Labor costs account for over 50 percent of total hospital expenses and have a significant impact on the finances of hospitals and health systems.
Coupled with inflation, skyrocketing pharmaceutical prices, and the cost of medical supplies and equipment, critical workforce shortages and labor costs are significantly contributing to rising input costs for hospitals nationwide.
A recent report by Becker’s Hospital Management analyzed nearly two dozen health systems and their associated labor costs from June 30, 2022, to June 30, 2023, and found that for some health systems, labor costs increased by nearly 30 percent year-over-year.
As 24/7 providers of high-quality care, hospitals and health systems need large numbers of qualified staff but finding and retaining these workers has become increasingly difficult due to a range of factors, including a shortage of nursing school faculty, burnout, and the lingering effects of the pandemic. For example, staffing expenses have increased by more than 20% since 2019.
Moreover, hospitals act as a stopgap for other sites of care, such as post-acute and behavioral care providers that are also experiencing staffing challenges, taking on the patients that others are unable to care for. The result is more hospital beds being occupied, often without the hospital being paid for the care it provides. To meet the growing demand for care amidst this workforce shortage, hospitals are forced to rely on expensive contract labor, the cost of which has increased by more than 250% since 2019.
These added expenses are unsustainable on their own, but financial pressures are increased due to chronic underpayments by Medicare, which only pays hospitals 84 cents on the dollar for care provided. This underpayment creates a constant deficit that hospitals must either account for through other means or absorb the losses, which can force hospitals to close lines of services like maternity care, or close altogether, including in rural areas which serve a disproportionately greater share of Medicare patients.
Administrative costs such as those placed on hospitals by commercial insurance companies have contributed to rising input costs and workforce challenges as well. These account for nearly a third of total healthcare spending, and are often cited as a primary factor in staff burnout as healthcare professionals struggle to balance burdensome commercial insurer billing requirements like prior authorization rather than serving patient needs. As these administrative expenses continue to grow and take up more time, less is left for the crucial task of providing patient care.
Without an increase in the labor supply and steps to rein in insurance company-imposed administrative burdens, hospitals will continue to face enormous challenges that exacerbate the cost of providing care. Rather than pushing for harmful new regulations like so-called “site-neutral” payments that would further cut hospital funding, Congress should be working to solve workforce shortages and ease outside administrative burdens, so hospitals can continue to focus on what they do best: serving patients and communities in need.