must be on site at all times.

The standards are lower than many industry experts were expecting, but CMS still estimates that 75 percent of nursing homes will have to increase staffing to meet these minimums. CMS will also allow facilities a temporary hardship exception if they can prove their region has a local worker shortage, and they have made good faith efforts to hire and retain staff.  

The Gist: 

A proposal to strengthen long-term care staffing standards was expected, as COVID’s toll on nursing homes included over 200k deaths among residents and staff, as well as a mass exodus of its workforce. 

But many facilities will struggle to meet these new standards, as nursing home employment is still down 11 percent from pre-pandemic levels.

Staffing shortages at long-term care facilities have been even more severe than those experienced by hospitals. The need to ramp up staffing levels will not only raise the cost of nursing home care, but will also exacerbate shortages for nursing talent in other care settings. 

Facilities that decide to close rather than comply will impact other parts of the care continuum, including exacerbating acute hospital discharge delays.

CMS to pilot global health budgets for states

Posted on by • Posted in All-Payer Health Equity Approaches and Development Model (AHEAD Model), Center for Medicare and Medicaid Services (CMS), Health Policy, Health System, Hospital, Hospital Industry, Innovation, Innovative Care Models, Medicare Shared Savings Program (MSSP), Primary Care, Primary Care AHEAD • Leave a comment

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On Tuesday, CMS announced the States Advancing All-Payer Health Equity Approaches and Development (AHEAD) Model, a new payment model that will give up to eight states or sub-state regions the ability to test global hospital budgets across an 11-year period.

Participating states will assume responsibility for managing healthcare costs for traditional Medicare and Medicaid populations, while encouraging private payers to pay hospitals under a similar relationship.

Primary care practices will have the option to participate in a primary care component of the model, called Primary Care AHEAD, in which they will receive a Medicare care management fee and be required to engage in state-led Medicaid transformation initiatives.

CMS is hoping that the AHEAD model will reduce healthcare cost growth, improve population health, and reduce health outcome disparities. It builds upon existing Innovation Center state-based models, including the Maryland Total Cost of Care Model, the Vermont All-Payer Accountable Care Organization Model, and the Pennsylvania Rural Health Model, which have all shown promise in lowering Medicare spending while improving patient outcomes.

Program applications will open late this year, and the first states selected would begin a pre-implementation period in summer 2024.  

The Gist:

Shifting to a total-cost-of-care model will be a difficult undertaking for even the most motivated states. 

Though a stable annual budget may be a welcome prospect to struggling hospitals, large regional systems may balk at the idea, especially as the Maryland Hospital Association has claimed that their state’s regulated rates have lagged hospital cost inflation by 1.3 percent per year.

With the Medicare Shared Savings Program (MSSP) saving only one quarter of one percent of Medicare’s total spending in 2022, CMS has good reason to explore other ways to reduce Medicare cost growth

—but these Innovation Center models will only achieve their goals if they can first induce sufficient participation.

First ten drugs selected for Medicare’s drug price negotiation program

Posted on by • Posted in Center for Medicare and Medicaid Services (CMS), Health Policy, High Drug Prices, Inflation Reduction Act, Lawsuit, Medicare Drug Price Negotiation, Out of Pocket Expenses, Pharmaceutical Industry • Leave a comment

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Last week, the Centers for Medicare and Medicaid Services (CMS) released the list of the first round of prescription drugs chosen for Medicare Part D price negotiations. The 2022 Inflation Reduction Act (IRA) granted CMS the authority to negotiate directly with pharmaceutical manufacturers, establishing a process that will ramp up to include 20 drugs per year and cover Part B medicines by 2029.

The majority of the initial 10 medications, including Eliquis, Jardiance, and Xarelto, are highly utilized across Medicare beneficiaries, treating mainly diabetes and cardiovascular disease. But three of the drugs (Enbrel, Imbruvica, and Stelara) are very high-cost drugs used by fewer than 50k beneficiaries to treat some cancers and autoimmune diseases.

Together the 10 drugs cost Medicare about $50B annually, comprising 20 percent of Part D spending. Drug manufacturers must now engage with CMS in a complex negotiation process, with negotiated prices scheduled to go into effect in 2026. 

The Gist:

Most of the drugs on this list are not a surprise, with the Biden administration prioritizing more common chronic disease medications, with large total spend for the program, over the most expensive drugs, many of which are exempted by the IRA’s minimum seven-year grace period for new pharmaceuticals.

However, pharmaceutical companies are threatening to derail the process before it even begins. Several companies with drugs on the list have already filed lawsuits against the government on the grounds that the entire negotiation program is unconstitutional. 

While President Biden is already touting lowering drug prices as a key plank of his reelection pitch, it will take years before these negotiations translate into lower costs for beneficiaries and reduced government spending. There also may be adverse unintended consequences, as drug companies may raise prices for commercial payers while increasing rebates to stabilize net prices, leading to higher costs for some consumers. 

Still, it’s a step in the right direction for the US, given that we pay 2.4 times more than peer countries for prescription medications.  

