Unsustainable Costs of Caring

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Tom Haederle
It's no secret that hospitals finances nationwide are stretched to the breaking point. Every hospital leader is well acquainted with these challenges and their effects on patient care. They include inflation, sicker patients, skyrocketing costs for supplies, drugs and labor, as well as burdensome administrative requirements. These issues and more are documented in the American Hospital Association's recently released 2023 Costs of Caring Report.

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Tom Haederle
As one expert puts it, you can see the numbers, but the scope of the problem will still hit you like a ton of bricks.

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Tom Haederle
Welcome to Advancing Health, a podcast from the American Hospital Association. I'm Tom Haederle with AHA Communications. Ffom 2019 through 2022, the cost of contract labor went up nearly 258%. For so many hospitals and health systems already operating on negative margins, these increased costs are simply unsustainable. In today's podcast, Bharath Krishnamurthy, AHA's director of health analytics and policy, speaks with Steve Wasson, executive vice president and general manager for Data and Intelligence Solutions, 

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Tom Haederle
with Syntellis Performance Solutions, a provider of innovative enterprise management, software data and intelligent solutions for health care organizations across the country. The subject, of course, is hospital financial pressures and the outlook for the future. As Steve notes, people are looking for ways to operate differently. With that, let's join Bharath and Steve.

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Bharath Krishnamurthy
Steve, thank you for joining me today to talk about this important issue. As hospitals and health systems around the country are facing immense financial challenges leading to 2022 being the most challenging year financially for hospitals since the pandemic began. Can you describe at a high level what sort of financial pressures hospitals and health systems have been facing over the past few years and the extent of these pressures based on the data?

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Steve Wasson
Sure. And thanks for having me. I really appreciate the time. And as you know, we track hospitals and health systems across the country with specific data around their financial operational performance. So there's a lot going on in that question. So let's unpack a little bit. So the the things that we're seeing and hearing from our customers is around inflation, a lot around inflation and cost pressures that they're seeing workforce transitions.

00;02;36;05 - 00;03;06;12
Steve Wasson
So the big theme is around workforce and the transitions of the workforce patient preferences. So the volumes are shifting from different settings of care, and that's putting a lot of financial pressure on folks where their investments might go. A lot of competition. So mergers, changes of how organizations are structured is putting financial pressure on folks. Some regulatory change challenges, you know, reimbursement changes, things like that are really forcing people to really rethink how they're structuring, where their lines of business need to be.

00;03;06;19 - 00;03;31;28
Steve Wasson
And so all of that culminated with post-pandemic world is putting a ton of pressure on folks. But overall, you know, in 2022, we saw a lot of negative margins. So over that whole period, margins were significantly down from previous periods. And in 2023, we're seeing the same, although just a small glimmer of hope for March in 23, we did see margins overall.

00;03;31;29 - 00;03;53;07
Steve Wasson
This is an aggregated view. Margins squeak out a little positive point 4%. So in any other period of time we think that was terrible. But given all the historical patterns of 22, we're just seeing a little bit of upward momentum on the margins. So we'll see how that plays out over 2023. But there's a lot of pressure. Our customers are seeing that.

00;03;53;14 - 00;04;23;06
Steve Wasson
And the last thing I'll say is, you know, we do a CFO survey every year, so we are talking to CFOs and asking their opinions and workforce optimization and productivity was almost uniformly the top thing folks were worried about. 98% said that, you know, that is their number one area. And then when we went further and asked where they're seeing other areas, so inflation supply chain expenses but employed and contract labor where they're leaders in that.

00;04;23;06 - 00;04;26;15
Steve Wasson
And so really people are looking for ways to operate differently.

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Bharath Krishnamurthy
Absolutely. And I completely agree that it's not just any one thing that's driving these financial challenges. It seems like it's a confluence of multiple different factors that are really driving these negative margins that you mentioned. I want to unpack a little bit some of these drivers that you talked about and you mentioned workforce. As you know, workforce costs on average account for about half of the hospitals budget.

00;04;50;01 - 00;04;57;26
Bharath Krishnamurthy
Can you talk a little bit more about how hospital workforce costs have changed since the beginning of the pandemic? And why are these changes so challenging for the field?

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Steve Wasson
So workforce, workforce and more workforce? So we're definitely on a theme here over the last several years. Over a three year period workforce. And as we discussed in your recent Cost of Caring report, high labor is really pushing up their overall costs. So, you know, when you compare it to the pre-pandemic world, so pre, you know, if you go back to 2019, the median total expense per adjusted discharge for workforce is up significantly.

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Steve Wasson
It's about 22 to 23% increase over that period on a per adjusted basis over that three year period and the total labor expense. So as you said, it takes up half of the the budget to the total labor expense is up 20, almost 21% over that three year period. So significant pressure and just the cost of providing and having a workforce that's coming to to take care of your patients. And you know, in health care setting, you don't have a choice but to have people come and take care of your patients.

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Steve Wasson
If you don't, you don't have an operation. So there's really a tremendous amount of pressure in that labor force of upward cost, a lot of turnover areas that are absolutely required are putting a significant amount of pressure on the financials of an organization.

