High Labor Costs Continue to Plague Providers, Data Shows

Hospitals’ finances have held relatively steady during the last 12 months, but high labor costs remain a persistent problem threatening providers’ bottom lines, according to data released this week by Kaufman Hall.

For its report on hospital finances, Kaufman Hall examined data from more than 1,300 hospitals. The report showed that hospitals’ year-to-date operating margin index was 4.3%, a slight decrease from past months this year, in which the same index floated closer to 5%. 

The report also showed that hospitals’ inpatient revenue and average length of stay was on the rise, indicating that hospitals are treating more high-acuity patients.

“We’ve seen a trend there — this movement of patients to outpatient settings where possible,” said Erik Swanson, senior vice president at Kaufman Hall. “What that means is that patients of lower acuities will ultimately be cared for in those lower cost settings — so hospitals will end up with higher acuity, more sick, more expensive patients.”

Swanson also noted that hospitals’ expenses have been steadily increasing all year, especially when it comes to drugs and supplies.

Health systems’ labor expenses have decreased slightly because hospitals have reduced their reliance on expensive contract labor, but the overall labor market remains tight, he pointed out.

“There’s some wage pressure driving up average wage rates. The common refrain that we have here is, if you think about many communities, Amazon fulfillment centers open up, or there may be other large employers in the community who have raised their rates. So hospitals have to compete in order to attract talent,” Swanson explained.

For its report on physician finances, Kaufman Hall analyzed data from more than 200,000 employed physicians and advanced practice providers from more than 100 different specialties. The report revealed that medical groups’ median investment in each employed physician reached over $300,000 for the first time.

This statistic emphasizes the unsustainable nature of traditional physician employment models, said Matthew Bates, managing director at Kaufman Hall.

“Somewhere around 30 years ago, we started to see physicians moving in a more material way into employment by hospitals, and that trend has continued to grow. We also see employment now by commercial private equity entities — think Optum and others. So today, about 80% of all of our physicians are employed — and in the hospital setting in particular, we find that when we start to employ them, bluntly, the costs start to exceed the revenues,” Bates remarked.

One key reason for this is that payers, including Medicare, have failed to ensure that their physician reimbursement rates keep up with the pace of inflation, he noted. It is difficult for providers to keep their physician costs down when expenses for goods and supplies are rising much faster than insurers’ small payment increases, he said.

Bates’ sentiment is shared by physician groups, most notably the American Medical Association. Just last week, the organization urged its members to contact Congress about “the growing financial instability” of Medicare’s physician payment system.

In Bates’ view, two things need to happen to address this problem, with the first being a marked increase to physicians’ payment rates.

“What we pay doctors needs to keep up with inflation, and we have a hole that we’ve created that we need to get caught up on,” he stated. “Without doctors, there’s no healthcare system. They’re the clinical captain of the ship.”

Secondly, Bates thinks the industry needs to “think about new kinds of models” that allow for more efficient collaboration between doctors and administrators to move the cost needle.

“Revenue or the amount we pay for healthcare is not unlimited — there’s only so much money to go around to pay for healthcare. White coats and suit coats have got to figure out how to more effectively partner to drive down costs and deliver care to patients.”

Photo: adventtr, Getty Images