How hospitals’ labor cost responses to the COVID-19 pandemic, differed and what the lessons learned mean for the future

Some hospitals slashed labor costs, others did not, in response to the COVID-19 pandemic’s economic fallout.

Two weeks after Black River Memorial Hospital followed federal guidance and suspended elective procedures in mid-March, the depth of the financial challenge became clear to its leaders.

“(We realized) we were going to have a lot of people without work and that we were going to see a significant drop off in revenue,” said Matthew Streeter, CFO for the critical access hospital in Black River Falls, Wisconsin.

It was a profound consequence of COVID-19 pandemic policy responses that quickly became clear to hospital finance leaders across the country.

The shutdown of non-emergent care varied widely, but frequently lasted a couple months. As a result, hospital revenue plunged by historic proportions.

“The total decimation of elective procedures caused a level of losses in March, April and May that we have never seen in a hundred years,” said James Blake, a managing director for Kaufman Hall.

Hospitals lost $202.6 billion from March through June, according to estimates by the American Hospital Association.¹ That included $161.4 billion in lost revenue from suspended non-emergent care.

Hospital finance leaders needed to balance their books to keep their organizations operational. Emergency infusions from bank loans and federal grants early in the pandemic helped the organizations, but many realized they needed to cut costs, as well. 

Labor costs, by far the largest hospital expense, became a logical target of many financial sustainability efforts. But it was also a choice fraught with non-financial considerations, which drove widely varying decisions among those organizations.

What hospitals decided not only affects their current financial positions but also may indicate their future responses to further waves of the virus and long-term labor directions for the industry, experts say.

Black River’s approach

Black River Memorial Hospital marks March 10 as the beginning of its pandemic response. That was when the hospital activated its incident command to prepare for an expected surge, which never materialized.

The hospital responded to rapidly changing guidance from federal and state health agencies with a modified suspension of elective care.

“We decided we’re going to continue to provide all emergency, essential and time-sensitive services the way we always have, and we’re going to provide it safely and effectively with our teams,” Streeter said. “Anything that can be put off, we will put off for the safety of our community.”

To address the resulting financial losses, the hospital took advantage of various types of federal assistance, including loans through the Paycheck Protection Program (PPP). The hospital of 360 employees qualified for the small business loan, which is forgiven if organizations meet employee retention rules.

“That was a game-changer for us,” Streeter said about the nearly $5.5 million obtained through PPP.

Beyond that federal loan program, the leadership of the hospital, which is the third-largest employer in its county, decided to prioritize the full retention of all of its employees, even as neighboring health systems undertook layoffs, furloughs and pay cuts.

“We were looking for a way to keep our people whole, while knowing the hospital was going to suffer financially from a lack of revenue,” Streeter said.

As the hospital closed service lines, its leaders realized new needs were popping up, such as for COVID-19 screening and testing. So they redeployed staff from suspended services to operate their drive-up COVID-19 testing and screening hotline, and to perform increased cleaning throughout the facilities.

Cross training was provided to surgical staff to deliver emergency department care, and the 25-bed hospital prepared for an emergency expansion of up to 80 beds.

Some staff were redeployed to help the hospital’s large home care and home hospice program after a surge in which local nursing homes and assisted-living providers stopped taking admissions and residents became reluctant to go to any healthcare facility.

In mid-May, after an eight-week suspension, the hospital started to gradually reopen its service lines and began to shift staff back to those roles, while continuing to operate the drive-up COVID-19 testing and its hotline.

The labor response also included asking staff to take on new roles. One RN who loved painting asked to move to environmental services to do that work, even though it came with a pay cut.

“Generally, the pandemic has done a lot for teamwork and a sense of community, both within and without our facilities,” Streeter said.

Industry approaches diverge

The challenge of responding to severe revenue losses was broadly felt by hospitals. And their 2020 labor costs veered wildly over the course of the year, according to industry tracking.

By July, the year-to-date labor expense per adjusted discharge had increased 18%, and FTEs per adjusted occupied beds increased nearly 9%, according to data from 800 hospitals tracked by Kaufman Hall.

The data indicated that as the patient volumes declined, most hospitals, overall, did not commensurately cut or furlough staff, said Erik Swanson, a vice president for Kaufman Hall.

“The volumes at those hospitals dropped by a far greater degree than labor expenses did,” Swanson said. 

By July, monthly patient volume broadly returned to pre-pandemic levels — amid major regional lags — and labor expense was 1% under budget. 

A caveat to the apparent financial equilibrium in July was that it was still a departure from the long-term trend of slowly increasing labor expenses, Swanson said. That could indicate the broad effects of ongoing furloughs and other labor cost controls.

The Kaufman Hall data indicate three overall hospital labor cost responses to the pandemic’s revenue losses:

• Immediate labor cost reduction
• Delayed labor cost reduction
• No job cuts

National expense observations

	Budget variance	Month-over-month	Year-over-year
Total expense	-1.3%	2.3%	1.4%
Total labor expense	-1.2%	3.9%	1.0%
Total non-labor expense	-1.1%	1.7%	2.3%
Supply expense	1.2%	5.5%	3.2%
Drugs expense	-0.9%	6.1%	4.8%
Purchased service expense	-1.3%	4.1%	6.0%
Total expense per adjusted discharge	4.7%	-3.0%	9.4%
Labor expense per adjusted discharge	4.1%	-1.7%	8.3%
FTEs per adjusted occupied bed (AOB)	-1.0%	-0.7%	0.2%
Non-labor expense per adjusted discharge	4.5%	-3.6%	10.5%
Supply expense per adjusted discharge	8.2%	1.4%	11.9%
Drug expense per adjusted discharge	3.5%	3.6%	13.9%

Source: Kaufman Hall data for July 2020. Unless noted, figures are actuals and medians.