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Bharath Krishnamurthy
That's great. And I completely agree. You know, one thing that we've heard from a lot of hospitals is that a big part of what's driving their increases in labor costs is contract labor. You know, workforce challenges is not something that was new during the pandemic. Certainly the pandemic exacerbated those challenges. What we really hear from our hospitals is that they have increasingly relied on contract labor and those expenses have gone up significantly.

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Bharath Krishnamurthy
Can you talk specifically about the rise in costs for contract labor and how that's impacted hospitals?

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Steve Wasson
Sure. So contract Labor has been a pretty hot topic over the past couple of years. And if you think about what I was just talking about in touched on in your previous question on turnover, so turnover rates have been much higher during this three year period than the historically had. So organizations are having trouble retaining their staff, which forces them to look for external resources to, you know, show up and take care of patients in a meaningful way.

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Steve Wasson
And that's continuing. So if you look back at November of 2022 and the way we calculate turnover, you have to look at over a period of time. But in November, the turnover just for that month for the market was around 2.5%. So just that one month, 2.5% of the workforce was turning over and then you every month, you know, you have to deal with that.

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Steve Wasson
So this metric is going to hit you like a ton of bricks, the contract labor expense rate. So the total amount that folks are paying for contract labor from the period of 2019 to 2022 through 2022 went up 250, almost 258%. So that amount of expense infused into your budget, it just puts so much pressure on organizations and how they can operate.

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Steve Wasson
And this snuck up on people. This wasn't something they budgeted for. This wasn't something they were expecting. So in early 22, this turnover really started accelerating and folks had to turn to contract labor. So the other thing that happened was the total number of FTEs that they were using in the contract labor. So in your workforce, the percentage of folks that you're pulling in from the external agencies went up during that same period, 138.5, almost 139%.

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Steve Wasson
So the percentage went up significantly. And then you couple that with the actual rate. So the actual rate that folks were paying, these contract labor agencies, the median wage rate rose 57%, 56.8% during that same period. So when you do that math problem of much higher rate, a much higher percentage of the workforce being contract labor, you end up with this very accelerated contract labor expense number in which put pressure on folks to understand how their financials were coming together.

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Steve Wasson
So this was just impacting all sorts of patient flow. Folks are really grappling with that. And when you talk to your CFOs and you talk to leaders in organizations, this was something that they were just really grappling with during 2022, we are seeing it settle a little bit. It's not going backward, but we are seeing it settle a little bit as we enter 23.

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Steve Wasson
But it is still a significant issue.

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Bharath Krishnamurthy
Wow, that is a staggering statistic you just shared, Steve. And certainly I think one thing to stress here is that the 57% increase in the rate that hospitals are paying to the staffing agencies, all of that is not going to the actual person, the nurse or the other allied health professional. A big portion of that is being kept by the staffing agency.

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Bharath Krishnamurthy
Is that correct?

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Steve Wasson
Yeah, that's right. So that number that I'm quoting is the amount that a hospital's paying an agency. What we don't see is what percentage the nurse or the care provider actually receives. To your point, that's the number that the hospital has to pay, but it doesn't necessarily mean it translates into nurse pay, because there is, you know, a margin that the agency keeps.

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Steve Wasson
And so and that's obviously an issue. It's it's not going necessarily to the nurse.

00;10;11;26 - 00;10;31;11
Bharath Krishnamurthy
Great. I want to pivot a little bit and talk about something that that I don't think a lot of folks have focused on. And that's the fact that patients are staying in the hospital longer than they were prior to the pandemic. Part of that is the fact that patients are sicker than they were before. But another part of that is this issue of a bottleneck that's occurring at the hospital.

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Bharath Krishnamurthy
Can you talk about what the data showing there and how this might be impacting hospital finances?

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Steve Wasson
Sure. So, yeah, a couple of things that play into a length of stay increase - and we definitely see length of stays have expanded during the 2019 to 2022 period. About 10.4, you know, 10.5% increase in length of stay, which has a lot of financial impact to an organization as their reimbursements and some of the things that are tied to length of stay.

00;10;59;10 - 00;11;30;27
Steve Wasson
From a quality perspective, definitely play into that. And the acuity of patients is a little bit out of the operational control of an organization, but the things within their operation that play into it really do fall into that staffing and some of the shortages that we we just talked about. So where that plays in is that when you have a patient that needs to move through the system from the acute care setting into the post-acute setting and then eventually home, you need the staff and the way in which you can manage that through.

00;11;30;28 - 00;12;05;13
Steve Wasson
So when you look at the discharges and what's what's going on. One area that I think gets overlooked as we look at right at the hospital, but it's actually in that post-acute setting into the skilled nursing area because a patient many times is going to a facility for a period of time before they go home. But what's happening there and one of the stats that we just recently posted in a blog which reinforces this is from the U.S. Bureau of Labor Stats, is that since March of 2020, skilled nursing has lost 12% of its workforce.

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Steve Wasson
Almost 200,000 folks are no longer in those jobs that they're used to have. And folks are grappling with how to fill those seats and to be sure that when a patient in the acute setting is ready to go to that post-acute skilled nursing facility, that they have the team ready to bring them in. And that's not happening. So it backs it up.

