Rising Contract Labor Utilization Boosted Hospital Labor Expenses

Contract labor utilization and cost increased dramatically during the COVID-19 pandemic and were contributing factors to rising hospital labor expenses, according to a report from Kaufman Hall.

The Special Workforce Edition of the National Hospital Flash Report reflects data from more than 900 hospitals collected every month.

While the pandemic has impacted all aspects of the healthcare industry, the healthcare workforce has received perhaps one of the biggest blows. Nearly one in five healthcare workers quit their jobs during the pandemic, while one-third of nurses plan to leave their current position by the end of 2022.

Hospital labor expenses rose as facilities scrambled to fill these gaps and maintain adequate staffing by turning to contract labor.

“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 press release.

“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.”

Between March 2019 and March 2022, the median labor expense per adjusted discharge increased from $4,009 to $5,494, signaling a more than 33 percent increase. Additionally, labor as a percentage of total expenses rose from 46 percent to 49 percent.

The Southern and Western regions of the country saw the greatest increases in labor costs, rising by 43 and 42 percent from pre-pandemic levels. The West also had the highest labor expenses at more than $7,000 in March 2022, with the Northeast/Mid-Atlantic regions following close behind.

The high labor expenses were mainly driven by increased contract labor utilization and costs. In 2019, contract labor accounted for 1 percent of total hospital hours, compared to 5 percent in March 2022.

In the South and Midwest, contract labor as a percentage of total hours increased more than two times the rate from pre-pandemic levels, the report found. In the Northeast/Mid-Atlantic, West, and Great Plains, contract labor use was three to four times higher than pre-pandemic figures.

Contract labor also became more costly over the years, accounting for 2 percent of total labor expenses in 2019 and rising to 11 percent of total costs in March 2022.

Acute care hospitals saw the most significant escalation in contract labor costs; in 2019, contract labor accounted for 2 percent of total labor expenses and grew to 12 percent of total labor expenses in 2022. Contract labor costs were three times higher than pre-pandemic rates for critical access and children’s hospitals, and more than four times higher for academic medical centers.

Contract labor expenses rose for both rural and urban hospitals, but the increase was slightly higher for urban facilities, the report noted.

As more hospitals turned to contract labor to fill staffing gaps, wage rates for contract nurses increased. While the median hourly wage for employed nurses only rose slightly from $35 in 2019 to $39 in 2022, contract nurses saw dramatic wage changes.

Even before the pandemic, hourly wages for contract nurses were almost double those for employed nurses at $64. The wages rose consistently throughout the pandemic, increasing to $71 in 2020, $103 in 2021, and finally to $132 in 2022. This 2022 median wage rate for contract nurses was over three times higher than the wage rate for employed nurses.

Hospitals saw negative operating margins for the first three months of 2022. With CARES Act funding, median operating margins fell from 5.6 percent in December 2021 to -1.4 percent in March 2022. Excluding CARES Act funding, margins went from 3 percent to -2.4 percent.

The negative operating margins resulted from a rocky financial start to 2022 that included rising expenses and declines in revenue and outpatient volumes.

Kaufman Hall’s most recent National Hospital Flash Report showed that, although margins remained negative in March 2022, hospitals saw some early signs of relief as revenues and outpatient volumes increased and expenses declined.

However, industry leaders have warned that the workforce shortage will likely continue even after the pandemic.