Payroll expenses at health systems nationwide increased by nearly 10% last year, highlighting continued issues with wage inflation and increased competition to recruit full-time employees.
The number of healthcare workers slowly has been picking up, but the higher headcount only contributes in small part to the increased labor costs, according to healthcare consulting firm SullivanCotter.
A survey by the firm, using data from 62 organizations that included systems like Atrium Health, Johns Hopkins Medicine and SSM Health, found that wage increases meant an additional $115 million, on average, in costs last year for health systems paying around $1.6 billion for worker salaries. The growth of full-time equivalent healthcare employees last year was between 1.9% and 2.6%, according to the survey published Tuesday.
Wage inflation has already eroded health systems’ operating margins, even as many try to realign their budgets and achieve sustainable staffing levels, said Matt Wolf, director and healthcare senior analyst at RSM, a consulting company.
“This is really difficult for organizations that historically have budgeted in 2 to 3% cost of living and wage increases for employees,” he said.
The surge in labor costs is largely due to health systems’ struggles with recruitment, retention and competition for talent.
Though it has been some time since hospitals have had “normal increases” in base salary expenses, it is likely that healthcare organizations’ costs will begin to stabilize over the course of this year, said James Roth, managing principal at SullivanCotter.
More systems are beginning to work on reducing expenses in other areas, offsetting investments and changing the structure of their workplaces, Roth said.
Employment growth in leadership roles involving population health, value-based care and health equity is increasing at rates up to 5.5 times higher than growth in healthcare worker growth in lower-level positions, the survey found. Clinical manager and director salaries have risen by 13.7% and 14.8%, respectively.
As a result, nearly 70% of organizations that participated in the survey said they have reviewed or expect to examine the structure and management of their leadership groups.
Some health systems are reconfiguring and reducing their workforces to cut costs.
Adventist Health, based in Roseville, California, has said it is attempting to save around $100 million by laying off dozens of administrative employees and consolidating its healthcare networks.
At Community Health Systems, based in Franklin, Tennessee, leadership lowered contract labor costs from $140 million during the fourth quarter of 2021 to $80 million during the final three months of 2022. Still, expenses for salaries and benefits were up by 1.5% at the end of last year.
Overall, nursing and human resources departments at the country’s largest health systems saw the most significant declines in employees, with decreases of 8.8% and 8.3%, respectively, in 2022. Regulatory and compliance areas have seen between 20% to 25% employment growth at small and midsize organizations, according to SullivanCotter’s survey.
As a share of hospitals’ total labor expenses, contract labor costs grew by about 179% from 2019 to 2022, according to the American Hospital Association.
While the SullivanCotter survey didn’t include data on contract labor expenses, those external sources of labor could add complexity to health systems’ cost structures and may lead to the need to hire more full-time workers, Roth said.
Elevated levels of wage inflation likely won’t go away anytime soon or be alleviated by reimbursements, meaning it will be on health systems to figure out how to improve employee experience, staffing ratios and scheduling flexibility for higher retention rates, Wolf said.
“This is the new normal and we need to navigate that,” he said. “Ultimately the way to bridge the gap between the demand for healthcare services and the diminished supply of labor will be through investments in technology that allow us to do more with less.”