everythingpossible
By Henry Reukauf
Multiple COVID surges dislocated the healthcare labor market and created a dramatic escalation in nursing labor costs. In our view, brighter days may be on the way.
In the healthcare provider space, nursing expense is the largest component of salaries, wages, and benefits (SW&B), which often represent more than 40% of revenue. As a result, a spike in nursing expense puts pressure on healthcare provider operating performance.
The duration and severity of the back-to-back Delta and Omicron COVID surges in the second half of 2021 and first quarter of 2022 created a dislocation in supply and demand for nurses. At the peak of the Omicron surge, the shortage of nurses was so severe that, in many markets, there were no nurses for hire at any price. As a result, the cost of temporary nurses increased from about $75/hour before the pandemic to over $200/hour in some markets, with temporary nurses in some instances making more than physicians. Although earlier COVID surges had caused spikes in the demand for nursing, the market had rebalanced fairly quickly. To the surprise of many providers, this was not the case after Omicron. The demand for temporary nurses remained strong, with the group making up 15 – 20% of total nurse staffing hours, up from 3 – 5% pre-COVID. Without quick normalization in nursing supply and demand, many healthcare providers had to reset their guidance for 2022.
Barring another disruptive COVID surge, however, we believe the market for nurses is now coming back into balance. We saw nurse staffing drop to 7 – 8% of total nurse staffing hours in the third quarter. This likely improve by more in future quarters. As temporary staffing declines, we think providers are in a decent position to manage labor costs and expand margins. Signs of this were evident at urban for-profit hospitals in the third quarter. Despite putting through mid-single-digit annual salary increases in the third quarter, they were able to keep SW&B per hour largely flat due to a reduction in the use of contract labor.
If the reduction in contract labor expense continues as we expect, healthcare providers’ performance could rebound in 2023. Patient volumes are also normalizing, with Omicron roughly two-and-a-half quarters behind us. Pricing, which always lags inflation due to the contracted nature of healthcare revenues, should also begin to catch up. The combination of an improved topline and moderating labor expense provides the base for our positive 2023 healthcare provider outlook.
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