Labor costs splash hospital balance sheets red in Western Pennsylvania
Hospitals are choking on red ink as labor costs spike and government help for COVID-19-related expenses dries up.
Locally, Highmark Health’s Allegheny Health Network was the latest to dip into the red, marking a $15.5 million operating loss on operating revenue of $997 million for the three months ending March 31.
Labor costs tell the story. Temporary staffing expenses rose $30.1 million from $13 million in the first quarter of 2021 to $43.1 million in the first quarter of 2022.
“Labor is the big story across the country and here at AHN in terms of challenges,” CFO James Rohrbaugh said. “This has been a very, very competitive market for labor and there has been a heavy use of contract labor.”
Salaries, wages and fringe benefits overall during the same three months spiked 13% to $606 million compared to a year ago.
Workforce investment — mostly enhanced salaries and benefits — exceeded $90 million for the quarter at AHN. That was three times the amount spent during the same period a year ago, Mr. Rohrbaugh said.
Other expenses are also rising. Medical supply costs bumped up “north of about 7%” in the first quarter of the year. Since the end of March, supply costs have continued to rise because of issues with manufacturing and shipping logistics, Mr. Rohrbaugh said.
Similar trends are playing out across the country.
Health system labor costs nationwide are up by more than onethird from pre-pandemic levels, the equivalent of a 37% increase per patient between 2019 and March 2022, according to a new report from Chicago-based health care consultant Kaufman Hall.
Median hourly wages for
contract nurses more than doubled during the three years from $64 to $132.
“Skyrocketing labor costs, decreasing patient volume and lower revenues create a perfect storm for steep decline in profit margins,” Erik Swanson, senior vice president of data and analytics at Kaufman Hall, said in a prepared statement.
The pain may be just starting. Fitch Ratings said nonprofit health care systems will “continue to face significant operating challenges” at least through the end of the year.
Hospitals around the country are telling a similar story: Cleveland Clinic booked a loss of $178 million for the first quarter of the year; Jefferson Health and the University of Pennsylvania Health System in Philadelphia reported operating losses of $78 million and $15 million respectively.
Community health systems have not been immune. Butler Health System, for example, reported an operating income loss of $8.2 million for the three months ending March 31 on operating revenue of $405.1 million, with wage and benefit spending spiking 16.3% for the quarter.
Butler Health officials were not available for comment.
On Wednesday, community health systems Butler Health System and Excela Health announced plans to merge, creating a five-hospital system and potentially the third biggest system in Western Pennsylvania behind UPMC and AHN.
For its part, UPMC also reported losses for the first quarter with operating income falling 83% to $50 million, driven down in part by a 2.9% operating loss for the health care giant’s health services division, which CFO Edward Karlovich attributed in large part to higher labor costs.
“It’s a very challenging time for the industry,” he said. “We have tried to respond to the challenge of COVID-19 by adjusting our compensation structures.”
Part of the drop in overall operating income at UPMC reflected a $10 million decrease in operating income from UPMC Insurance Services, which includes UPMC Health Plan. The decline was attributed to medical expenses across product lines.
In the meantime, the overall UPMC health system, which employs 90,000 people, joined other health care systems in boosting pay and benefits for employees.
Effective in January, for example, UPMC raised its base starting wage to $15.75 an hour, which followed a workforce investment of $300 million in November that included a one-time $500 bonus for every employee. Overall, salaries, professional fees and benefits rose 9% to $2 billion for the three months ending March 31.
Hospital executives at UPMC and elsewhere say they must pay higher labor costs: Competitive wages and benefits in a market with a scarcity of nurses are critical to having staff available to serve the community’s medical needs. At the same time, the higher costs are not easily passed along to health insurers and other payers that rely on fixed reimbursements, squeezing the bottom line at many hospitals.
AHN and UPMC both reported that government-related COVID-19 aid, including advance payments for care from Medicare and other sources of support, was evaporating.
UPMC reported that its COVID-19 relief funding declined by $49 million in the quarter ending March 31 when compared to a year ago, while AHN reported a $134.5 million drop in Medicare advances for the three months.
“We’re all facing the same challenges here,” UPMC’s Mr. Karlovich.