Health systems' labor costs increased significantly over the last three years as hospitals relied on expensive contract labor during the pandemic and, more recently, increased pay to keep up with high inflation rates.
In the first quarter, salary and wage growth for nonprofit hospitals slowed to a median of 7 percent — down from almost 11 percent for the 2022 fiscal year. While labor expenses are still taking a toll on hospital margins, CFOs are encouraged by market trends.
Tactics health system leaders are employing to march down labor costs revolve around recruitment and retention, strategic use of agency staff and improved employee productivity.
"Our team did a great job of managing the premium cost of labor in the first quarter," IU Health CFO Jenn Alvey told Becker's. "Like most health systems, most of our expenses are attributed to labor. But I think the market is softening. Travel workers are costing less, and we have been very focused on where we are placing travelers and where we are not. Our new CHRO also has a great recruitment and retention plan, and we are beginning to see some strong results there, too."
At the beginning of the year, IU Health's financial, nursing and human resources teams developed a plan to march down premium pay throughout 2023.
"As we built our budget for the year, we really focused on labor. We set goals around how much less we are going to pay travelers, the number of travelers we are going to have and how much less we are going to pay internally for premium labor," Ms. Alvey said. "This also helps with the burnout of your team if they aren’t working significantly more shifts and have the support of the travelers around them."
Jim Heilsberg, CFO of Tri-State Memorial Hospital and Medical Campus in Clarkston, Wash., believes the question of reducing labor costs in the current environment must focus on three areas: Agency staff, productivity for current staff, and the refinement of existing tools or addition of new ones to improve efficiency.
"We have implemented strategies that will increase the number of people in the graduation pipeline choosing our hospital for their first job and continue to work on methods to decrease costs for agencies with contract/price changes or elimination of contracts due to improved hiring results," Mr. Heilsberg told Becker's.
Tri-State Memorial also plans to analyze workflow improvements targeted at operational and clinical areas to help staff become more efficient and invest in data tools that help support and clinical staff to do more with less over time.
"In all efforts, any efficiencies found and realized are intended to be capitalized on to reduce costs over time," Mr. Heilsberg said.
Cleveland (Okla.) Area Hospital has taken a different approach to reduce labor costs by moving to a partially self-funded plan in 2021. Last year, the hospital went fully self-funded and chose to absorb a large portion of the increase as part of the employer contribution.
"Labor costs to our organization include the total compensation package, which includes benefits. Because we expect each year that to some degree health insurance premiums will increase, we have consistently looked at ways to hedge the increase," Ray Moss, CFO and chief privacy officer of the hospital, told Becker's. "Going forward we are looking at reducing the payments from the plan by investigating excessive and inappropriate charging and coding from non-domestic claims as well as hedging out-of-pocket deductibles for our employees by means of a supplement or a buy-down on the front end. All in an effort to focus on employees allowing their dollar to go further rather than just being concerned with just the base."