Hospitals need to think outside the box if they hope to survive the challenges caused by labor shortages, rising labor costs and supply chain disruptions.
It’s no secret that in order to retain workers, many hospitals and healthcare systems have had to increase pay rates for different employees. These same organizations have struggled during the pandemic to maintain revenue as elective procedures have been delayed and low-reimbursement COVID-19 care has dominated, posing a significant threat to profit margins.
This threat is forcing many healthcare finance leaders to rethink how they forecast profits and what can be included in day-to-day operating costs, as is the case at Emory Healthcare in Atlanta. Emory was hit hard in two key areas due to increased payrolls.
“The biggest impact comes from temporary or contract work,” says Bradley Haws, Emory’s chief financial officer. “We’re reading data that indicates that nationally, the Southeast has been more severely impacted by the temp work trend than other regions. But I’m seeing the impact in other places as well.”
The rate Emory Healthcare pays nurses has essentially tripled on average and quadrupled in some cases, Haws says. While a nurse in the Emory market typically earned between $40 and $43 per hour, pay rates rose to around $170 or $180 per hour. Haws says he’s even seen rates go up to $250 an hour.
Rise in agency hiring hits hospital payrolls hard
It’s a similar story at El Camino Health in Mountain View, Calif., where rising pay rates are driven by the need to hire contract labor to fill staffing shortages. Much of this trend is due to professional nurses leaving their full-time jobs to join agencies, where they are then relocated to a health care setting as an entrepreneur. Hospitals then pay the necessary salary for the nurse, plus agency fees.
“We all compete for a limited pool of employees, which significantly increases our labor costs,” says Carlos Bohorquez, chief financial officer at El Camino Health. “Despite our success in recruiting and retaining employees, our reliance on contract labor has tripled in the past 18 to 24 months. Over the past 12 months, the average rate we pay for contract RNs has nearly doubled.
The story is the same at Northern Arizona Healthcare, which has also seen labor costs rise dramatically.
“We have increased pay scales and rates significantly lately for both clinical and non-clinical staff to remain reasonably competitive in the market,” says Cliff Loader, chief financial officer of Northern Arizona Healthcare in Flagstaff, Arizona. “But the same is true for our competitors, who are setting up a continuous cycle of competition for staff. normal salary increases.”
The rapid increase in contract nursing work has created a difficult financial dilemma for hospitals. Should they bow down and pay the higher rates needed to retain staff? Or should they let the employees walk, then hire contract labor to fill the necessary positions? On the one hand, the organization is setting a precedent for higher pay rates in the future. On the other hand, he reluctantly spends extra money to line the pockets of an agency.
Complicating the situation, “supply and demand are running wild, at a time when the national pool of qualified candidates is shrinking, especially in rural areas,” says Loader. Yet he explains that Northern Arizona Healthcare has “taken the pragmatic position that we would rather pay premium rates for the nurses who work for us than [temporary] traveling nurses. It is economically impossible for us to follow the contractual rates.”
Nurses’ salaries have increased by 300% to 400% in many regions
To put that salary pain into perspective, Loader explains that Northern Arizona Healthcare typically pays about 40% to 45% of net income in labor costs.
“This year, we can expect labor costs to increase by 10% to 15%, which for most systems is not sustainable in the long term,” Loader says.
The same is happening at Emory Healthcare, Haws says.
“It’s devastating,” Haws notes, the impact on the organization’s ability to make accurate earnings forecasts. “About 14% to 15% of our workforce has become contract labour. When you talk about the change in the labor rate over six months, that’s hundreds of millions of dollars. In healthcare, the economic systems are not designed to support this type of work. Most places are on a budget and have a 3-4% operating margin. That’s more than eaten up by this increase in labor. So a lot of places have negative operating costs.
These operating margin percentages, and the impact on them of rising labor rates, are confirmed by Loader.
“Many nonprofit hospital systems operate on a margin of around 3% to 3.5%, which means that for every dollar raised, there is about 3 cents in profit after paying staff and bills,” says Loader. “Even with patients who have good insurance, the systems end up with negative monthly margins.”
Hospitals need higher payouts, cheaper operations and new staffing models
Solutions to this problem will not be easy.
“I don’t think after the pandemic it will go back to the old cost structure,” Haws continues. “If that assumption is true, then there will be costs that will be passed on, ultimately, to the public. So whether it comes from tax revenue or whether it’s a commercial payer and whether it’s ultimately be passed on by the premium, we’re going to have higher healthcare costs.”
While it’s not uncommon for hospitals to currently have negative operating margins, some can stay afloat by using non-operating or investment income.
“They may be using reserves at some level, but it’s not sustainable,” Haws points out. “So the question is how long can this continue? When are we going to start cutting services to compensate for what’s going to happen here? We need to cut capital expenditure. We need to change other operations Weak hospitals have already started cutting services, and some are closing.”
As for what hospitals and health systems can do now to reverse these trends, “I think the first thing to look at is how to find more nurses and create more school-based training programs,” Haws says. “Also, could we use alternate personnel to do some of this work?”
Fortunately, schools are starting to respond with accelerated nursing programs, Haws says. This will help get more nurses into the field sooner and alleviate some of the salary pressure.
More immediately, hospitals should look for ways to cut costs wherever they can, Loader says.
“We are looking for all cost-cutting opportunities, specifically targeting outsourced medical supplies and services,” Loader says of Northern Arizona Healthcare.
“We do not see the national shortage of available nurses solving in the short term,” he continues. “Therefore, we will have to augment them with less skilled and cheaper labor to help them take on a greater patient load. On the other side of the equation, we will have to ask for raises from the government and to third-party payers to help cover the cost of providing care in this environment.”
In the short term, higher payments from governments and third-party payers are needed, Loader says.
“Longer term, we need to develop a different staffing model that allows nurses to perform higher-level work and lets less-qualified staff perform the tasks currently performed by nurses,” he says. “There could also be technologies being developed, like artificial intelligence, that can help nurses be more focused and productive in their work. We certainly can’t just ask them to work harder.”