RSM’s Wolf: Health System Leaders Will Face High Levels of Expenses for Years

Sept. 8, 2022
Matt Wolf, healthcare director at the RSM consulting firm, examines the prospect of years of elevated wage costs and staffing challenges facing health systems for years into the future

Recently, Matt Wolf, director and senior healthcare analyst at RSM, the Chicago-based tax, accounting and consulting firm, shared an analysis with the press, looking at some of the financial pressures facing hospitals, medical groups, and health systems, in the current economic landscape of healthcare. “While providers will feel the most pressure, wage inflation will challenge all health care organizations,” Wolf wrote. “The supply of health care labor, both clinical and non-clinical, will not meaningfully improve in the short- or medium-term. Meanwhile, demand for that labor will continue to increase, which will continue to push wages higher. Health care organizations will not be able to hire their way out of this shortage.”

Wolf continued on to say that, “Meanwhile, health care wages are growing at rates nearly 2-3 times that of the post-global financial crisis, pre-pandemic period. From June of 2009 through February of 2020, health care and social assistance wages increased at an annualized rate of 1.94 percent. Since the pandemic began, these same wages have increased 3.77 percent on an annualized basis. Senior care has seen a nearly three-fold increase in wage growth. Both increases are greater than the increased growth in all service sector wages (1.7x increase). Pre-pandemic, many providers would budget for narrow margins assuming 2-3-percent wage increases per year.”

Meanwhile, Wolf opined, “The senior care predicament is especially challenging. Wages are growing at nearly three times the pre-pandemic rate, and yet the sector cannot attract enough talent. Senior care employment is down 372,700 jobs from pre-pandemic levels, which represents a decrease of 11.14 percent. One in nine people employed in senior care have now left the industry post-pandemic. Meanwhile, 10,000 Americans turn 65 each day. Despite the demand and higher wages, senior living providers cannot attract enough talent. Health care providers are also experiencing elevated growth rates for medical supply costs. Over the post-global financial crisis and pre-pandemic period, medical supply costs grew 1.79% per year, on average. Since the pandemic began, those costs have growth 2.56% annually, which represents a 40% increase in growth. Most ecosystems are experiencing heightened inflation. However, unlike other service sectors, health care has limited ability to pass wage and supply cost increases on to customers- which in health care mean payers, including CMS, employers and patients. Government and commercial reimbursement rates increase, if at all, on a year or more lag, and likely won’t match inflation.”

And, he noted, “Payers will feel pressure to increase rates while also paying their employees significantly more, and while their customers (employers) are also pressured to managed benefit cost increases amid rising wage increases. The rate of wage growth may slow in the medium and long-term. However, nominal dollar wages will not decrease. Health care organizations will not be able to decrease the actual hourly wage or salary paid to employees. Meanwhile, consumer goods that patients are paying for are increasing at accelerated rates. Energy and gasoline costs have increased 41.6 percent and 60.6 percent on a year-over-year basis, respectively. Similarly, food, apparel and rent have increased 10.4 percent, 5.2 percent and 5.5 percent over the past year, respectively. These increases exceed the wage gains most employees have received over the past year.”

Healthcare Innovation Editor-in-Chief Mark Hagland spoke with Wolf regarding his analysis. Below are excerpts from that interview.

Start at 40,000 feet, with costs versus possible charges, what do you see right now across the U.S. healthcare system?

It’s not pretty. Let’s start with RSM’s focus: we’re a global professional services accounting and consulting firm, like the big four you’ve heard of; in our case, our focus is on the middle market, which in healthcare, is for a medical practice maybe up to $100 million in annual revenues, and in a health system, up to $15 billion in annual revenues. Historically, we saw an annual increase in wages for hospitals of 2-3 percent a year; now, we’re in an operating landscape where we’re seeing a 10-percent increase a year, when one considers the element of travel/contract nurses, and even locum tenens physicians; and most of that cost increase is falling to the bottom line. On the not-for-profit health system side, many hospital-based organizations had endowments or investments that could once help offset operating losses, but now with the market doing what it’s doing, they’re getting hit from all sides.

We will get through this inflationary environment, but the wages that healthcare providers are paying will not go down; the rates of increase will simply slow. And there’s an upward edge on how much any provider can pay, and we’re encouraging provider leaders to look not just at compensation, but, especially if you’re a mission-driven organization, reminding everyone why they entered healthcare, and really supporting that part of the experience, and focusing on that and bringing that forward. How can we create more flexible staffing models, and remote or hybrid models for the administrative staff?

