Reports on healthcare labor trends indicate an improved outlook for hospitals

The labor picture continues to stabilize for hospitals even amid sustained high demand for healthcare services, according to new insights.

In its latest labor tracker, Fitch Ratings reported that hospital staff payrolls have been steadily expanding and now represent a 6.7% increase relative to the pre-pandemic month of February 2020. Hospitals added 18,650 jobs per month for the 12-month period through August, compared with 14,510 during the previous year-long stretch.

“Hospitals are still dealing with post-pandemic pent-up service demand, especially from seniors, that has kept labor needs high,” the analysis states.

Still, the latest data from the U.S. Bureau of Labor Statistics indicates a measure of equilibrium, with hospitals adding 9,600 positions in August — roughly in line with pre-pandemic levels. Meanwhile, ambulatory settings added 24,000 positions.

Job openings in the overall healthcare and social assistance sector have dropped this year from 7.9% in January to 6% in July, Fitch reported, although that’s still higher than the 2010-19 average of 4.2%. The numbers indicate “the ongoing shortage of clinical labor that will take time to address,” according to the analysis.

Improved stability in staffing is reflected in a reduction in the quits rate from 2.9% in May 2023 to 2.3% in July 2024. That’s still up from an average of 1.6% for 2010-19.

The expansion of hospital payrolls has been manageable lately due to tempered wage increases, Fitch wrote. Year-over-year employee earnings rose by 3% in 2024, compared with 4.2% in 2023, which was a period of intensified efforts to attract and keep hospital employees as a tactic to diminish the need for expensive contract labor.

In its monthly report on hospital financial trends, Strata Decision Technology wrote that labor expenses rose 5.7% year-over-year in July but were down by 4% per adjusted discharge.

An ongoing challenge

Lingering structural issues in the labor market will take time to modulate.

Moody’s newly released briefing (login required) on the state of the not-for-profit healthcare industry notes that hiring has been robust, amounting to almost 50% of hiring across industries in the latter half of 2023. But labor costs remain “a headwind” at a time when service demand is still high.

A workforce increase of about 15% will be needed through 2032 to meet demand at hospitals, the report projects. The majority of that will go toward filling the upcoming void left by retirements.

A recently released study commissioned by Mercer similarly found reason to anticipate shortages in some segments of healthcare. The shortfall will amount to more than 100,000 workers in the industry as of 2028, with substantial variance by state and role. For example, small surpluses are expected for registered nurses and physicians, with a deficit of 72,000 among nurse assistants.

Yet the adequacy of the labor supply is hard to predict at a time when Medicare enrollment is expected to surge just as larger segments of the workforce reach retirement age, according to insights from a September policy discussion of the Medicare Payment Advisory Commission (MedPAC).

“Another way of thinking about it is that there’s an unmet need [for clinical services], and there’s demand, and that demand is accelerating over time,” said Amol Navathe, MD, PhD, vice chair of MedPAC and a healthcare policy expert at the University of Pennsylvania. “If we took a snapshot right now, it looks like maybe we’re OK, but in the future we may not necessarily be.”

Tactics and strategies

Although the labor picture has settled down compared with recent years, some NFP hospitals are “still using bonus overtime pools,” Suzie Desai, sector lead of the not-for-profit healthcare group with S&P Global Ratings, said during an August webinar. “They’re trying to whittle that down a bit more, but that cost basis remains high and so remains a challenging point.”

In a counter to the notion that payrolls have been steadily rising across the board, she noted the workforce reductions that were reported at some hospitals seeking to right-size their staffing toward the end of 2023.

Said Desai, “The question will be: Does that stay sustained to keep the staffing at that lower level?”

Even though recruitment and retention strategies have proven to be vital over the last couple of years, those only go so far.

“The absolute volume of labor probably is not going to change that much,” Kevin Holloran, sector leader for not-for-profit healthcare with Fitch, said during an August webinar (Holloran is a member of HFMA’s Board of Directors). “Since we probably can’t get more bodies to help out, we have to make them more productive.”

Technology initiatives, including AI, loom as conceivable game-changers, he noted.

Other pressing concerns

For roughly a year, nonlabor expenses have ranked as potentially a more vexing short-term challenge than labor costs for hospital finance leaders.

Strata’s data for July showed a 10.8% year-over-year rise in nonlabor expenses, stemming from jumps of 17.3% for drugs, 16.4% for supplies and 12% for purchased services. Per adjusted discharged, nonlabor expenses ticked up by 1.9%, although the change in that metric from June to July was favorable: a 2.4% decrease.

“The industry will not be able to build lasting stability until we rein in rising expenses,” Steve Wasson, chief data and intelligence officer with Strata, said in a news release.

With inflation cooling in the general economy, the hope is for a similar shift in healthcare. Regarding drug costs, provisions in the Inflation Reduction Act were drafted to help curb rising prices, giving Medicare authority to negotiate the prices of 10 frequently utilized drugs for 2026 and 60 as of 2029.

However, accelerating increases in drug prices arise not only from pricing decisions by manufacturers and pharmacy benefit managers but also from dozens of shortages, many of which are rooted in structural issues in the supply chain.