Philly-area hospitals face an epic wage inflation surge, causing losses in the millions

A nationwide shortage of nurses and other staff continued to undermine the financial health of Philadelphia-area health systems during the first three months of the year, a period that included the worst of the devastating omicron wave.

Hiring and keeping staff now represents the biggest challenge for hospital executives, and they are spending heavily — hiring costly short-term help and boosting salaries and bonuses — in a desperate bid to fill out their nursing and staffing needs.

This unprecedented spending surge caused a rare loss for the University of Pennsylvania Health System as well as for Jefferson Health, Main Line Health, and Doylestown Hospital during the year’s first quarter. The need to pay more for workers has also dramatically slashed the performance of the Temple University Health System and Children’s Hospital of Philadelphia, records show.

“This is probably the number-one thing that is keeping me up at night,” Temple Health’s chief financial officer, Nicholas Barcellona, said this week, referring to rising salary and benefit expenses at the nonprofit system anchored in North Philadelphia.

Temple’s health system, which gets a huge share of its revenue from government insurance for poor people, is spending about $3 million a month on short-term help to cover nursing and other shifts, Barcellona told investors this week during a conference call on the system’s latest financial results.

That extra monthly labor expense is six times more than before the pandemic, he said later.

Productivity improvements — including those from technology upgrades and new beds that make moving patients easier and faster — cut that impact by a third, he said. But still, “this is a $2 million problem on a monthly run-rate perspective, so certainly the biggest challenge we face going into next year. We’re not alone in that.”

It’s a nationwide problem. Labor expenses at U.S. hospitals soared by 37% per patient between 2019 and March 2022, according to a recent report from Kaufman Hall, a Chicago health-care consulting firm. The spike came mainly from short-term labor contracts, which jumped to 11% of total labor expenses from 2% over the same period, the firm said.

“Skyrocketing labor costs, decreasing patient volume, and lower revenues create a perfect storm for steep declines in profit margins,” said Erik Swanson, senior vice president of data and analytics at Kaufman Hall.

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As if the financial weight from high-cost staff and disruptions to care when COVID-19 hospitalizations peak weren’t enough, another blow is building: regularly scheduled Medicare rate cuts, suspended during the pandemic, resumed in April with a 1% trim, with an additional 2% cut scheduled to start in July.

Despite the pressures, Temple’s operating profit in the March quarter held up better than others, falling by 50%, compared with a 60% drop at CHOP. Other major systems, Main Line Health (-$36 million), Jefferson Health (-$78 million), Tower (-$73 million), and Penn (-$15 million), had operating losses in the quarter.

Smaller systems are contending with even bigger losses relative to their size.

Standard & Poor’s, which evaluates hospital’s financial health, downgraded Doylestown Health this month by two notches, to a weak “BB” from “BBB-,” putting the Bucks County nonprofit into junk-bond territory. Doylestown lost $12.7 million on $106 million in revenue in the March quarter.

The losses are expected to keep building through the end of the hospitals’ fiscal year on June 30 largely because of “considerable staffing challenges and increases to labor expenses,” S&P said. Doylestown is not expected to return to profitability on an annual basis for three years, S&P said.

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Hospitals typically employ nurses full time and sometimes rely on so-called travel nurses to fill in the staffing gaps. These workers, also called agency or day nurses, get much higher pay than the regular workforce.

Payments to these short-term nurses have been rising dramatically during the pandemic. The median hourly wage for contract nurses more than doubled to $132 this year from $64 in 2019, while the rate for employed nurses rose just 11%, to $39 an hour from $35 an hour, Kaufman Hall reported.

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Since December, when the omicron wave started, Doylestown has spent $6.8 million in premium pay to encourage nurses to take extra shifts — on top of overtime. The organization also spent $3 million on agency staff, said chief financial officer Elizabeth Seeber. Historically, Doylestown used very little agency staff, especially not for registered nurses in the hospital, she said.

Plus, Doylestown last fall raised minimum wage for all staff to $15 an hour, from a range of $11 to $12 an hour, leading to an upward cascade for workers already making that or more, said Jim Brexler, Doylestown’s CEO. “That’s another $4- or $5 million on an annualized basis.”

Brexler said Doylestown’s plan to get back to profitability is conservative. “We did not put anything into our forecast that is not known,” he said.

Doylestown’s S&P credit rating is now one notch higher than the rating for the financially troubled Tower Health system. Tower, which reported a $72 million loss in the quarter, saw another drop in its cash reserves as it tries to unwind a string of money-losing acquisitions. Tower closed Brandywine and Jennersville Hospitals in the last six months and is trying to sell Chestnut Hill Hospital.

Penn’s $15 million operating loss in the March quarter came from a rugged January, when the system had a $45 million operating loss, the health system’s chief financial officer said during a March board meeting.

Keith Kasper said in a statement Wednesday that the system had “recovered from the peak financial impact of the omicron surge and we expect to end the fiscal year with a positive operating margin.” S&P said Penn, which owns six hospitals and has a large network of outpatient facilities, returned to profitability in February, more quickly than many peers nationally.

Penn is aiming to reduce the amount it has been spending on agency staff by 70% in the next year by boosting recruitment and retention efforts, Kasper said.

In its credit report dated May 24, S&P affirmed Penn’s strong AA rating and said the system’s outlook was stable. It said the focus on staff recruitment and retention could give the system greater stability in fiscal 2023 but warned that the nonprofit’s profit margins would remain under pressure through next month.