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Steve Wasson
So the person ends up staying in the hospital because you can't move them. If they aren't, there's no place to move them to. And it's it's definitely having an impact for organization. So I think it's important to look at that flow, look at the staffing, not only at the hospital, but in those post-acute areas. That's really having an impact.

00;12;49;03 - 00;12;53;19
Steve Wasson
And the data is definitely supporting that issue for organizations.

00;12;54;21 - 00;13;16;26
Bharath Krishnamurthy
Yeah, it's certainly a tough issue. And I would add that, you know, as patients stay in the hospital for those extra days, they can't be discharged to the appropriate post-acute care setting. They are not receiving reimbursement for those for those additional days. So it's certainly a huge challenge for hospitals. So I want to talk a little bit and look towards the future.

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Bharath Krishnamurthy
What is the financial picture for hospitals look like for 2023? And do you think that the challenges that hospitals face in 2022 will continue into this year and potentially beyond this year?

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Steve Wasson
Yeah. So, you know, we're sitting in April and so we've got one quarter behind us in 2023. We do see a lot of continuance of issues into 2023, particularly around the staffing issue,  expenses being higher than they were before. Now we are seeing a little bit of slowing in the growth of some of those expenses. And that's not to suggest they're not still high because they are.

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Steve Wasson
We're now at a new normal of high, but we are seeing it slow a little bit in the first quarter in terms of just the the rate of growth on some of these expenses. But, you know, if we look at March, you know, total hospital expenses were up 4.7% year over year in March of 2023. So that's a continued trend and that's the 11th consecutive month of accelerated expense that organizations are dealing with.

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Steve Wasson
So there's not a ton of relief that we're seeing there now. We are seeing some other inflationary areas slow down. So and we're being told that inflation is starting to cool a little bit. So we're starting to see that a little bit in the data. But it's important to note that it's not going backwards. It's just, you know, not growing at the same rate.

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Steve Wasson
The other thing that if you look at some of the reimbursement rates and some of the trends in terms of employment that I'm concerned about in 2023, you know, we had a high rate of employment in 2022, which means that, you know, a high number of people were showing up with insurance coverage and things like that. So as you know, the economy is cooling and we see potential recession on the horizon that we kind of hear in the news.

00;15;06;12 - 00;15;34;24
Steve Wasson
I worry about reimbursement rates, insurance coverage, percentages dropping, uninsured populations increasing, which puts a lot of pressure on organizations on the top line. They still have to care for the folks that, you know, show up at their facility. But the coverage and the reimbursement might not be as lucrative as it was in 2022 as a percentage of the folks. And the last piece on that, what we see historically when those patterns emerge is deferred care, folks that have a choice in when they get a service might delay.

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Steve Wasson
And so, you know, we're talking about, you know, elective surgeries that, you know, it's not an urgent matter, but something that you have a choice on. So we see sometimes those volumes go down. Now, on the bright side, we are seeing volumes come up in 2023.

00;15;53;29 - 00;16;19;03
Steve Wasson
So we have seen an increase in volumes in this first quarter. So in January, volumes year over year were up pretty significantly, almost 20%, 19.5% in January and up in February and then again in March at a more modest pace. But so we are seeing volumes hold or go up. Time will tell whether that continues into 2023. But with that volume comes more labor, more expense.

00;16;19;11 - 00;16;47;17
Steve Wasson
And, you know, it's tough times ahead. And then the last thing is that organizations, as we look forward not only this year but into the future, reimbursement and settings of care are shifting. One example of that in which folks most know about but they have to manage through is when things like knee replacements or hip replacements are changing from acute to non-acute settings, organizations seem to be ready for that because those reimbursements are changing, the settings of care changing and patients are making different choices.

00;16;47;25 - 00;17;09;14
Steve Wasson
And so, you know, from 2018, 80% of of knee replacements were done in acute care, and today that's about 30%. So those sorts of trends organizations, I would argue, need to kind of adjust to be ready for the type of care and the setting of care that can be most beneficial to their sustained operation. So 2023 is going to be a challenge.

00;17;09;21 - 00;17;22;04
Steve Wasson
Expense wise, reimbursement wise. But I think by looking at data and understanding what the world around you from a market perspective is how I see folks being able to compete and, you know, offer the best care possible.

00;17;22;25 - 00;17;52;22
Bharath Krishnamurthy
Absolutely. That was extremely insightful. And certainly as the public health emergency winds down in May, I think that that will introduce a whole other set of challenges from the reimbursement side, from the insurance covered side, etc.. Well, Steve, I want to thank you for your time, for your wonderful insights here in the data. As you said, data is extremely important in guiding hospitals decisions, but also understanding the magnitude of the impacts on hospitals health systems across the country are facing.

00;17;53;00 - 00;17;56;18
Bharath Krishnamurthy
So again, thank you for your time and look forward to talking with you again.

00;17;57;09 - 00;17;58;23
Steve Wasson
Yeah, great to talk to you. Thanks again.