Hospitals face persistent jump in costs of labor

Pay pressures stay strong even as pandemic subsides

Hospitals are starting to emerge from the worst of covid-19, but one consequence has persisted: They still have to pay workers more.

HCA Healthcare Inc. and Universal Health Services Inc., two of the largest U.S. for-profit hospital chains, each warned last month that the price of labor could continue to eat into their profits. While executives say costs should eventually subside as covid dies down, when and by how much remain to be seen.

Wages have gone up for hospital workers across the board, said Aaron Wesolowski, vice president of policy at the American Hospital Association. That’s particularly so in positions that faced the most strain during the pandemic, such as nurses, respiratory therapists and intensive- care staff. Drug and supply costs are up as well, with patients coming in sicker and needing more care, and staff wearing more protective gear.

“It doesn’t take much to really exacerbate that issue” of workforce costs, Wesolowski said, which make up more than half of a typical hospital’s expenses. Even small increases can make a big difference, he said, “and what we’re seeing are really large increases.”

A report released by the AHA last week said that labor costs per patient jumped by 19% in 2021 from 2019. High-cost traveling nurses made up 39% of hospital nursing budgets in January 2022, up from 5% in 2019.

The pandemic upset the U.S. economy in many ways, but health care was subject to some of the biggest shocks. Nurses, doctors and other staff were exposed to covid on a daily basis before vaccines were available, and often lacked proper protective gear.

In the first year of the pandemic more than 3,600 health care workers died of covid, according to Kaiser Health News. High labor needs, burnout and illness have left many hospitals short-staffed, and large numbers of nurses took betterpaying travel jobs, working on contract for a few weeks or months in surge locations.

It’s true that supply chain shortages and a tight labor market have pushed up the cost of goods across many industries, but health care wages have increased faster than other sectors. From January 2020 to January 2022, private wages at hospitals rose 13.1%, compared with 11% across all sectors, according to the U.S. Bureau of Labor Statistics.

Before covid, hospital labor increases were predictable, rising 1.5% to 2% a year, said Martin McGahan, co-head of consulting firm Alvarez & Marsal’s health care practice, which helps hospitals in financial trouble. “That has changed dramatically,” he said.

In Massachusetts, the omicron wave hit hospitals so hard in January and February that almost all had to run at a loss, even with the government subsidies, according to the Massachusetts Health and Hospital Association.

“It is clear that these hospital losses are simply unsustainable,” association Chief Executive Officer Steve Walsh said in a statement.

Even as many small hospitals have suffered, the largest operators have still managed to turn a profit. HCA, Universal Health and Community Health Systems Inc., three of the largest publicly traded chains, all reported growing profits and stock prices over the course of the pandemic.

Rising costs have begun to take a bite, however — HCA reported $1.27 billion in adjusted net income in the first quarter, down from a year prior. Universal Health Services reported smaller first-quarter profits than in any quarter of 2021. Shares of both companies fell after they reported.

In some cases, hospitals have curbed how many patients they care for. Universal Health employs about 89,000 people and runs more than 400 hospitals, behavioral health centers and other facilities. At some of those locations, which treat mental health conditions and substance-use disorders, they’ve had to limit the number of patients they take on.

Executives said they believe costs will ease over time. HCA employs more than 270,000 people and has 184 hospitals in about 20 states. CEO Sam Hazen last month called this period a “high-water mark on labor costs” and said “we’re going to gain ground on the pressure that we’ve experienced over the past three quarters.”

So far though, even as covid hospitalizations have declined following the omicron wave, labor pressures have continued, said Universal Health CFO Steve Filton last week on the company’s earnings call.

“To some degree I think we’ve found labor issues to be stickier and more difficult to navigate in the back half of the quarter than we were expecting,” Filton said, referring to late February and the month of March.

Hospitals are trying to come up with ways to help build a pipeline of workers and retain the ones they have. Community Health, which operates 83 hospitals in 16 states, said it will expand its employee benefits in an effort to “attract and retain a strong workforce.”

The company said those added benefits are valued at about $40 million each year across its about 66,000 workers and include new student loan repayment benefits, reimbursement for job license renewals and an expanded tuition reimbursement program.

Hospitals can pass along some costs to insurers and their clients, but not instantaneously. It can take a year or two before higher labor costs get baked into Medicare’s reimbursements to hospitals, executives from HCA said on an earnings call late last month. And rates with commercial insurers are typically contracted well in advance.

Health insurance rates haven’t yet responded to higher labor costs, said insurer Centene Corp.’s CEO Sarah London.

“We haven’t really seen anything so far this year,” she said on a call with analysts Tuesday. “The fact that our rates are contracted creates a buffer on that,” she said.