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Understanding & Controlling Labor Costs in Healthcare

September 7, 2022
The Trusted Works Team

Between 2019 and 2022, hospital labor costs in the U.S. have skyrocketed. Labor expenses are up 37%, spending on contract labor jumped from 2% to 11%, and labor cost increases are responsible for 35% of the overall growth in hospital costs1.  

Despite ever-increasing spending on labor, hospitals are still struggling to stay staffed, and clinicians are still burning out. Now more than ever, healthcare leaders are charged with the delicate balancing act of recruiting and retaining qualified providers to deliver outstanding quality care while optimizing labor costs.  

In this post, we explore what’s driving rising labor cost trends and how healthcare leaders can leverage technology to improve financial performance without compromising care.

The Key Drivers of Labor Costs in Healthcare

Hospitals and health systems are paying $24 billion more per year for clinical labor than they did before the COVID-19 pandemic. Dwindling financial and human resources were already concerns before the pandemic, but the past two and a half years have turned these burgeoning issues into full-blown crises. Primary causes include:

Widespread reliance on contract work

Use of agency and temporary labor is up 132% for full-time and 131% for part-time healthcare workers—racking up a hefty price. For example, median hourly wages increased by 106% for contract nurses since 2019 (compared to just 11% increase for staff nurses in the same time span). In fact, contract work has been identified by several healthcare organizations and professional analyses as the number one cause of unsustainable increases in labor costs.  

High turnover rates

Hiring clinicians is hard enough and retaining them has become exponentially more challenging as the pandemic drags on and resilience wavers. A recent survey found annual turnover among ED, ICU, and nursing staff has increased from 18% to 30%. Anytime hospitals see an uptick in turnover, they also experience a correlated rise in expenses as they hurry to fill scheduling holes, provide overtime bonuses to existing staff (note: the AHA found a 52% increase in overtime hours compared with a pre-pandemic baseline), and onboard new clinicians. Hospitals are competing to hire from a dwindling pool of qualified, active medical professionals—resulting in paying more money for fewer individuals.  

Record-breaking care trends

The pandemic ushered in record-breaking trends in patient care, with brutal increases in coronavirus hospitalizations, devastating drops in elective procedures, and dangerous avoidance of hospitals even for emergent care. These trends had vast impacts on hospital environments, financial stability, staff burnout, and cost of everything from supplies to utilities to personnel.  

Potential Impacts of Unrestrained Healthcare Labor Costs

Though hospital leaders and industry experts expect labor costs to stay high, they also fear what may happen if they continue to rise unchecked. Some healthcare groups are even calling for investigation into contract labor firms whose hourly billing rates have risen 213% since the start of the pandemic.  

Ongoing blows to hospital staffing budgets in the form of COVID surges and high employee turnover have—in part—caused hospitals to operate with uncomfortably thin or negative margins for significant portions of the past few years. Facilities can only function in the red for so long before it has ripple effects. Some impacts of dwindling hospital margins include:  

  • Inability to update important equipment and technologies
  • Little to no capacity for innovation or growth
  • Toxic organizational culture
  • Dissatisfied, exhausted workforce
  • Compromised patient outcomes  
  • Loss of community loyalty
  • Difficulty contracting with payers
  • Increase in price of care
  • Closure of departments
  • Shut down of entire facilities  
  • Rise in number of underserved locations and populations

The future of patient care is dependent on having people to deliver and manage it. So, how do healthcare leaders strike the tricky balance between paying staff fairly, serving patients well, and ensuring a sustainable future for the organization?

How to Drive Healthcare Labor Cost Optimization

As labor costs and needs evolve, healthcare executives will need to think flexibly and creatively.  A more dynamic, tech-enabled workforce management plan for hiring and scheduling can help curb typical staffing costs and allow for strategic shift distribution. We suggest these strategies for optimizing healthcare labor costs:

Adapt to new models of staffing

Hospital leaders must be open to innovative ways of filling schedules. Options include varying shift lengths to accommodate varying worker availability and endurance, deploying float pools to adapt to fluctuating needs within a health system, offering travel-at-home programs, or offering more remote and virtual options for applicable roles.  

Intelligently manage contingent labor

When you rethink scheduling, consider technology to support your new approach. Leverage technology that allows you to view your available resources and make a strategic plan that considers realistic staff needs forecasting and worker preferences. Flexible, holistic workforce management leads not only to less burnout, but also to more operational efficiency and reduced premium costs.

Carefully leverage agency support

Using external resources can be cost-effective in some cases, but the choice should be made thoughtfully and strategically, with an understanding of the tradeoffs. By expanding supply options and empowering internal resources, hospitals can make the decision to rely on external staffing when it makes the most sense, and not simply out of desperation.  

Align incentives and pay

Provider organizations—health systems in particular—must take care to standardize offerings across units and facilities whenever possible. Though some differences in pay and benefits structure may be inevitable (e.g., cost of living in area, location-specific requirements, etc.), aligning these elements across the organization’s workforce will keep staffing assignments fair, expand opportunity for cross-functional or cross-location scheduling, and avoid unnecessary internal bidding wars for talent. These standards can be adapted to adjust to market trends and industry changes but should not vary significantly within the health system itself.  

Rethink benefits package

As younger generations begin to dominate the workforce, ensure you are not spending precious dollars on inconsequential benefits. Some of the perks that mattered to Baby Boomers and Gen X are phasing out as Millennials and Gen Z bring their values and needs into the workplace. Stay up to date on these trends to ensure you are offering packages that appeal to the current talent pool and spending money on benefits that are truly meaningful.  

The effects of dramatically increased labor costs are not entirely unavoidable. Unfortunately, we cannot turn back to a pre-pandemic time and address these issues before they became crises. However, healthcare executives and industry experts do have influence on where the trends go from here. By understanding the forces at play and keeping an open mindset to new approaches, we can help guarantee the sustainability of health professions and patient care now and into the future.  

Keep Hospital Labor Costs Under Control with Works

Works powered by Trusted gives you a bird’s eye view of your entire workforce—internal, external per diem, local, and regional float—to understand performance, spend, and trends across source pools. This enables a more flexible labor pool that you can leverage to creatively solve staffing challenges, find the best-fit worker for any open shift, and automatically apply incentives to shifts that need the most coverage. Works reduces total costs to fill and the amount of time you and your staff spend dealing with staffing issues. The technology also empowers nurses to sign up for shifts that best meet their preferences and needs, giving them the work flexibility and choice that they seek. Learn more about how Works can help your hospital optimize labor costs at works.trustedhealth.com.

1https://www.kaufmanhall.com/sites/default/files/2022-05/KH-NHFR-Special-Report-2.pdf