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How Hospitals And Health Systems Can Keep Contract Labor Costs Down

Analysis  |  By Amanda Schiavo  
   May 25, 2022

"Hospital finances have been highly pressured and, in large part, driven up due to these increases in expenses, but a large part is on the labor side," says Eric Swanson, senior vice president of data and analytics at Kaufman Hall.

The pandemic has exacerbated the nationwide shortage of healthcare workers, and with hospitals and health systems' increasingly relying on contract labor their expenses are spiking, and profit margins are falling.

If hospitals and health systems hope to maintain their financial well-being, they'll need to find some out-of-the-box solutions that will reduce their dependency on contract labor, without sacrificing patient care.

According to new data from healthcare consulting firm Kaufman Hall, the rise in contract labor from 2019 through March of 2022 resulted in a 37% increase in labor expenses per patient. That's $4,009 to $5,494 per adjusted discharge. In hospitals and health systems, contract labor has grown from only 2% of total labor expenses in 2019 to 11% in 2022. Additionally, the hourly wage rate for contract nurses has skyrocketed by 106% from 2019 to 2022. According to Kaufman Hall, contract nurses are earning an average of $132 an hour in 2022 versus $64 in 2019. Wages for employed nurses for the same period have increased by 11%.

"In the beginning of this year, hospital finances have been highly pressured and, in large part, driven up due to these increases in expenses, but a large part is on the labor side," says Eric Swanson, senior vice president of data and analytics at Kaufman Hall. "There's extreme levels of growth here. We looked at some of the drivers of that labor expense growth, in large part, a lot of it is due to this growth in contract nursing. We noticed that not only had the amount of utilization of that contract labor increased—in some cases nearly five times the rate of utilization that it was before—but the payments that those hospitals are paying for these types of services have also increased nearly threefold."

There's been a supply and demand problem in the labor force since before the pandemic

A lot of the blame for the struggles currently facing the healthcare industry can be placed on the pandemic, but even before the crisis struck there was a shortage of nursing labor. Indeed, according to a 2018 reevaluation of registered nurse supply and demand from 2016 to 2030, there was expected to be a shortage of 154,018 nurses by 2020 and 510,394 nurses by 2030, according to the United States Registered Nurse Workforce Report Card and Shortage Forecast: A Revisit. When COVID-19 swept across the country, the labor shortage issue was exacerbated exponentially.

"As a result of that, one of the challenges that organizations faced was omicron," Swanson says. "As omicron hospitalizations increased dramatically, over a month-and-a-half period, the amount of nursing resources required to care for the patients coming into hospital were often not met by those that were employed by these systems. As such, they had to look elsewhere for resources to help handle this surge."

Hospitals and health systems will need to address the continuing labor shortage if they hope to remain financially stable and provide high-quality patient care. And there are actionable and creative steps hospitals and health systems can take to improve their financial health without cutting their workforce or reducing care quality, says Therese Fitzpatrick, PhD, RN, senior vice president of Kaufman Hall and a member of the firm's strategic and financial planning practice.

"We're seeing lots of creative things happening both on the supply and demand side," Fitzpatrick says. "On the demand side, it is the rare organization that is not looking at changing what their model of care looks like. Irrespective of the cause, with fewer RNs coming into the organization, hospitals all over the country are looking at their models of care. They're looking at team-based care, which is where a nurse, instead of necessarily doing that direct care system herself, is leading a team of licensed practical nurses and technicians who can deliver care. We're seeing a lot of that happening."

Embracing technology is a clear solution

Another thing Fitzpatrick says they've been seeing is the turn toward the digital facilitation of care, one example being an EICU center for patients. That means having a group of intensivists and nurses monitoring all the patients in ICUs for a large system.

"Instead of having those techs overlooking what's going on in each individual hospital, you can pull all of that monitoring into a central location," she says. "In a large system, let's say of a dozen hospitals, you can set up an electronic ICU to oversee what's going on in each of the critical care units in those hospitals. That allows you to better leverage physicians and nurses. So, we're seeing lots of that happening."

Retaining nursing and other staff is another challenge hospitals and health systems have been facing. As COVID-19 left its mark on the labor force, opening hospitals and health systems up to more competition from organizations in different industries, Kaufman Hall cites data showing one-in-five healthcare workers quit their job during the pandemic, and over a third of nurses plan to leave their current positions by the end of this year.

"We're also seeing some creative things happening with the recalibration of salaries," Fitzpatrick says. "We're not speaking just in terms of dollars, but in benefits as well."

Fitzpatrick says they are seeing organizations add benefits like childcare support and transportation subsidies to help create incentives for employees to stay and reduce their need for contract labor.

"Again, looking at both the supply and demand, and the creative strategies around recruitment and retention, [hospitals and health systems are] making meaningful changes to the work environment to retain that staff," she adds. "With federal subsidies winding down, we'll see a decrease over time in the use of contract labor, because hospitals don't have the money to be able to afford that."

Amanda Schiavo is the Finance Editor for HealthLeaders.


Hospitals and health systems have been depending on contract labor to get through the pandemic.

Some of the biggest expenses hospitals and health systems have incurred over the year has been related to labor.

There are creative and actionable solutions available to organizations to reduce their dependence on contract labor, without sacrificing patient care.

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