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Those that cut labor costs early were more likely for-profit organizations. Other hospitals took no initial action on labor costs but finally decided to implement cuts, Blake said.

“Ultimately, they started to take action this summer, as they saw [revenue] really wasn’t coming back as much as they thought,” Blake said.

Hospitals most likely to cut positions, according to Kaufman Hall, were the smallest, with fewer than 26 beds. Such hospitals are more likely rural.

Labor cuts were most likely to have occurred at the 40% of financially vulnerable organizations, according to a Definitive Healthcare survey in May of 81 acute care organizations.

Acute care organizations that self-identified as financially at risk of closure laid off staff at nearly four times the rate of those not at risk, 38% versus 10%.

“Particularly for rural hospitals, who already struggled to attract and retain physicians and, generally, those rural areas contain older patients with higher rates of chronic conditions,” said Matthew Valley, a data analyst for Definitive Healthcare. “In that respect, COVID is making an already bad situation worse for those rural hospitals.”

By August, Definitive Healthcare, a healthcare data analytics firm, had identified 75 facility closures — most temporary — because of the pandemic’s financial toll.

The survey also found more than 80% of organizations repurposed staff to fulfill new obligations.

Another effort to retain staff

Edward-Elmhurst Health, an integrated health system in Illinois, also prioritized staff retention amid revenue declines as deep as 53% in April.

Instead of eliminating any of its 7,000 FTEs, the health system undertook a series of rolling labor policies, as the pandemic unfolded.

The state mandated the suspension of elective care in March, and Edward-Elmhurst continued to pay all staff through April, whether they were working or not. By May, the health system began to mandate PTO. If employees had no accrued PTO, they were allowed to borrow against future PTO.

The response aimed to, at least, match competitors, that were not undertaking mass layoffs.

“We didn’t want to lose people because we were doing more draconian measures than other systems were and then have employees leave and go to work for other employers and not be able to get them back,” said Denise Chamberlain, CFO for Edward-Elmhurst Health.

For June, July and August, the health system looked to its departments to focus on productivity targets, using both furloughs and PTO to achieve them due to reduced volumes. 

Other labor responses included reducing the health system’s retirement matching payments, cutting the travel budget and postponing a decision on merit pay outlays scheduled for January. Additionally, departments were asked to consider whether they needed to fill vacant positions. Future labor cost changes could include restructuring its health insurance benefits. 

The system also continued a pre-pandemic policy requiring all new positions that were not nursing or direct patient care to receive approval from a senior executive committee.

Another labor response was immediate formation of a health systemwide labor pool to bring nurses from closed physician offices to fill hospital needs for lower-acuity observation patients. Training was provided on the use of the electronic health record and inpatient care. Some inpatient hospital nurses also received ICU training.

The health system was too large to qualify for PPP loans, but it was bolstered by federal grants from the CARES Act.

It also is tracking eligible expenses, like testing sites, refrigerator trailers, excess PPE and labor pool training for possible FEMA grants.

Since the state’s reopening, most staff have returned to previous positions, and others retained new permanent positions, such as greeters at entrances to ensure infection control. 

The health system planned ahead so when Illinois gave notice that the ban would lift on May 11, it was able to have surgeries scheduled that day beginning at 6:30 a.m.

Although patient volumes generally have returned to pre-pandemic levels, ED volumes and physician office use have been much slower to return.

A doubling of the health system’s share of revenue from uninsured and Medicaid patients from pre-pandemic levels has resulted in higher gross revenue than a year ago, but lower net revenues.

“That’s my bigger concern,” Chamberlain said. “I can get the patients back; I just don’t know if that will generate enough revenue to cover the higher costs of taking care of patients.”

For instance, PPE costs increased 500% during the early months of the pandemic and remain higher than normal, she said.

So far, the health system’s finances have been bolstered by bank loans, a de-risked investment portfolio, CARES grants and Medicare advanced payment loans.

“Right now, it’s all about cash,” Chamberlain says. “Making sure we have enough cash to survive.”

What the future holds

Although Edward-Elmhurst has cut its capital spending budget in half this year, as a cost-reduction move, future investments remain a priority. One potential future expansion is the launch of a hospital-at-home program, which could free inpatient capacity with a less labor-intensive option. 

“We learned a lot from COVID about better ways to take care of patients without them having to be in the hospital, because nobody wanted to come,” Chamberlain said.

Also, Edward-Elmhurst is talking to health plans about taking on more risk-based contracts, shortening patient lengths of stay and garnering commensurate payments for moving patients to less-costly home-based settings.

“It’s about continuing to march forward maybe at a little more accelerated pace toward the healthcare of the future, which will have different care models and different payment models,” Chamberlain said.

The health system also is running various possible future financial scenarios, given the ongoing pandemic. 

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Acute care hospital staffing adjustments

Organizations identifying as being at risk for closure as a result of the COVID-19 pandemic are more than twice as likely to have laid off nonessential staff already (22% v. 10%).

• 84% repurposed acute care staff
• 77% repurposed non-acute care staff
• 63% have at-risk, non-frontline staffers work from home
• 57% furloughed non-essential staff
• 21% sourcing or attempting to source staff from less impacted areas
• 15% laid off non-essential staff
• 9% requested recently retired staff to consider returning
• 3% hired/planning to hire medical students about to graduate
• 5% none of the above

Source: Definitive Healthcare Executive Summary. Data collected between April 30, 2020, through May 7, 2020.

^1. AHA, Hospitals and health systems face unprecedented financial pressures due to COVID-19, May 2020.