Labor expenses continue to challenge hospitals

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While hospital and health system financial performance was relatively stable in September, expenses remain high, especially when compared to 2021-2023, according to Kaufman Hall's September Flash report released this month.

Contract labor rates and utilization have decreased, but the overall labor market is still tight, data showed.

Labor expenses account for about 84% of medical groups' total expenses, while the median investment per employed physician was more than $304,000. And provider and physician compensation per full-time employee increased 3% over the prior year.

Physician pay in Q3 per full-time equivalent (FTE) hit $369,392, while provider compensation per FTE was $305,533.

WHAT'S THE IMPACT?

Hospital and health systems' finances have remained stable in the last 12 months, but high labor costs continue to challenge the bottom line, according to the report.

Record-high labor costs and subsequent financial losses are forcing hospitals and health systems to reconsider traditional physician employment models, according to the report.

"Investment/subsidy per physician rose above $300,000 for the first time -- a sign that current models of physician employment are not sustainable," said Matthew Bates, managing director and physician enterprise service line leader with Kaufman Hall.

"Revenue is increasing but physicians and providers are working more while generating less revenue. Health systems need to rethink operations to align the costs of provider employment with the current healthcare environment."

Hospitals have seen slight decreases in volume and operating margin. The average hospital margin decreased slightly to 4.3% after several months of lingering at about 4.7%, data showed.

Inpatient revenue and average lengths of stay will be monitored in the months ahead, said Kaufman Hall, because both metrics increased in September, indicating hospitals are treating more high-acuity patients. Authors said organizations will need to contain expenses if this trend continues.

Outpatient revenue declined somewhat during the same period, which authors said indicated a shift toward more intensive patient care.

THE LARGER TREND

Contract labor rates and utilization have decreased since and post-COVID-19, according to the report.

Data published last year by the American Hospital Association showed contract labor expenses for hospitals shot up 258% from 2019 to 2022, which is linked to long-standing labor shortages in the industry.

Contract labor has helped to fill some of the gaps caused by those persistent staffing shortages, which were only made worse over the past couple of years by an increase in patient demand due to the COVID-19 pandemic. Compared to before the pandemic, hospital total expense per patient, as measured by median total expense per adjusted discharge, rose 22.5% – due largely to a 24.8% increase in labor expense per adjusted discharge from 2019 to 2022. Total expense rose 17.5%, and total labor expense jumped 20.8% over the same period.

Relying on labor from contract staffing firms contributed to higher overall labor expenses. Total contract labor expense skyrocketed 257.9% from 2019 to 2022 as a result. Contract labor full-time equivalents (FTEs) jumped 138.5% over the three-year period, and the median wage rate paid to contract staffing firms rose 56.8% as organizations competed for a limited pool of qualified healthcare professionals.

Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.