Hospital labor costs rocketed over the last four years, hitting margins and cash flow hard, according to Moody's. And the problem isn't going away any time soon.
"The steep rise in healthcare wages over the last three years remains a structural problem and credit risk for the hospital industry," states Moody's Oct. 15 report on hospital financial performance. "While the wage growth rate will remain low in 2025, average hourly earnings will continue to top prior years. Reimbursement increases from payors, particularly government ones will not keep up with higher wages."
Moody's noted the median operating cash flow margin was 8.5% for nonprofit hospitals in 2019, before the pandemic, and dropped since then to 5.3% in 2023. Growing expenses in labor and supply costs are driving the change, with salaries and benefits comprising 53% of nonprofit hospitals' expenses, according to Moody's. Supply costs comprise 21% of the expenses, based on 2023 medians.
"We expect operating margins to remain below historical levels in 2025," the report states.
Nonprofit hospital operating margins are 4.2% on average, according to Kaufman Hall's National Hospital Flash Report released Oct. 3. From January to August, operating margins are 14% above where they were in 2023 but down 11% from 2021.
Labor costs shot up during the pandemic when hospitals needed expensive nurse staffing agencies to quickly increase staffing as they filled to capacity with COVID-19 patients. When the demand for nurses dropped, hospitals focused on hiring full time staff to reduce reliance on temporary labor. Hospitals now have more control over staffing costs and are offering more flexibility to permanent team members, according to the report, but it won't be enough to completely calm financial challenges.
"While hospitals are reporting lower expected wage increases for coming years, the existing high rates will persist," the report states. "Hospitals are taking steps to offset this hurdle by aiming to reduce current costs through improving efficiencies, scrutinizing the hiring process more closely, decreasing patient length of stay and aiming to find a better fit between employees' roles and their skill set."