By Matt Wolf, health care senior analyst with RSM US LLP
Outpatient volumes continue to increase, providing much-needed revenue to many health care providers. However, the increase may not be enough to offset rising labor costs, a challenge that will likely persist after the pandemic impact subsides.
Growth in outpatient volumes slowed last quarter, while staffing costs for volumes continued to rise as the labor market remained tight. According to CDC data, as analyzed by Bloomberg Intelligence, physician office visits increased 28.5% in the fourth quarter to date versus the same period in 2019 (pre-pandemic). The increase by itself seems positive, however, it represents a slowdown in growth as outpatient volume growth decreased more than 2,700 basis points (bps) relative to an average increase over the prior two quarters of 55%.
Source: CDC, Bloomberg LP, RSM US LLP
At the same time, we’ve seen wage and salary (labor) costs per adjusted admissions increase for publicly traded health systems, which report the data quarterly. Adjusted admissions is a metric meant to combine inpatient and outpatient volumes in a way that creates comparability across providers and over time.
Labor costs per adjusted admission for the major publicly-traded health systems, HCA Healthcare, Tenet Healthcare, Community Health Systems and Universal Health Services, have all increased since the pandemic began; most notably Tenet, which is now reporting wage costs per adjusted admission of $9,079, compared to $7,278 pre-pandemic, an increase of 24.7%. HCA’s costs increased for the second quarter in a row after a brief decline. HCA has experienced a cumulative pandemic increase of 21.4% in its salaries per adjusted admission metric. Community Health Systems’ labor cost per adjusted admission also rose for the second consecutive quarter to $5,670, which represents a pandemic increase of 14.7%.
Source: Company filings, Bloomberg LP, RSM US LLP
The publicly traded health systems are hardly alone. Data from Kaufman Hall, as discussed in our recent outlook, show that most health care providers and systems still have not recovered to pre-pandemic margins. Providers will find it difficult, if not impossible, to return to pre-pandemic profitability unless outpatient volumes return in full and labor cost increases abate.
The latest employment survey from the Bureau of Labor Statistics offered little relief for health care providers struggling to source, let alone pay for, sufficient labor. The much-anticipated jobs report showed the entire health care sector added 18,000 jobs in January, which beat the 2021 average monthly increase of 7,750 jobs. However, the sector remains down 378,400 jobs from the pre-pandemic employment levels of 16.5 million.
Hospital employers gained 3,400 employees in January of 2022, which is an encouraging number. In all of 2021 the hospital subsector only gained 7,100 jobs net of losses. However, like the overall health care sector, hospital employment remains significantly below pre-pandemic levels. As of the end of January, the last month for which data are available, hospitals are 104,600 jobs below pre-pandemic levels. At current rates, it would take 30 months just to replace lost hospital labor. Further, it will take additional time to catch up to ongoing increased demand.
Labor shortages are pushing up costs per admission. They’re also crowding outpatient volumes; providers are delaying, diverting or canceling procedures they would otherwise perform due to lack of labor. Universal Health Systems commented as much on its earnings call recently:
“In what was already a very tight labor market. These incremental labor challenges in addition to pressuring our salaries and wages expenses also suppressed patient volumes at our acute care and behavioral health facilities.”
HCA similarly acknowledged the challenges of this labor market and its attendant margin pressures, indicating “…mainly we are operating in a difficult labor market. Over the past year, we have invested in our colleagues with increased pay, supplemental bonus programs and additional benefits. These investments coupled with our efforts to improve operational support for providing care should help us mitigate some of the difficulties caused by the environment.”
Many providers are also sourcing labor via contract or travel nursing arrangements. Such relationships can provide critical labor to health systems, however, these solutions are expensive. HCA and others expect their reliance on contract labor to decline sometime in 2022, but this may result in continued pressure on margins.
Uncertainty around COVID-19 remains at the forefront of health care, even as other industries move forward. The degree to which COVID-19 outbreaks delay procedures and cause clinicians to stay home sick will pressure providers in the short- and likely medium-term. Tenet acknowledged as much in a comment that echoes what we hear from private health care executives every day, indicating “…we’re still in the throes of this current COVID surge. And so labor rates are higher than you otherwise like them to be, in particular for contract labor. And then the shortages of staff that omicron has created because the staff have been affected by omicron just exacerbates that.”
Providers, especially hospitals and health systems, are feeling the incredible pressure of increased cost of labor, and now are facing a potential slowdown in outpatient volume recovery. A quick recovery in the health care labor market remains unlikely. Providers need to continue to evaluate new ways to do more with less and drive efficiencies in their organizations through organizational change and technology.