Healthcare CFOs Are Rethinking Their Approach To Profit Forecasting

Hospitals must think outside the box if they hope to survive the challenges caused by labor shortages, rising payroll costs, and supply chain disruptions.

It is no secret that to retain workers many hospitals and healthcare systems have had to increase pay rates for different employees. Those same organizations struggled during the pandemic to maintain revenues as elective procedures were delayed and low-reimbursement COVID-19 care dominated—resulting in a significant threat to profit margins.  

This threat is forcing many healthcare finance executives to rethink how they do profit forecasting, and what can be included in daily operating costs—as is the case at Emory Healthcare in Atlanta. Emory has been hit hard in two key areas because of raising payroll.

"The bigger impact is coming through temporary or contract labor," says Emory CFO Bradley Haws. "We read data that says, nationally, the southeast has been more severely impacted by the temporary labor trend than other areas. But I see the impact in other places as well."

The rate Emory Healthcare is paying nurses has essentially tripled on an average basis, and quadrupled in some cases, Haws says. While a nurse in the Emory market would typically earn somewhere between $40 and $43 per hour, pay rates rose to around $170 or $180 per hour. Haws says he has even seen rates go as high as $250 per hour.

The rise of agency hiring hits hospital payrolls hard

It's a similar tale at El Camino Health in Mountain View, California, where rising pay rates are being driven by the need to hire contract labor to fill staffing shortages. Much of that trend has been due to professional nurses leaving their full-time jobs to join agencies, where they are then placed back into a healthcare setting as a contractor. Hospitals then pay the nurse's needed wages, plus the agency's fee.

"We're all competing for a limited pool of employees, which is significantly driving up our labor expenses," says Carlos Bohorquez, CFO at El Camino Health. "Despite our success in recruiting and retaining employees, our use of contract labor has increased threefold over the past 18 to 24 months. Over the past 12 months, the average rate we pay for contract RNs has almost doubled."  

The story is the same at Northern Arizona Healthcare, which has also seen labor costs rise dramatically.

"We have increased pay ranges and rates significantly in recent times for both clinical and non-clinical staff in an attempt to stay reasonably competitive in the market," says Cliff Loader, CFO at Northern Arizona Healthcare in Flagstaff, Arizona. "But so have our competitors, setting up a continuous cycle of competition for staff. The most impacted jobs have been primarily bedside nursing roles, for which we've roughly tripled our normal pace of pay increases."

The rapid rise in contract nursing labor has created a tough financial dilemma for hospitals. Should they knuckle under and pay the higher rates needed to retain staff? Or should they let employees walk, and then hire contract labor to fill needed job roles? On the one hand, the organization sets precedent for higher pay rates going forward. On the other, it begrudgingly spends extra money to line an agency's pockets.

Complicating the matter is a state of "supply and demand run amok, during a time of a diminished national qualified candidate pool, particularly in rural areas," Loader says. Still, he explains that Northern Arizona Healthcare has "taken the pragmatic position that we'd rather pay premium rates for nurses who work for us rather than [temporary] traveling nurses. Keeping up with contract rates is economically impossible for us."

Salaries for nurses have risen 300% to 400% in many regions

To put this payroll pain in perspective, Loader explains that Northern Arizona Healthcare typically pays out approximately 40% to 45% of net revenue in labor costs.

"This year, we can expect labor costs to run 10% to 15% higher, which for most systems is not sustainable in the long run," Loader says.

The same thing is happening at Emory Healthcare, Haws says.

"It's devastating," Haws notes the impact on the organization's ability to do accurate profit forecasting. "About 14% to 15% of our workforce has become contract labor. When you talk about the change in the labor rate over six months, it's hundreds of millions of dollars. In healthcare, economic systems are not built to sustain that kind of labor increase. Most places are budgeting and have a 3% to 4% operating margin. That's being more than eaten up by this labor increase. So, a lot of places have negative operating costs."

Those operating margin percentages, and the impact on them by rising labor rates, are confirmed by Loader.

"Many nonprofit hospital systems run at a margin in the range of 3% to 3.5%, meaning for every dollar collected there is about 3-cents of profit after paying staff and bills," Loader says. "Even with patients who have good insurance, systems are finding themselves with negative monthly margins."

Hospitals need higher payments, less costly operations, and new staffing models

Solutions to this problem won't come easy.

"I don't think after the pandemic it will return to the old cost structure," Haws continues. "If that assumption is true, then there will be costs that are going to get passed on, ultimately, to the public. So, whether that comes through tax revenue, or whether it's a commercial payer and it is eventually passed on through by premium, we're going to have higher healthcare costs."

While it is not uncommon for hospitals to have negative operating margins now, some may be staying afloat using non-operating or investment income.

"They may be using reserves at some level, but that's not sustainable," Haws points out. "So, the question is, how long can this continue? When do we start cutting back services to compensate for what's going to go on here? We've got to curtail capital spending. We've got to modify other operations. Weak hospitals have already started to curtail services, and some are closing."

In terms of steps that hospitals and healthcare systems can take now to buck these trends, "I think the first thing to look at is how can we find more supply of nurses and create more school training programs," Haws says. "Also, could we use alternative staff to get some of that work done?"

Fortunately, schools are starting to respond with accelerated nursing programs, Haws says. That will help put more nurses into the field sooner, and ease some of the payroll pressure.

More immediately, hospitals should look for ways to cut costs everywhere they can, Loader says.

"We are searching for any opportunities to reduce costs, specifically targeting medical supplies and contracted services," Loader says of Northern Arizona Healthcare.

"We don't see the national shortage of available nurses resolving in the near term," he continues.  "Therefore, we'll need to augment them with lower-skilled and less expensive labor to help them take a larger patient load. On the other side of the equation, we'll need to seek increases from government and third-party payers to help cover the cost of providing care in this environment."

In the short term, higher payments from governmental and third-party payers are needed, Loader says.

"Longer-term, we need to develop a different staffing model that allows nurses to perform higher-level work and let lower-skilled staff do tasks currently done by nurses," he says. "There could also be technology developed, such as artificial intelligence, which can help nurses be more targeted and productive in their work. We certainly can't ask them to simply work harder."