High labor expenses still challenging providers

Medical groups’ median investment in each employed physician surpassed $300,000 for the first time ever in the third quarter, according to Kaufman Hall.

Article By: Emily Olsen

Blog Source From : https://www.healthcaredive.com/

Dive Brief:

• Heightened labor costs are still hitting health systems’ bottom lines, even as their finances have held relatively stable over the past year, according to two reports by consultancy Kaufman Hall. 
• Pricey contract labor costs have decreased, but the rest of the labor market is still tight, the consultancy said.
• Medical groups’ median investment per employed physician reached $304,312 in the third quarter, the first time the metric has risen above $300,000. The increase suggests current models of physician employment aren’t sustainable, Matthew Bates, managing director and physician enterprise service line leader at Kaufman Hall, said in a statement.

Dive Insight:

High labor costs aren’t a new problem for hospitals and medical groups. Labor expenses rose due to temporary hires and staffing shortages during the pandemic, hitting health systems particularly hard in 2022 and dragging down margins.

But the industry’s financial outlook began to improve last year, and hospital performance has recovered even more in 2024, according to Kaufman Hall’s Hospital Flash Report. 

Still, the sector is lagging behind financial targets from before the pandemic. Meanwhile, hospitals are now reporting increased inpatient revenue and average lengths of stay, suggesting they’re treating sicker patients.

“If this continues, organizations will need to contain expenses,” Erik Swanson, senior vice president and data and analytics group leader at Kaufman Hall, said in a statement.

Overall, hospitals’ operating margin index was 4.3% for the calendar year to date, a slight decline from previous months this year, which have hovered closer to 5%. 

Among medical groups, labor expenses have remained elevated, according to Kaufman Hall’s Physician Flash Report. The total direct expense per full-time provider increased 5% compared with the third quarter in 2023. Physician productivity also rose 6% year over year. 

As expenses rise, healthcare organizations should consider changing their physician employment models — like rewarding efficiency or using more advanced practice providers. according to the consultancy.

“Revenue is increasing but physicians and providers are working more while generating less revenue,” Bates said in a statement. “Health systems need to rethink operations to align the costs of provider employment with the current health care environment.”