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Published in Health Care
DeVos Children’s Hospital in Grand Rapids. DeVos Children’s Hospital in Grand Rapids. COURTESY PHOTO

Rocked by unprecedented cost pressures, Michigan hospitals face ‘very, very challenging’ outlook

BY Thursday, December 22, 2022 04:19pm

Health systems across Michigan head toward 2023 facing major financial headwinds from an intensifying worker shortage that has sharply driven up labor costs that cut hard into their bottom lines.

The steep costs for contract labor to fill gaps created by the staffing shortage, especially in nursing, plus the resulting higher costs to recruit and retain staff in a tight and fiercely competitive labor market, have pushed expenses up markedly.

Those significantly higher expenses for labor, as well as for supplies, have pushed down operating margins for national and Michigan hospitals, which are unable to pass on the rising costs under existing reimbursement contracts with health insurers.

“Under the sunniest of days, it’s a low-margin business. You put in any demand shock or supply shock and that quickly takes a single digit or mid-single digit operating margin and drops it to low single digit to negative,” said Dr. Rakesh Pai, president of University of Michigan Health Partners and chief population health officer for University of Michigan Health-West.

“Everyone is asking for more money, yet we don’t have any pricing power in any way, shape or form. It’s all locked in many years ago,” Pai said. “We haven’t had a lot of those CPI (consumer price index) kinds of things in contracts because we’ve had, historically, price stability for 40-whatever years.”

From 2021 through October this year, total labor expenses at hospitals nationwide increased 10 percent, according to the latest monthly report on hospital financial performance by health care management consulting firm Kaufman, Hall and Associates LLC. Total expenses increased 8 percent for U.S. hospitals in the same period, while revenues grew only 3 percent, according to the report.

Hospitals and health systems across the U.S. posted a collective median operating margin of negative 0.5 percent through October. That’s actually an improvement from early 2022, when median margins hit negative 3.4 percent in February. That compares to positive operating margins nationally of 4.3 percent in November and December 2021.

Diminished financial performance as of midyear led Corewell Health in September to eliminate 400 positions across the state in a move to address rising costs.

Corewell Health, which was created with this year’s merger between Spectrum Health in Grand Rapids and Southfield-based Beaumont Health, recorded $59.1 million in operating income on $10 billion in operating revenue for the first nine months of 2022, for a scant 0.6-percent margin.

The $100.3 million in state and federal funding that Corewell Health received this year lifted net operating income to $159.4 million through the third quarter, according to a November quarterly financial report that attributed the low margin in part to “higher agency and critical staffing costs in our care delivery divisions.”

The results for Corewell Health reflect how health systems have sought to meet the staffing storage with higher pay, sign-on and retention bonuses, and using high-cost travel nursing agencies.

The Michigan Health & Hospital Association estimates that hospitals in the state will pay more than $1.22 billion for contract labor in 2022, four times the 2020 cost. Michigan hospitals this year also will pay another $108 million in retention bonuses, nearly seven times the amount paid in 2020, and $74 million in recruiting bonuses, an increase of more than 250 percent compared to two years ago.

Hospitals today face a “very, very challenging situation when it comes to the bottom line performance,” Michigan Health & Hospital Association CEO Brian Peters said in a recent media briefing. Hospitals’ finances are “challenged today perhaps as never before,” Peters said.

“The preponderance of our membership right now would tell you they have seen worse financial performance to this point in the year than they have seen in many, many years, perhaps decades. They are under water in terms of the patient care margins,” Peters said. “It is really a very, very challenging situation when it comes to the bottom line performance of our hospitals.”

The nursing shortage has resulted in Michigan hospital staffing 1,700 fewer beds today than in 2020, plus longer ER wait times and greater difficulty transferring patients between care providers, according to the MHA.

Some health systems have collaborated with colleges to replenish the talent pipeline in the long term.

Most recently, University of Michigan Health-West partnered with Grand Rapids Community College to provide financial support to nursing students. 

Under the initiative, the health system intends to pay for up to three semesters of tuition for students enrolled in GRCC’s nursing program who have completed one semester of their instruction. Nursing students accepted into the program would have to commit to working at University of Michigan Health-West for two years after earning a two-year degree at GRCC and securing their state license.

Even with those kinds of efforts, the nurse staffing shortage will persist through 2023 and beyond, according to Peters.

“The creation and expansion of partnerships between Michigan hospitals and health systems and higher education are designed to make improvements to the talent pipeline and improve staffing. However, it still will take at least several years before graduates of those programs enter the workforce,” Peters said. “We anticipate staffing to remain at existing levels for some time unless more resources are dedicated to make Michigan hospital careers more competitive with both competing industries and other health care organizations across the country.”

State lawmakers earlier this year appropriated $300 million in assistance for Michigan hospitals to cover pandemic-related expenses and lost revenues. Legislators directed $225 million of that money toward training, recruiting and retaining health care workers.

The MHA has since asked Gov. Whitmer and legislators for further assistance, a request that may come up for consideration in early 2023.

“As helpful as they have been, the problem is not solved. The problem has not gone away,” Peters said. “The ability to increase the talent pipeline should alleviate the reliance on contract labor, which in turn will help address some financial pressures. Yet until changes are made to reimbursement to account for inflation, hospitals will continue to provide care at rates that fail to account for growing expenses and will harm the viability of hospitals and health systems, and in turn, jeopardize access to care for Michiganders.”

In the recent media briefing, Peters could not speculate on whether the tight finances for many hospitals may spur more mergers among Michigan health systems, although “what we do know is this activity has been on the rise — we know what the drivers of that trend have been, certainly.”

Days later, Lansing-based Sparrow Health announced plans to merge into University of Michigan Health. The deal should close in the first half of 2023, pending regulatory approval.

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