‘Skyrocketing labor costs’: Hospitals are paying 37% more since COVID-19 pandemic

A new Kaufman Hall report says increased labor costs have added to the financial challenges facing American health systems. Healthcare leaders will have to find ways to recruit and retain workers.

Labor expenses at U.S. hospitals have risen by more than a third since the arrival of the COVID-19 pandemic, according to a new report by Kaufman Hall.

Hospitals have been struggling with higher costs for labor and supplies in recent years, and those higher costs have been a drag on their financial performance.

Labor expenses at American hospitals and health systems rose 37% per patient between 2019 and March 2022, according to the report, which was released May 11. Labor costs per adjusted discharge rose from $4,009 to $5,494 in that span.

Contract labor expenses were identified as the key factor in the higher labor costs. Hospitals and health systems are spending 11% of their total labor costs on contract labor in 2022, up from just 2% in 2019.

Median hourly wages for contract nurses rose from $64 in 2019 to $132 in 2022, an increase of 106%, the report stated. Staff nurse rages rose from $35 to $39 over the same three-year span, an increase of 11%, Kaufman Hall reported.

Healthcare systems have bristled at the higher wages imposed by contract labor firms, particularly travel nurses. The American Hospital Association said last month hourly billing rates for contract labor firms have risen 213% since the start of the pandemic. The AHA and other healthcare groups have asked federal regulators to investigate possible price gouging.

The rising labor costs have made it more costly and difficult to treat patients, said Erik Swanson, senior vice president of data and analytics at Kaufman Hall.

“Skyrocketing labor costs, decreasing patient volume and lower revenues create a perfect storm for steep declines in profit margins,” Swanson said in a statement. “Hospitals now face a number of pressures to attract and retain affordable clinical staff, maintain patient safety, deliver quality services and increase their efficiency.”

Hospitals have been dealing with negative operating margins for the past three months, Kaufman Hall has reported. Median operating margins, including federal CARES funding, fell from 5.6% in December 2021 to -1.4% in March 2022, according to the new report.

Health systems suffered a brutal start to the year with record COVID-19 hospitalizations, which only added to staffing shortages. Hospitals also had to postpone non-urgent procedures due to the surge of patients with the Omicron variant, and some patients delayed care, so hospitals saw less revenue.

Healthcare leaders have said they have dealt with severe shortages of personnel, including nurses. They’ve also complained that nurses have left hospital staff jobs for more lucrative positions as travel nurses.

Nurses have countered that they aren’t adequately supported or paid by hospitals and said nurses wouldn’t be leaving in droves if health systems were treating them well.

Hospitals across the country have struggled with higher labor costs, but the largest increases were in the South and West (43% and 42%, respectively), according to the Kaufman Hall report.

The West and Northeast/Mid-Atlantic regions had the highest labor expenses, with the median labor cost per adjusted discharge surpassing $7,000.

Labor now accounts for 49% of the total expenses of hospitals, up from 46% three years ago, according to the report.

Hospital leaders are going to have to continue to plan for higher labor costs. Leaders must devise strategies to recruit new workers and to retain the valuable employees they can’t afford to lose, the Kaufman Hall report stated.

“Healthcare executives will need to bring their most flexible attitudes and their most creative thinking to a challenge of great dimension and even greater complexity,” the report stated.

Roughly one in five healthcare employees have left their jobs since the pandemic began, according to Morning Consult. As many as 40% of nurses - and one out of five doctors - have said they plan to walk away in the next two years.

A U.S. Health and Human Services Department report released last week shed more light on the difficulties hospitals have faced during the pandemic. In January, about one in five hospitals (22%) reported critical staffing shortages.

Some hospitals, including rural hospitals, are facing perilous financial challenges, the report stated.

At the HIMSS Global Health Conference in March, Diane Swonk, chief economist of Grant Thornton, said some hospitals were on the cusp of shutting their doors.

“We’re about to see a lot of hospitals close,” Swonk said.