Labor costs and availability continue to vex hospitals and health systems. Even the large, publicly traded systems (HCA Healthcare, Tenet Healthcare, Universal Health Services and Community Health Systems) are not immune. Everyone is paying more for labor, if they can find it.
By the numbers
Last week Universal and Community reported third quarter earnings, joining the other major publicly traded health systems. Like HCA and Tenet, Universal and Community also reported increased compensation per adjusted admission, a metric meant to account for both inpatient and outpatient admissions with a single, combined metric. Over the prior quarter, Community and Universal saw 9% and 5% increases in compensation per adjusted admission, respectively. HCA saw the largest increase at 12%.
One theme of the companies’ earnings calls this quarter was how the delta variant surge did not require the same prohibitions on non-emergent procedures that the initial virus waves did. Despite surging COVID-19 cases, providers were generally still able to keep all operations open. The increased outpatient volumes helped top-line revenue but created additional staffing challenges. More volumes (higher demand for clinical labor) with the same or fewer clinicians (lower supply of the same) means higher costs for providers.
As the chart above shows, all major systems’ wage cost per adjusted admission increased last quarter, in line with the increase in case count. In fact, these costs are generally above the same costs these systems experienced during peak COVID-19 case counts from previous waves.
For example, HCA is paying 7% more on wages per adjusted admissions than it did in the second half of 2020. Universal is 8% above where it was in the third quarter of 2020. Community has been able to better manage its wage per adjusted admission expense since 2020’s second quarter onset of the pandemic, but the system is still paying 9% above pre-pandemic levels.
Another theme from this quarter’s health care provider earnings calls is the short- and long-term costs of labor. Most providers are paying sign-on, shift and other bonuses, and are paying high rates for traveling nurses or locum tenens; these expenses will eventually decrease as the supply and demand of labor reaches its new equilibrium. However, part of the wage story, i.e., what is driving the chart above, is baseline increases to compensation, particularly for nurses or other non-clinical caretaker roles in long-term care, senior care and home care. These baseline wage increases will not reverse and will continue to challenge the profitability of providers.
According to data collected by the Bureau of Labor Statistics, the baseline cost of health care wages, i.e., wages excluding stay bonuses and overtime, has increased 7.8% since the end of February 2020, compared to all wages, which increased 7.5%. Inpatient and outpatient wages have increased 8.5% and 6.6%, respectively, over this same period. These wages will not revert to pre-pandemic levels, even once providers stop paying increased bonuses and overtime.
(Note: the spikes in costs early in the pandemic reflect how business closures related to social distancing requirements generally pushed lower-wage workers into unemployment. Those workers “left” the workforce, and the remaining employees, who were higher-paid and could work remotely, pushed up the averages.)
What we’re hearing
My discussions this quarter with provider executives around labor have focused around two topics:
- The 2% to 3% annual wage increase we typically budgeted for over the past 10 years will not return until 2024 or maybe 2023. In the meantime, the compensation increase of 5% to 7% is a more appropriate baseline, consistent with what we’ve seen in the public data.
- Money won’t completely solve the war for talent. Employees want flexibility and a new work/life experience. Employees working in a clinical setting won’t get the opportunity to work from home like many of their friends and family members do; however, leading organizations are exploring ways of allowing some employees more control over their schedules.
For example, imagine a home health provider allowing caretakers sign up for as many or as few shifts as they want via an app. Shifts that look to be understaffed might pay better, if the employee commits early to working that shift. Staff timeliness and other factors could also be “gamified” into a new ecosystem that provides invaluable flexibility to staff, which helps with attracting and retaining talent.
Labor challenges for health care providers are not going away, even as more adults (and soon children) get vaccinated and case counts fall. Leading organizations should anticipate increased systemic costs of labor while also making investments to change the employee experience to reduce expensive turnover.