Addressing Labor Costs in Healthcare

February 25, 2022

What is the “new normal” of higher labor costs?

Today, the U.S. healthcare system is going through a workforce crisis. However, even before the COVID-19 pandemic started, there were issues with the workforce in the healthcare system. This is hardly news, but it has become complicated by the fact that leaders are now dealing with the crisis during the ongoing COVID-19 pandemic. There are many factors that are contributing to the ongoing issue of higher labor costs in hospitals and healthcare systems, three being:  

  • Outsized reliance on contract labor 
  • Pressure to increase compensation 
  • Pervasive shortages

The U.S. Bureau of Labor Statistics estimates that the healthcare sector has lost nearly half a million workers since February 2020, while Morning Consult reported that nearly 1 in 5 healthcare workers have quit their jobs during the pandemic.  

Why are labor costs rising?

Since the pandemic, CEOs and CFOs are facing the same staffing problems, especially acute due to the demands and burnout associated with being on the frontline of care. All health systems and hospitals are seeing increased turnover, major increases in early retirement, job changes and exits to other career paths. They are also seeing major increases in wages and taking on significant incremental costs from leveraging agency and traveling nurses, who are able to travel to cities and towns with higher COVID-19 rates. Due to that, their rates can be 200% to 300% that of nurses on staff. This has caused a complicated dynamic for leaders trying to maintain a balanced culture.  

a hospital leader looking at labor statistics

In an HFMA article explaining the impact surging labor costs have had on hospitals, one leader shared the difficulty of maintaining culture during this time. “Our teams are very committed, but it gets really challenging for them to work beside many nurses that are making so much more than they are,” said Erica Deboer, RN, chief nursing officer with Sandford Health, a multistate health system based in Sioux Falls, South Dakota. “It is creating some of that unrest.” 

What are leading hospitals doing to curb labor costs? 

In the history of America’s healthcare system, there has perhaps been no bigger disruptor to hospital finances than COVID-19, which has strained resources and shut down service lines in hospitals across the country. Labor costs have historically represented the largest category of health system expense, making them an obvious first consideration for hospitals.  

In response, one hospital focused their efforts on keeping their staff during this time. 

Nebraska Medical Center (NMC) wanted to focus on controlling labor costs and keeping their staff. They leveraged their budget, cost accounting and patient data, all in one place. At the start of 2020, they used new data capabilities and some training and education to get physicians, nurses and hospital leadership on board. During the first wave of COVID-19, NMC did not furlough any employees. They continue to hope it stays that way. 

“We can look at the data and say, ‘Whose productivity is down because they don’t see patients anymore? Whose productivity is too high?’ We used it as a way to determine where we have resources, who’s up and who’s down,” said Kristi Atkinson, budget and cost accounting manager at NMC. 

Because of that, NMC was able to shift around some staff to maximize their available resources. Clinicians that are unoccupied now help out in a different department or assist overwhelmed staff, while surgical nurses who find themselves in limbo after the cancellation of elective surgeries due to COVID-19 are now escorting patients to various spots in the facility during check-in, taking some of the pressure off regular nurses. In fact, Nebraska has the lowest unemployment rate of any U.S. state, at 1.9 percent in November 2022. 

Many more organizations, including Utah-based Intermountain Healthcare and Children’s Hospital of Philadelphia, were able to take good care of their workforce at the beginning of the pandemic by not furloughing non-essential personnel, not cutting pay and not taking away bonuses.   

How can labor management tools help hospitals?

A health system located in the Midwest knew that there was a need to monitor salaries more closely to maintain regular pay and avoid furloughing staff during the pandemic. Leaders at this academic health system realized the importance of moving away from less accurate, non-patient- specific costing methodologies. The organization invested in Time-Driven Costing ™ (TDC™), a methodology combining data on billing activities, employee-level payroll and timestamps pulled from EHR log to determine costs of patient and staff-level variation.

Another tool they utilized was StrataJazz® Productivity Reporting, which helps organizations correct inaccurate pay rules related to premium pay, specifically overtime. They currently use this report every day to track who is receiving overtime and identify variances, such as pay rules that provide overtime to staff working more than eight hours per day. Now, they can better manage their staff, cutting long shifts to reduce overutilized overtime pay.  

Using tools and resources such as TDC and StrataJazz turned the future of this health system around. This is why it is so important for hospital leaders to start shifting their attention to how to fix the problem going forward instead of fixing the problem just for now. 

What strategies are the top hospital CEOs and CFOs using to manage labor costs?

At the 40th Annual J.P. Morgan Health Care Conference, Strata’s CEO Dan Michelson summarized top challenges shared by CEOs and CFOs from 20 of America’s most prominent health systems. Based on those presentations, he concluded there were five top actions organizations can take to address staffing challenges. 

  1. Investing in their current workforce 
  1. Accelerating clinician education 
  1. Looking outside the U.S. for recruiting 
  1. Developing a flexible approach for staffing 
  1. Deploying telehealth to increase access and efficiency  

What is in store for 2022?

It’s clear that health systems have developed some strategies to better weather the COVID-19 storm, which has given them the ability to start looking to the future. However, no strategy or initiative will be successful without the resources to support it, and the primary focus for health systems right now must be addressing their labor challenges. As the last two years have proven, there is no one group more important on the frontlines than caregivers.