Can Healthcare Outsourcing Rescue Hospitals from Labor Challenges that Underpin Their Financial Struggles? Part 1: The Struggle

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.

• Hospital margin on reimbursement for Medicare services was expected to fall from -8 percent in 2020 to -9 percent in 2022, even though Medicare and Medicaid account for the majority of hospital utilization.
• Waning federal support for COVID-19.
• Still a growing number of payers, with increasing complexity surrounding policies, making billing
• more costly, time-consuming and eroding returns.
• Rising acuity levels.
• Social and patient care behavior challenges as patients may change their care pathways, clinical preferences, and when they seek care.

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.

1. Hiring managers see the pool of qualified candidates continuously shrinking, contributing heavily to the
   demand for higher wages and more flexibility. In addition, many qualified candidates have chosen to
   leave healthcare in general after the pandemic invigorated the desire for work-life balance. Remote first work and baby boomers entering retirement have made the market more competitive.
2. The administrative burdens of labor management remain prevalent. For example, applicants per opening (APO) for nursing-specific roles remain consistently low, while the operations expense of filling and re-filling roles is rising.
3. Lengthy recruiting and hiring processes make it harder for current team members to combat burnout as the “Great Resignation” ripples through hospitals nationwide. According to the 2022 NSI National Health Care Retention & RN Staffing Report, hospital turnover increased by 6.4 percent and currently stands at 25.9 percent. The average cost of turnover for a bedside RN is $46,100, resulting in the average hospital losing between $5.2 million and $9 million.
4. Increased dependencies on contract staff and staffing agencies as well as efforts to recruit and retain top talent are sending hospitals into historic financial hardship. Billing rates and staffing costs continue to climb as healthcare systems struggle to meet the cost demand. The American Hospital Association (AHA) reported that hourly billing rates hospitals pay staffing firms for contract employees increased 213 percent compared to pre-pandemic levels and led to a 62 percent profit margin for contract staff
   agencies.
   

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.

The Downfall of Versatility for Hospitals

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.

1. There are no guarantees that hospitals won’t fail. Over the course of 2022, 19 hospitals filed for bankruptcy, closed, or announced plans to close, according to other reports.
2. The more these organizations must focus on emergent financial and labor crises, the less bandwidth they have for patient care and future strategies.
   

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.

• Provider facilities must find a way to regain their margins and liquidity levels in the short term. Short-term strategies are almost certain to include cost-cutting measures, as many revenue drivers require additional investment or are simply outside the provider facilities’ control. Determining where and when to cut costs will be challenging as these decisions have resounding and lasting impacts on organizations.
• Provider facilities can no longer consider labor strategies as an afterthought. Workforce optimization and productivity monitoring are ranked as chief priorities for Chief Financial Officers (CFOs) in 2023. According to the AHA report above, leaders’ top departmental goals for this year are reducing costs, managing improvement initiatives, and managing productivity.
• Short-term efforts must be weighed against their impact on the organization’s long-term efforts. To do this effectively, organizations must be clear on what they can do best and establish a vision for how they will get there. Organizations that fail to do this will continue to be “scattered, diffused, and inconsistent” in their performance.

Impact of Reducing or Outsourcing Healthcare Jobs

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.

Layoffs and Workforce Reductions

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.

Advantage:

• Highly effective at reducing short-term costs.

Disadvantages:

• Cost savings may come at the expense of quality.
• Negative community perceptions (local employment impacts).
• Negative impact on the morale of remaining team members may even increase burnout in adjacent teams.
• May contribute to increased long-term costs if they need to bring the roles back (now with higher salaries, added recruiting costs, and training costs).
• May prevent or create a bottleneck for revenue.
• May not align with the mission of the organization, for example, eliminating analytics and reporting staff that help the organization identify high-impact areas and monitor performance.

Job Changes for Efficiency Gains

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.

Advantages:

• Focuses on removing waste from processes.
• Aims to prevent labor reductions at the expense of quality.

Disadvantages:

• Takes time to materialize, doesn’t yield immediate cost savings.
• Savings are not guaranteed.
• May require additional investment to achieve efficiencies, including areas like staff, reporting, and technology.
• May impact morale with additional required work in the short-term, and employees may feel
• like they are working themselves out of a job.

The Typical Scenario

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.

Advantages:

• Highly effective at reducing short-term cost.
• May be an effective long-term cost-reduction strategy.
• One less distraction from patient care.

Disadvantages:

• Inherent risks include disruption to workflow with new people/process/technologies, people who are less qualified or skilled, and resources may extend themselves thin as a dedicated team is too costly.
• Lack of transparency/control.
• Negative community perceptions (local employment impacts).
• Negative impact on the morale of remaining team members.
• May not produce long-term sustainable cost reduction.
• May not align with the mission of the organization.

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.

Healthcare Outsourcing Done Smartly

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.

• Will our employees benefit—or at least not be adversely affected?
• Will we strengthen our capabilities as we pursue a broader organizational strategy?
• Will we increase our organization’s flexibility and innovation?
• Will we bolster our organization’s reputation and brand?
• Will we improve our long-term financial performance?
• Will we realize short-term and long-term cost savings?
• Will the partnership be mutually beneficial and allow each party to focus on key areas that they are uniquely suited to deliver on?

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.

Additional Reading

Would you like to learn more about this topic? Here are some articles we suggest:

• Data-Driven Labor Management Delivers Financial and Operational Improvements
• Analytics Improves Population Health Operational Insight and Reduces Labor Costs
• Automating Professional Practice Evaluation Improves Quality and Saves Thousands of Labor Hours
• Can Outsourcing Rescue Hospitals from Labor Challenges that Underpin their Financial Struggles? Part II: The Rescue