The Medicare Drug Pricing Program will Attract Uncomfortable Attention to the Rest of the Industry

Posted on by • Posted in Center for Medicare and Medicaid Services (CMS), Health Policy, High Deductible Health Plans, High Drug Prices, Lawsuit, Medicare, Medicare Drug Price Negotiation, Out of Pocket Expenses, Pharmaceutical Industry, Price Transparency, Supreme Court • Leave a comment
The Medicare Drug Pricing Program will Attract Uncomfortable Attention to the Rest of the Industry

Last Tuesday, the Center for Medicare and Medicaid Services (CMS) announced the first 10 medicines that will be subject to price negotiations with Medicare starting in 2026 per authorization in the Inflation Reduction Act (2022). It’s a big deal but far from a done deal.

Here are the 10:

  • Eliquis, for preventing strokes and blood clots, from Bristol Myers Squibb and Pfizer
  • Jardiance, for Type 2 diabetes and heart failure, from Boehringer Ingelheim and Eli Lilly
  • Xarelto, for preventing strokes and blood clots, from Johnson & Johnson
  • Januvia, for Type 2 diabetes, from Merck
  • Farxiga, for chronic kidney disease, from AstraZeneca
  • Entresto, for heart failure, from Novartis
  • Enbrel, for arthritis and other autoimmune conditions, from Amgen
  • Imbruvica, for blood cancers, from AbbVie and Johnson & Johnson
  • Stelara, for Crohn’s disease, from Johnson & Johnson
  • Fiasp and NovoLog insulin products, for diabetes, from Novo Nordisk

Notably, they include products from 10 of the biggest drug manufacturers that operate in the U.S. including 4 headquartered here (Johnson and Johnson, Merck, Lilly, Amgen) and the list covers a wide range of medical conditions that benefit from daily medications.

But only one cancer medicine was included (Johnson & Johnson and AbbVie’s Imbruvica for lymphoma) leaving cancer drugs alongside therapeutics for weight loss, Crohn’s and others to prepare for listing in 2027 or later.  

And CMS included long-acting insulins in the inaugural list naming six products manufactured by the Danish pharmaceutical giant Novo Nordisk while leaving the competing products made by J&J and others off. So, there were surprises.

To date, 8 lawsuits have been filed against the U.S. Department of Health and Human Services by drug manufacturers and the likelihood litigation will end up in the Supreme Court is high.

These cases are being brought because drug manufacturers believe government-imposed price controls are illegal. The arguments will be closely watched because they hit at a more fundamental question:

what’s the role of the federal government in making healthcare in the U.S. more affordable to more people? 

Every major sector in healthcare– hospitals, health insurers, medical device manufacturers, physician organizations, information technology companies, consultancies, advisors et al may be impacted as the $4.6 trillion industry is scrutinized more closely . All depend on its regulatory complexity to keep prices high, outsiders out and growth predictable. The pharmaceutical industry just happens to be its most visible.

The Pharmaceutical Industry

The facts are these:

  • 66% of American’s take one or more prescriptions: There were 4.73 billion prescriptions dispensed in the U.S. in 2022
  • Americans spent $633.5 billion on their medicines in 2022 and will spend $605-$635 billion in 2025.
  • This year (2023), the U.S. pharmaceutical market will account for 43.7% of the global pharmaceutical market and more than 70% of the industry’s profits.
  • 41% of Americans say they have a fair amount or a great deal of trust in pharmaceutical companies to look out for their best interests and 83% favor allowing Medicare to negotiate pricing directly with drug manufacturers (the same as Veteran’s Health does).
  • There were 1,106 COVID-19 vaccines and drugs in development as of March 18, 2023.
  • The U.S. industry employs 811,000 directly and 3.2 million indirectly including the 325,000 pharmacists who earn an average of $129,000/year and 447,000 pharm techs who earn $38,000.
  • And, in the U.S., drug companies spent $100 billion last year for R&D.

It’s a big, high-profile industry that claims 7 of the Top 10 highest paid CEOs in healthcare in its ranks, a persistent presence in social media and paid advertising for its brands and inexplicably strong influence in politics and physician treatment decisions.

The industry is not well liked by consumers, regulators and trading partners but uses every legal lever including patents, couponing, PBM distortion, pay-to-delay tactics, biosimilar roadblocks et al to protect its shareholders’ interests. And it has been effective for its members and advisors.

My take:

It’s easy to pile-on to criticism of the industry’s opaque pricing, lack of operational transparency, inadequate capture of drug efficacy and effectiveness data and impotent punishment against its bad actors and their enablers. 

It’s clear U.S. pharma consumers fund the majority of the global industry’s profits while the rest of the world benefits.

And it’s obvious U.S. consumers think it appropriate for the federal government to step in. The tricky part is not just government-imposed price controls for a handful of drugs; it’s how far the federal government should play in other sectors prone to neglect of affordability and equitable access.

There will be lessons learned as this Inflation Reduction Act program is enacted alongside others in the bill– insulin price caps at $35/month per covered prescription, access to adult vaccines without cost-sharing, a yearly cap ($2,000 in 2025) on out-of-pocket prescription drug costs in Medicare and expansion of the low-income subsidy program under Medicare Part D to 150% of the federal poverty level starting in 2024. And since implementation of these price caps isn’t until 2026, plenty of time for all parties to negotiate, spin and adapt.

But the bigger impact of this program will be in other sectors where pricing is opaque, the public’s suspicious and valid and reliable data is readily available to challenge widely-accepted but flawed assertions about quality, value, access and outcomes. It’s highly likely hospitals will be next.

Stay tuned.