In February, U.S. inflation as measured by the Consumer Price Index grew 7.9% year-over-year, the highest increase in four decades. The factors influencing the current inflationary environment are many and interconnected, including supply chain disruptions, infusions of stimulus money, pent-up demand for goods and services, and more recently, the war in Ukraine and the resulting economic sanctions for Russia. And while the entire global economy has been affected by the current inflationary period, the challenges facing U.S. healthcare providers are particularly pronounced.
Many of the household items that have risen in price—from gasoline to food prices—are likely to stabilize and even decline with time. Unfortunately for hospitals, however, skyrocketing labor costs will likely result in a sustained structural reset of their expense base—at least until the emergence of offsetting workflow restructuring or technology solutions. In February, hospitals’ labor expense per adjusted discharge rose a staggering 32% from February 2020, immediately prior to the onset of the COVID-19 pandemic in the United States, and was 15.3% up from February 2021, according to the most recent Kaufman Hall National Hospital Flash Report.
Beyond rising salaries, hospitals are also faced with shortages of all types of workers in multiple departments—from nursing to environmental services. With U.S. unemployment rates nearing all-time lows, hospitals must now aggressively compete with every employer in their communities for entry-level workers. Some economists predict worker shortages and related higher costs will persist for decades to come. And in contrast to similar positions in other industries, even entry-level healthcare workers require significant training before they are prepared to work in a hospital.
The very nature of hospital employment is also shifting rapidly. In February, the median contract labor expense as a proportion of U.S. hospitals’ overall labor expense in U.S. hospitals reached approximately 12%—up from roughly 2% as recently as October 2020, according to Kaufman Hall data. And while many hospitals may view travel nursing primarily in terms of cost, it’s possible that a sizeable percentage of the nursing workforce—including younger Millennial and Generation Z workers—will prefer the lifestyle flexibility of travel nursing for years to come. In all likelihood, the current workforce challenges will require a new set of solutions to complement efforts to increase productivity and optimize a given hospital or health system’s workforce.
The current combination of broader macroeconomic pressures and workforce shortages with the specific inflationary pressure in the healthcare workforce has created a perfect inflationary storm.
More than ever in the past, hospital leaders must be able to develop a clear organizational point of view about the near-term and then systemic implications of inflation and other macroeconomic forces. If an organization believes we are in a long-term expense restructuring cycle, that will suggest one set of resource management decisions. If an organization believes that inflationary pressures will be more muted or short-term, that would suggest a different set of decisions.
For example, if an organization is contemplating the need to issue additional debt, and if the organization believes inflation will be long-term, the organization should move as quickly as possible to issue fixed-rate debt to defend against the prospect of rising interest rates. On the other hand, if an organization believes that inflation will be temporary, it could be more deliberate about issuing debt and might assess structuring options that trade the possibility of lower cost for the retention of interest rate risk.
Moving forward, hospital financial planning exercises should include a careful assessment of what the future might hold for their organizations and the broader industry climate, including:
- Where are our biggest areas of vulnerability?
- What is our current cost structure?
- How and when will our cost structure normalize?
- Will new technology be required to stabilize our cost structure, and will we need tech-savvy partners to help us achieve that?
- What is our organization’s future outlook for accessing external capital to achieve our goals?
- How do we best position resources to respond to these pressure points?
The first quarter of 2022 has presented tremendous challenges to the U.S. healthcare industry—including successive waves of Omicron COVID-19 subvariants, widespread inflation, rising interest rates, and the economic aftershocks of the ongoing war in Ukraine.
While some of those pressures may ease with time, rising labor costs and ongoing workforce shortages indicate a lasting, structural change in expenses is in the offing. Hospitals seeking to remain resilient through this perfect inflationary storm must be able to clearly assess the broader macroeconomic forces influencing their organizations, integrate those assessments with their existing financial planning frameworks, and allocate resources accordingly to protect their organizations from future shocks.