One of the unforeseen consequences of sending everyone home to work remotely who could be sited remotely, during the worst of the pandemic, has been the de facto nationwide job market, one in which hospital-based health systems are competing now no longer competing with just the hospital down the street for talent in many areas, but with hospital-based organizations across the country, correct?

Yes, absolutely. And in some categories, we’re actually having to compete not only nationally but even globally. The challenges are especially big if you’re a mission-driven provider. For example, we work with a lot of children’s hospitals. And you can take your employees down and walk them through the NICU. But if your coders and revenue cycle management people are remote, it’s more difficult for them to see how special your organization is, on a day-to-day basis. And that’s where it becomes intentional. And yes, you might want to bring the remote people in, once or twice a year, just to reinforce the culture.

Traveling/agency nurse fees are coming down somewhat, but will they ever go back to pre-pandemic levels?

It’s hard to imagine they could. And the reality is that we’ve lost a lot of nurses who have just left the industry. And demand continues to increase even as the supply of nurses has continued to decrease. So that will push and keep wages elevated, whether it involves contract or employed nurses. And in some public-company earnings calls, they’ve talked about this, but also, in anecdotal reports, we’ve heard that the local nurse unions are pushing for 30- or even 40-percent wage increases over the next few years.

What are the smartest strategies around labor costs and costs overall, right now?

That’s a good question. We’ve seen a lot of hospitals and health systems creating new partnerships with nursing schools, and that can bear fruit. You could have externs in your hospitals, but some of your clinicians can also teach, and you can reduce some of that bottleneck that’s long existed. But it’s so much more than just signing a contract with a nursing school; it requires some procedural changes. But that will probably be a part of the solution for some organizations. And again, reminding everyone why they’re in healthcare, and creating processes that reduce some of the non-clinical work, to allow clinicians to focus on patient care. And third, we saw the pandemic disrupt this idea of what a typical workday might look like. There’s only so much flexibility available, but there have to be ways in which we can bring some flexibility to nurses in the way that they experience their days, as some of their friends who are office workers are enjoying. As for some of the traps that providers are falling into, one is the delusion that this will all be over soon, and we’ll return to the pre-pandemic models; we just won’t.

What about IT people, both as staff members, and as people who can advance automation?

Technology is inherently disinflationary. And speaking of nurses or IT professionals or most categories of labor, the demand for that kind of labor will outstrip supply significantly, and the only way to bridge that gap will be through automation. And the important part is to note that it’s not about removing the human being from care or squeezing in more primary care visits or having a skeleton crew of IT people doing more functions; it’s about helping people to work at the top of their abilities, whether they’re a systems admin or a cardiac surgeon. That said, implementing these tools can be difficult; it can require a lot of cultural change. Technology implementation is really about change management, and change management is really about people management. So let’s say we want to implement a natural language processing tool to help clinicians reduce their documentation load. That might be a great goal, but let’s start by looking at some of the back-office function, and look at some process changes there. Then, you can go to your clinician leaders and say, we’ve implemented tools to support the IT function, the revenue cycle function, the administrative function, and here’s what we’ve learned, and now we can look at some clinical areas. But the important part of this is that it’s a process, it’s a journey, it’s not a one-and-one.

How will all of this evolve forward over the next five years?

A few movements—consumerism and value-based care—that we had seen before the pandemic—will accelerate. We’re reaching an inflection point with costs becoming unsustainable. We need to shift faster from the fee-for-service model to the value-based model. You had asked how providers would manage rising costs along with stagnant reimbursement levels? I think that consumerism will play a role. Providers will have to go to individual consumers, employers, etc., and compete for contracts, and will have to know what it costs them to make a margin, and will learn what it takes to be sustainable and competitive. And one element there will be telehealth, digital health, virtual health. And the economics of value-based care are much more supportive of those technologies, and of pursuing the Quadruple Aim. Per technology being disinflationary, if we virtualize a service, we can transmit it across great distances cost-effectively. And that can increase access and even quality. And ultimately, per the idea of organizations having to operate in “two canoes,” at some point, we need to step out of the fee-for-service framework of payment.

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