Hospitals' per patient labor spend increased 37% from 2019 to Q1 2022

Hospitals across the country have seen their per-patient labor expense increase by more than a third since 2019, largely due to the spike in contract labor prices during the delta and omicron surges, Kaufman Hall reports.

Between 2019 and March 2022, the median labor expense per adjusted discharge rose 37% from $4,009 to $5,494, the firm wrote in a new report, citing monthly data from over 900 hospitals polled by Syntellis Performance Solutions.

“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 two years,” Erik Swanson, senior vice president of data and analytics at Kaufman Hall, said in a statement. “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.”

Per-patient labor expense increases were seen across each area of the country but were most noticeable in the South (43% increase) and the West (42% increase), Kaufman Hall wrote. These expenses were consistently highest in the Northeast/Mid-Atlantic and the West, the latter of which supplanted the former as the priciest labor region in 2021.

While Kaufman Hall cited reports on nurses and other healthcare workers departing the industry as a contributing factor in the expense increases, the firm placed primary blame for the spending trends on contract labor utilization and pricing.

Whereas contract labor comprised 1% of hospitals' total labor hours in both 2019 and 2020, those percentages increased to 6% in 2021 and 11% during the first three months of 2022, according to the report. Similarly, contract labor made up 2% of hospitals’ total labor expenses in 2019 and 2020, and then jumped to 6% in 2021 and 11% during the opening quarter of 2022.

Increases in contract labor utilization were seen across each region of the country and across each type of facility, peaking at 12% for acute care hospitals during the first quarter of 2022, Kaufman Hall wrote. Contract labor also made up a greater portion of hospitals’ total labor expenses over time within rural and urban hospitals alike.

As demand for their services increased, contract nurses were also able to ask for higher wages from hospitals. Median hourly wage rates for these workers increased slightly during the pandemic’s first year from $64 in 2019 to $71 in 2020 but shifted further upward to $103 in 2021 and $132 in the beginning of 2022, according to the report.

Kaufman Hall noted in its report that hospitals’ operating margins have been in the red during the first three months of 2022 due to the “perfect storm of expense, volume and revenue pressures attributable largely to the effects of COVID.”

Major health systems have broadly characterized the beginning of 2022 as the most strenuous of the pandemic and, in particular, called out the high rates being asked by contract labor in January, when omicron peaked, and the two months that followed.

Health system executives have also said they expect labor costs to gradually normalize over the remainder of the year—but still acknowledged that another variant-driven surge or other pandemic curveballs could upend those hopes.

In the report, Kaufman Hall wrote that healthcare leaders will need to take a multi-level approach to tackling the workforce shortages and higher rates weighing down their bottom lines.

“Financial plans will need to be reworked to accommodate higher labor expenses moving forward,” the firm wrote. “Recruitment and retention strategies will need to be sensitive to subtly different segments of people and jobs. Real-time data will need to be used to improve processes and workforce efficiency. And the nature of work itself will have to be redefined for the new socio-economic environment.”