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February 18, 2002 Issue

How Do Healthcare's Labor Shortages and Increasing Wages Impact My Healthcare Benefit Costs?

This article will not surprise those in the healthcare industry. For other readers, it is valuable to know how what is happening in the healthcare labor market impacts your organization's benefit costs.

Recent studies by the American Hospital Association and the Federation of American Hospitals reveal an alarming statistic. The current shortages in healthcare workers are worsening throughout the country while demand for healthcare services is dramatically increasing. Census levels, measured as number of beds filled, are over 100% of capacity in many organizations. The privilege of private rooms has given way to semi-private rooms with as many as three patients in a room.

Of the 1,092 healthcare organizations included in these studies, 60% saw a dramatic increase in their inability to attract and retain nurses and other critical staff over the past two years. The national nurse vacancy rate has risen to 13%. Imaging technicians (X-Ray / Radiology) have now topped the 15% vacancy rate level.

This has a dramatic impact on both the quality of care and customer satisfaction levels. Over one-third of the hospitals in these studies report dramatic increases in customer complaints due to the inability to respond in the manner patients and families expect. There are also serious overcrowdings in emergency rooms that are being used as "stand-by" units while waiting for patient rooms to come available.

To add additional concern, there is a movement for legislation dictating staffing levels (number of nurses per patient) in hospitals. The state of California, where many of these trends begin, recently announced required staffing ratios for all hospitals in the state. The ratios are as follows:

Medical Surgical Unit: one RN to six patients
Emergency Department: one RN to four patients
Intensive Care Unit: one RN to two patients

The implications of this are obvious. Any hospital not capable of maintaining these ratios will have to reduce patient loads or close beds in order to meet the ratios. With a growing nursing shortage, healthcare organizations will be under increased pressure by the communities they serve to do whatever it takes to hire more staff.

To address this and other staffing problems, over 89% of the hospitals in the study reported paying salary increases well above the national average of 3% to 4%. Starting rates for Nurses, Radiology Technologists, Pharmacists, Laboratory Technologists, and others have skyrocketed in the past year. Some regions move the start rate for RNs an average of 6% every six months. Recently, in two very different parts of the country (New Orleans and Boston), Imaging Tech start rates jumped $4.00 overnight. Starting Pharmacists with no experience command starting salaries over $70,000. Hiring and retention bonuses, some over $10,000, are more the norm than the exception.

In an unprecedented move, Republican Governor George Pataki of New York worked side by side with Dennis Rivera, the outspoken leader of New York's Healthcare 1199 SEIU union, to develop and pass a $1.8 billion healthcare funding package. This package directly subsidizes healthcare worker salaries and helps in the recruitment and retention efforts of hospitals and nursing homes. The package also guarantees no Medicaid reimbursement rate cuts for the next three years. This is a dramatic change in political strategy that only reinforces the critical nature of this issue.

The US Department of Labor recently released its report on healthcare costs for 2001. While the CPI for the country rose 1.6% on average in 2001 and 3.4% in 2000, the healthcare CPI rose 4.7% in 2001 and 4.2% in 2000. The two areas that influenced this healthcare CPI rise are prescription drug costs and overall hospital service costs, primary compensation. Between 60% and 70% of a hospital's expense budget is directly impacted by labor costs.

Hospital service costs rose 7.1% in 2001 and 6.2% in 2000. The impact of this is dramatic. Watson Wyatt Worldwide predicts that healthcare benefit costs to American business will increase over 15% in 2002. A large part of this increase can be directly tied back to the inflationary spiral of healthcare labor costs.

The future does not look promising. Approximately 50% of Astron Solutions' client base is healthcare related organizations. We see increased activity in conducting market surveys for clients. Human Resource departments are under constant pressure to respond to department and line management requests for additional staff. Community Boards complain to top management that services are not satisfactory. The Federal government is entertaining budget cuts in Medicare reimbursements.
There is some hope for the future, however. Recent studies show a 3.5% increase in Nursing school enrollments, the first increase in several years. Major corporations, like Johnson & Johnson, have joined forces with healthcare organizations to market healthcare professions to high school students. State hospital associations focus on how to make the profession more attractive.

Yet in the short-term, we anticipate continued wage inflation in the healthcare industry. This will have a profound impact on the cost of healthcare benefit programs.

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ISSN Number 1549-0467