Rocky road ahead for hospitals in 2022 with rising labor costs, tougher negotiations with payers

Stethoscope on top of five, ten, and twenty dollar bills.
The median hospital operating margin fell more than 9% this September compared to the same time last year. Hospitals in regions hit hardest by the delta variant were most affected, a Syntellis report said. (Getty Images/PLG)

Respiratory care departments at hospitals across the country are buckling under rising labor and supply expenses, according to a new report.

For the past 14 months, labor costs at respiratory care departments have exceeded pre-pandemic levels. September was no exception: The median labor expense per procedure was nearly 22% higher than the same time in 2019, according to an analysis from Syntellis Performance Solutions. 

However, whereas there was an inverse relationship between surgery volumes and labor costs in 2020, costs in 2021 have remained high despite recovering procedure volumes. An increase in the hourly rate of respiratory therapists has contributed to this heightened cost, despite lower staffing levels than before the pandemic.

Syntellis, a software company, regularly collects payroll data from more than 135,000 physician groups and 1,000 hospitals.

RELATED: Hospital leaders agree COVID revealed 'significant' supply chain issues. Less than half say they've plugged the gaps 

Other costs are also piling up due to the global supply chain crisis: Non-labor expense per adjusted discharge rose more than 22% in September compared to September 2019, while medical supply expense per procedure was up nearly 80%.

The median hospital operating margin fell more than 9% this September compared to the same time last year. Hospitals in regions hit hardest by the delta variant were most affected, the Syntellis report said. 

As labor costs escalate, providers “must compete for a shrinking pool of qualified healthcare professionals” the report said. Coupled with high patient volumes from ongoing COVID-19 and rising non-labor expenses, “one can easily see the equation is unsustainable,” the report said.

RELATED: Lower volumes, higher wages, supply chain disruption all dragged down hospital

Outlook for 2022

Because labor costs are up across the board at hospitals, everything is going to get more expensive, Steve Wasson, executive vice president and general manager at Syntellis, told Fierce Healthcare. 

And, inevitably, smaller healthcare organizations are going to feel these pressures most. They will have less to offer in terms of competitive wages to keep talent, Wasson explained. “We’re seeing people just offer more money to recruit,” he said. Not being able to do so as a smaller player will “leave them a little vulnerable to that competitive market.” 

It will also be difficult to renegotiate contracts with payers, said Kevin Thilborger, managing director focusing on value-based care, strategy and transformation at Huron, a global consulting firm. Before the pandemic, hospitals may have been operating at a 5% annual increase in costs, but the typical payer-negotiated contract allowed only for 2% to 3% in annual rate increases, Thilborger explained. Now, that gap is even wider. 

“That’s why the negotiations are even tougher, because they have to ask for more,” Thilborger said.

Payers are not likely to oblige. In fact, they are already requesting decreases in negotiated rates from hospitals, he said. Premiums rose this year, and Thilborger expects that trend to continue into the next. 

RELATED: Willis Towers Watson: Employers expect health costs to rise by 5% in 2022

Payers will justify their increases with a lack of experience in COVID long-term impacts regardless of record profits they made during the pandemic, Thilborger predicted. These hikes may end up being even more substantial, given how many employers in recent years have moved to offering self-funded health plans.

Costs will also rise as hospitals are left with no other option, Thilborger said, though not all will be able to negotiate higher rates. “Those with less leverage will have more future financial risk,” he said. Payers and providers are already considering terminating contracts over what they see as unreasonable demands from the other party.

These trends will further drive consolidations, joint ventures and service line outsourcing in 2022, Thilborger said. That may mean fewer healthcare services offered by providers in one area, carrying significant implications for rural communities in particular. These ripple effects would have happened sooner were it not for federal aid during COVID-19, he noted.