Hospitals and healthcare systems are facing a perfect storm of challenges as they try to find their way back to sustainable business models from the peak of the COVID-19 pandemic. Broad and serious threats such as healthcare labor costs erode margins and exact a profound financial toll.
These compounding financial and operational shortfalls stem from a multitude of unforeseen circumstances: Increased length of hospital stays, patient volume fluctuations caused by ongoing COVID-19 cases, revenue losses, complex labor challenges range from staffing shortages to skyrocketing healthcare labor costs, and costly efforts required to retain valuable employees. In many ways, these are stress factors that the industry hasn’t seen converge and compound on each other in almost five decades.
Three critical challenges, in particular, are causing shrinking financial margins that rapidly affect hospitals and health systems, regardless of size or affiliation.
1. Revenue Declines. Not only are revenue sources becoming less predictable due to inconsistent trends in patient volumes, but they are also continuing to shrink, with several factors contributing to reduced revenue for provider organizations.
2. Cost Increases. The alarming rise in healthcare costs is crippling hospital operations nationwide as hospital expenses increase at unmanageable rates. When coupled with rising inflation and growth in input prices across labor, drugs, supplies, and supply chain, these expense increases have a severe and detrimental impact on hospital finances, leading to billions in losses and over 33 percent of hospitals operating on negative margins.
From 2019 to 2022, healthcare providers’ labor costs rose by more than 20 percent, and total costs increased by 17.5 percent over that three-year period. Leaders expect the workforce and inflation challenges they experienced in 2022 to persist into 2023 and beyond.
3. Compounding Labor Challenges. The sharp increase in healthcare labor costs is causing hospitals to see dramatic declines in their year-to-date (YTD) operating margins which are projected to continue on an unsustainable path.
Healthcare labor has become more expensive due to market inflation and the increasing demand for higher salaries to attract and retain talent. At the same time, attracting and keeping the right mix of skilled labor is costly and difficult for organizations to sustain, as evidenced by the following factors.
Not only is healthcare labor costing more, but it’s also becoming harder to manage, and those challenges fuel the dire state of today’s healthcare labor crisis as healthcare providers struggle to maintain their focus on delivering high-quality and high-value patient care.
US-based provider facilities in their most simplistic form are organizations that aim to deliver patient care in cost-effective ways. These organizations face the same competitive pressures as organizations in other industries.
Provider facilities have their hands full as they evaluate what strategies they should use to provide direct care given new social norms, patient expectations, and pressures to reduce the cost of care—regardless of the financial reimbursement model they are in. For example, supporting remote patient monitoring and telehealth visits are almost undeniable requirements for providers, a result of the COVID-19 public health crisis, that must be supported into the future; however, shifting patient care delivery comes with many additional challenges and costs.
The macro-economic and social shifts facing the healthcare industry leave us with universal truths for hospitals and hospital systems, realizing there is a downside to being versatile and now needing to rein in their broad capabilities.
Contributing to the labor crisis is the increasingly complex process of filling open roles and retaining employees. Without a playbook to guide financial decisions, reorganizing administrative expenses to stay afloat has led to widespread employment layoffs, efficiency or overtime adjustments, and outsourcing jobs for hospitals and health systems nationwide. Risks and disadvantages outweigh the short-term benefit gains for the following labor cost management strategies.
Job cuts are often in non-patient care roles such as administrative and technology that can be absorbed by other employees or departments within the organization or through outsourcing.
Infusing efficiencies into an employee’s work or implementing new overtime policies are strategies that can succeed in the future; however, not all employees are receptive to these new approaches and leading to additional turnover and investments in technology that the organization doesn’t have today.
In a typical outsourcing scenario, a healthcare provider organization would contract with a third party to complete non-clinical tasks and projects, or assume a continuous function for the company. Employees and their jobs would be eliminated, often without notice.
Healthcare outsourcing may appear to be the most viable option for financial improvement; however, cutting costs by cutting jobs is detrimental to system performance, employee satisfaction, and team member morale. The traditional options for achieving short-term goals usually come at the expense of long-term goals and vice versa. These options can leave provider facilities feeling like there aren’t any good options.
For hospitals and health systems needing to improve their financial situation by cutting costs, outsourcing support functions—roles that are not specialized in direct patient care—may be the best option if it can be done in a way that brings value to all parties involved, including healthcare employees.
How can outsourcing be improved to overcome the undesired risks and outcomes? Healthcare organizations can do their diligence by asking direct questions to help identify the correct type of outsourcing partner who can preserve company values.
At Health Catalyst, our mission, business model, and unique expertise allow us to take an innovative approach to partnerships and outsourcing models. In our next article, Can Outsourcing Rescue Hospitals from Labor Challenges that Underpin their Financial Struggles? Part II: The Rescue, we will outline an outsourcing services solution to the healthcare financial crisis that many health systems have adopted with immediate success in their efforts to reduce labor costs and deploy improvements in financial, operational, and quality outcomes. Tech-Enabled Managed Services (TEMS), an outsourcing services engagement model, leverages people and technology for maximum value improvements and generates millions in annual labor cost savings with a proven approach to employee care.
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