State of the State Mid-2022: Soaring contract labor costs moving Baptist to the red

Almost $100 million in extra expenses for traveling nurses and other contract labor brought on primarily by the COVID-19 pandemic will cause Little Rock-based Baptist Health to lose money this fiscal year. But it’s not just Baptist Health struggling with staffing issues.

“[In] 2020 and 2021, we were in the black, and we are severely in the red in 2022. … I don’t see a way that we will be positive by year end,” said Troy Wells, president and CEO of the 11-hospital Baptist Health system in Arkansas.

In fiscal year 2021, Baptist Health paid $89 million in contract premium labor costs outside of its normal cost of business, primarily for traveling staff, but federal dollars helped offset the costs. In 2022, Baptist Health had planned on $74 million for premium labor, but at its current pace it will exceed that by about $20 million. It’s also spending another $35 million in wage adjustments, primarily for nursing. Wells said that represents roughly a 10% increase in the overall budget for a system with about $1.8 billion in total revenues.

“It’s like a revolving door: our folks going to travel, and we would then in turn have to bring travelers in, and that comes at a huge cost that we’re still challenged with today,” he said.

Likewise, the University of Arkansas for Medical Sciences spent $44 million on contract labor in its last fiscal year ending June 30, said Dr. Steppi Mette, CEO of UAMS Medical Center and vice chancellor for UAMS Health. The year before the COVID pandemic began, UAMS paid $600,000 for contract labor. UAMS is counting on its contract labor costs being cut in half, but it’s too early to predict, Mette said. Market forces are bringing the price of contract labor down 30-40%, and the number of contract laborers at UAMS has fallen from a peak in the high-200s to 190-220 in a total workforce of 11,000 people.

“We’re always on the verge of having to think about cutting back elective services just because we don’t have adequate staff to staff the care, which is a painful thing for any health care system to think about,” he said.

Mette said high labor costs along with a 30% increase in pharmaceutical and supply costs are eating into UAMS’s clinical enterprise, which normally generates a margin between $50 and $70 million and helps support the system’s other missions. The system has not closed its books for the last fiscal year, but the hospital was able to improve its position through government stimulus dollars that no longer are being offered.

“We’ll just about break even for this past fiscal year, but I can’t tell you for sure,” he said.

CERTIFICATION CHALLENGE
Wells said nursing has become a national job market, which means Arkansas is competing with other states for wages even though it has the nation’s lowest commercial insurance reimbursement rates. Mette also said Arkansas has lower Medicare reimbursements than any other state.

The expenses for traveling nurses came as the profession was already facing a nursing shortage. Wells said hospitals will have to provide health care using fewer people through technology and by finding ways to train other caregivers to fill some of those roles.

“We’re looking back at, how did we do this 50 years ago?” he said. “Well, we trained a lot of clinical people on the job, and over the past 50 years, you’ve had all these licensure requirements, certification requirements, things that different societies that represent these professionals have created, and it’s made it really difficult to move people into the workforce quickly.”

Wells said some two-year certifications need to be shortened or eliminated. He anticipates there will be efforts to address workforce restrictions in the 2023 legislative session.

The workforce shortage is not as acute among physicians as they are among nurses. Baptist Health recently graduated its first class of family medicine and internal medicine physicians from its new residency program at its North Little Rock campus. About half are remaining in Arkansas. About 90 to 100 physicians are in training in the North Little Rock program in those disciplines and in psychiatry.

INFLATION HIT
Baptist Health is also dealing with ongoing double-digit inflation expenses for medical supplies and with supply chain disruptions.

“On a given day, we’ve got 20 things that we can’t find,” Wells said.

Wells said hospitals can’t pass costs on to their customers. Baptist Health can’t simply ask for more money from Medicare and Medicaid, its largest revenue sources. Baptist Health is negotiating with commercial payers, as is UAMS.

“If we don’t find ways to do this together, then we’re going to be starving our health care institutions in this state, and it’s going to be really difficult to recover from that,” Wells said. “So I think we’ve got to be looking at this differently than we have in the past. This is not a situation where you sit down and the payers try to give you as little as possible, and the providers try to get as much as possible because that’s how you negotiate. We have to be really thoughtful about the path forward because if we’re not, we’ve got major, major challenges with health care institutions in Arkansas.”

Wells said large, independent hospitals and small- to midsize health systems will be cooperating with expenses for information technology, electronic medical records and other digital tools. Hospitals’ financial challenges could lead to more mergers and acquisitions. Wells said small, independent hospitals are navigating a difficult environment.

“We’ve had people talk with us, you know, what do we do, and are there opportunities? I think we’ll continue to see that,” he said.

RURAL CHANGE, COVID CASES
Dr. Joe Thompson, president and CEO of the Arkansas Center for Health Improvement, said the state’s expansion of Medicaid eligibility under the Affordable Care Act continues to be a “safety net” for hospitals.

“It’s $2-plus billion a year pumped out into the health care system, and I think you see the effects of that on hospital closures in surrounding states that we’ve not had yet,” he said. “That does not mean that the effects of the pandemic don’t heighten the risk to our hospitals. I think we’re just kind of in the early stabilization phase where we’ll see how much economic hardship our hospitals are going to face going forward.”

He said hospitals will consider whether to be designated as rural emergency hospitals under Medicare through the federal Consolidated Appropriations Act of 2021. The new designation allows hospitals to provide emergency services, observation care and additional services without providing longer-term care. Regulations are being formulated by the Arkansas State Board of Health. Thompson said the designation will be in some hospitals’ best interest.

COVID cases have been increasing in recent days. Wells said more employees are testing positive, so the system is having to manage its workforce. Mette said UAMS is seeing COVID hospitalization rates equivalent to March and April, but many are hospitalized for other reasons and testing positive while there, and fewer patients are in the ICU. At Baptist Health, 66% of the COVID-positive patients have COVID-19 listed as their primary reason for hospitalization.

Among the positive outcomes from the pandemic has been increased cooperation within the Baptist Health system when intensive care unit beds are low. Wells said the system created an access center that helps find the right bed for patients. In the past, hospitals with emergencies typically first contacted the Little Rock hospital, but the system’s Conway facility might have an available bed.

Mette said demand for care has increased. He said UAMS has become more efficient and has streamlined some of its processes.

“The spirit of cooperation and teamwork and can-do attitude of our organization has improved quite dramatically, so we proved to ourselves that we can rise to any occasion and get the work done and provide high-quality care,” he said.

Wells said growth in retail use of telemedicine has tapered off. While it was a necessary tool in early to mid-2020, its highest use since then has been in behavioral health care and by women in their 20s. Baptist Health is focusing on using telemedicine to provide specialty care for places with limited access.

“It’s come down quite dramatically,” he said. “Now, it’s higher than it was before the pandemic, but there was a huge use in 2020, and then it started to trail back down as doctors’ offices started to open back up. It turned out people liked seeing the doctor in person.”

Editor’s note: Link here to connect to the State of the State section.