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Contract Labor Is Out. CFOs Grow Staff Instead to Save Margins

Analysis  |  By Amanda Norris  
   October 27, 2023

In a push to improve margins, the utilization of contract labor is declining.

Reducing labor costs is a top concern for CFOs, so pulling back on agency use has been a major theme in 2023, especially since the money CFOs pumped into contract labor during the pandemic is now majorly stressing the bottom line.

As HealthLeaders has been reporting, a new survey is showing there’s a major reduction in contract labor and an increased interest in recruiting and retaining home-grown staff.

According to Kaufman Hall’s 2023 State of Healthcare Performance Improvement report, the utilization of contract labor appears to be majorly declining. Only 4% of organizations are experiencing increased utilization of contract labor, compared to 27% last year, the report says.

In fact, 61% of respondents to this year’s survey say contract labor utilization is decreasing, compared to 44% in last year’s survey.

How are CFOs achieving this?

The ability to reduce reliance on contract labor may be driven in part by the significant percentage of organizations that are using such tactics as internal or enterprise float pools (64%) or a greater number of per diem or pro re nata employees (45%) in lieu of more expensive contract labor.

Organizations are also strengthening their recruitment and retention strategies. Almost all surveyed (98%) are pursuing one or more recruitment and retention strategies, including raising starting salaries or the minimum wage (90%), the report says.

These aspects are exactly what Scott Wester, president and CEO of Memorial Healthcare System, a South Florida-based nonprofit system, prioritized for his organization.

“COVID changed the landscape of how we dealt with the workforce, predominantly the reliance on agency nurse travelers, outside contractors, and not having enough personnel to meet the demand that was out there, mostly on the clinical side,” Wester said.

“We spent almost $280 million a year utilizing outside contract or incentive pay and heavy reliance on nurse travelers. We recognized we needed to get people back to wearing our Memorial badge. Over the course of 12 months, we've dropped about 80% of use of outside contract labor. We're now about a $200 million savings just on that perspective,” Wester said.

So how did Memorial pull it off? The organization did it by bolstering its talent acquisition team, making sure to play more offense than defense, and by reaching out to the work community to try to figure out what was limiting people from joining the organization.

[SeeThe Exec: How Memorial Healthcare System's CEO Slashed Workforce Turnover]

How is this affecting the bottom line?

While the reduction in contract labor will help, Kaufman Hall experts expect that it will be a slow climb for hospitals to return to the 3-4% operating margins that help ensure long-term sustainability.

While staffing and capacity challenges have clear implications for revenue, an increased rate of claim denials—reported by 73% of respondents—has had the most significant impact on hospitals’ revenue during the past year, the report says.

[See: Denials Management is Costing Some Revenue Cycles Millions]

Where should the focus be in 2024?

Ongoing labor cost management, revenue cycle optimization, and strategic planning will be key for CFOs in 2024.

CFOs will need to continue to focus on labor cost management. The declining utilization of contract labor and the emphasis on recruitment and retention strategies suggest a future trend of hospitals intensifying their efforts to manage labor costs even more so in 2024.

Leaders may explore innovative workforce models, invest in employee development, and collaborate with educational institutions to address contract labor costs and talent gaps.

Revenue cycle optimization will still be the key to financial health in 2024. With increased claim denials having a significant impact on revenue, CFOs will likely continue to heavily invest in technologies and processes to improve revenue cycle management.

Not only will tech investments help revenue cycle performance, but it can play an important part in staff retention strategies as technology can reduce administrative burdens.

CFOs will obviously need to continue to focus on achieving and maintaining long-term financial sustainability as margins are not where we want them. This may involve cost containment, revenue diversification, and strategic financial planning to gradually recover and maintain healthy operating margins into 2024 and beyond.

Amanda Norris is the Director of Content for HealthLeaders.


As CFOs have been scrambling to bolster their bottom lines in 2023, many placed the focus on cutting contract labor.

In fact, 61% of healthcare leaders say their contract labor utilization is decreasing, according to a new study.

What will this mean for 2024? Ongoing labor cost management, revenue cycle optimization, and strategic planning will still be key.

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