Growing Hospital Expenses: Rising Nurse Pay or Poor Planning?

A recent report is critical of the steep increase in staffing costs for contract nurses. But experts say it’s important to look at what’s causing nurses to leave the profession and search for ways to improve their experience at work.

The workforce report by healthcare consulting firm Kaufman Hall found that hospitals’ use of contract labor for nurses during the COVID-19 pandemic has resulted in higher hospital expenses. The consulting firm revealed that labor expenses at US hospitals and health systems went up 37% per patient between 2019 and March 2022. The hard dollar increases were $4,009 to $5,494 per adjusted discharge.

The increased contract labor expenses during this time rose from 2% of total labor expenses in 2019 to 11% in 2022, per the report.

“The pandemic made longstanding labor challenges in the healthcare sector much worse, making it far more expensive to care for hospitalized patients over the past 2 years,” said Erik Swanson, senior vice president of data and analytics at Kaufman Hall, in an announcement.

“Skyrocketing labor costs, decreasing patient volume, and lower revenues create a perfect storm for steep declines in profit margins. Hospitals now face a number of pressures to attract and retain affordable clinical staff, maintain patient safety, deliver quality services, and increase their efficiency,” added Swanson.

Three additional findings from Kaufman Hall’s report included:

Contract labor as a percentage of total labor expenses increased more than five times the rate from pre-COVID pandemic levels.
The median wage rate for contract nurses was more than three times the rate of employed nurses in March 2022.
Hospitals were hit in the first quarter of 2022 with steep declines in year-to-date operating margins in a combination of expense, volume, and revenue pressures that are mostly associated with the COVID-19 pandemic.

Workforce optimization is one way hospitals can staff nurses appropriately while managing costs, Swanson told Medscape Medical News. That process involves predicting patient volumes and building a “flexible enough” staffing organization to ensure that “ebbs and flows” are covered, he added.

Nurses

Some hospitals will manage staffing with “nursing float pools” who can work across different departments to meet patient demand, said Swanson. Building attractive schedules, focusing recruiting efforts among early career nurses, and partnering with local nursing schools to create a talent pipeline can also help, he added.

The report included data from Chicago-based financial planning software company Syntellis Performance Solutions across more than 900 hospitals on a recurring monthly basis over the last 3 years, according to Kaufman Hall. Hospitals of all types were included, ranging from large academic hospitals to small critical access hospitals, and varied geographically and by bed size.

One in five healthcare workers left their jobs during the COVID-19 pandemic, per the report, which also revealed that more than one third of nurses plan to leave their current roles by the end of the year.

Hospitals Want to Raise Prices; Payers and Businesses Say ‘No’

A recent article from The Wall Street Journal also took aim at the increasing labor costs associated with nurses. The news outlet reported that HCA Healthcare and Universal Health Services’ hospitals are among those that want to raise prices by as much as 15% for health insurers and businesses, which also means higher premiums for patients.

But Jack Needleman, PhD, a professor and chair of the department of health policy and management at the UCLA Fielding School of Public Health, questions the data used in the The Wall Street Journal article.

“Roughly one half of hospital costs are for labor and one half of labor costs are [nurses]. So, whatever hospitals have estimated as their additional personnel costs, which the WSJ article put at 7.5% to 15%, needs to be divided by four to estimate the impact on overall hospital costs,” he told Medscape Medical News.

The hourly cost of travel nurses is typically twice that of staff nurses, said Needleman, who recommends that hospitals offer higher salaries as a way to recruit and retain staff nurses. The impact of these salary increases should be savings due to reduced reliance on traveling nurse agencies and traveling nurses, he added.

Health insurers and employer groups are rejecting the price increases from hospitals, according to The Wall Street Journal’s reporting. Some hospitals will ask to increase their prices between 7.5% to 15%, said people familiar with the negotiations, per the news outlet’s reporting, which found that typical price increases are in the 4% to 6% range.

Employer groups and health insurers are pushing back on the price increases because they contend that the highest cost hospitals can pay the increased labor costs without raising their rates, reported The Wall Street Journal.

Improve Nurse Pay and Create Better Work Environments

“This blame [for increased costs] has been misdirected in so many ways,” Rachel French, PhD, RN, a fellow at the Leonard Davis Institute of Health Economics at the University of Pennsylvania School of Nursing, Philadelphia, told Medscape Medical News. She points to The Wall Street Journal article, in particular, and the Kaufman Hall report as “blaming this ‘machine’ of travel nurses who are making wages that have never been seen before in the field of nursing … but what I think this does is distract from a relevant conversation.”

“It pins [the blame on] the wrong people … the people who deliver care instead of the people whose job it is to think about profit and workforce staffing issues, who are not the people delivering healthcare,” said French.

While she acknowledges that the COVID-19 pandemic created a “perfect storm of the mass exodus of nurses from the workforce,” she encourages hospitals to retain nurses by increasing financial compensation to somewhere between what a contract nurse and a staff nurse earn.

But even more important is thinking about the environments where nurses work, according to French. “The working conditions have become so brutal for nurses, leading to extreme rates of burnout, dissatisfaction, and moral distress. These things are also in the purview of hospital administrators,” she said.

Needleman agreed, adding that the work done by nurses is often misunderstood or undervalued by hospital executives. “The executives only see that nurses are one quarter of the hospital costs and thus a cost center to be managed rather than the service line to be promoted and enhanced,” he said.

While healthcare executives know that nursing is physically and emotionally demanding, “there’s far too little appreciation that [the] work of frontline nurses is cognitively, intellectually, and managerially complex,” said Needleman.

In addition to caring for patients, administering drugs, taking vital signs, and helping patients eat, use the toilet, and bathe, nurses are also responsible for duties such as checking for errors in orders (especially for drugs), following up on orders, and preventing errors. Nurses also serve a vital role as the “emotional, psychological, and existential support for patients and families,” said Needleman.

Aine Cryts is a veteran health IT and healthcare writer based out of Boston, Massachusetts.

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