Nursing shortage will continue to pinch hospital margins

Hospitals will continue to feel financial pain stemming from the ongoing nursing shortage for the next three to four years, according to a new report.

Labor comprises more than half of most hospitals' operating revenue, and that share will continue to rise as turnover among nurses remains high and not enough new nurses enter the workforce, a report from Moody's Investors Service said. Providers will have to spend more to recruit qualified employees while the nursing shortage persists through 2025, according to the Bureau of Labor Statistics. They are already facing higher costs related to rising pharmaceutical prices and technological investments, compounded by waning reimbursement levels. The rapidly aging population and need for chronic disease management will drive nursing demand, particularly in areas in the southern and western regions of the country where there is stronger population growth and a weaker nursing pipeline. Rural providers will also be acutely impacted because they cannot match the compensation offered by urban hospitals and are not located close to nursing schools, Moody's said. The number of obesity and diabetes cases are disproportionately growing in the South while Florida, Texas and California have some the fastest rates of population growth and highest average age combined with the lowest number of nurses entering the workforce. Although the expanded nurse training programs and increasing number of eligible nurse educators are expected to bolster the nursing supply, it will still take three to four years for the supply to meet expected demand, Moody's analyst Safat Hannan said. In the meantime, providers will have to deal with an aging nursing workforce, competition from staffing and traveler agencies, and a scarcity of training programs and nursing instructors. Hospitals' average annual revenue growth of 5.7% between 2012 and 2016 exceeded salaries and benefits expense growth of 5.5%, according to Moody's annual medians. But that did not include recruitment expense, which is higher in growing economies because nurses are more willing to change jobs and providers must up the ante with better rates, bonuses and benefits to keep them on staff. "Salaries and benefits have risen for a variety of reasons, one is that hospitals are becoming more aggressive in adding physicians, another is the nursing shortage," said Bob Joyce, U.S. Bank's senior vice president and group head of healthcare and food industries. "All of that is putting pressure on the expense side." Recruiting a nurse in the home health sector used to cost $1,500 to $2,000 and he or she would produce about $100,000 in revenue, netting about a 10% margin, said Assaf Shalvi, CEO and founder of Swift Shift, software that aims to improve the recruiting process for home health clinicians. But in today's competitive landscape, recruitment costs closer to $5,000 and nurses are spending less time at a job, which narrows margins as Medicare and Medicaid reduce their reimbursement levels, he said. "The nurses are the ones that help people recover," Shalvi said. "Decreases in nursing staff increases readmissions and length of stay, which have negative impacts on hospitals." Adding to the expense of retaining and recruiting nurses, hospitals are partnering with local colleges to provide hands-on training to nursing students and creating internal pools to fill temporary vacancies without using contract labor. While these affiliations come with added cost, they also increase the likelihood that the student will choose to work at the hospital after he or she graduates and will be prepared through customized curriculum tailored to the organization. But flexible staffing models can exacerbate the problem and create a self-perpetuating cycle, said Tom Fahey, a partner at the law firm Nixon Peabody. "They end up with a nursing workforce that is called in when needed, and there is ultimately a morale and retention issue," he said. While more help is on the way, it will take time for nursing schools to increase the number of nurse educators. Data from the Health Resources and Services Administration show that enrollment for undergraduate nursing degrees increased 34% between 2012 and 2016 and is projected to increase by another 9% by 2019. The projected supply of nurses will be about 3.9 million by 2025 compared to the projected demand for nurses of 3.5 million over the same period. The number of doctoral nursing graduates also significantly increased by 22% per year from 512 in 2006 to 2,065 in 2011. Doctoral nursing graduates are the largest source of nursing educators and are projected to add nearly 2 million new entrants into the nursing profession by 2025, the report said. Telemedicine and electronic consultations will also increase access to clinical services in remote communities, but it is unclear if that will translate to a net reduction in the number of nurses needed at a hospital, according to the report. "We need to increase nurses' patient-facing time so they can make more money by delivering nursing services in a more scalable way through video and other virtual technology," Shalvi said. Nurses' value needs to match their pay, he added, with an example of a model that passes some of a providers' savings related to lower readmission rates to nurses. "We need to find ways to make nursing attractive to young people with getting paid quicker and a better recruitment process," Shalvi said. "That is the only way you are going to solve the shortage." Nursing shortages have also led to a number of lawsuits alleging that less staff compromises patient safety, which could translate to hefty settlements and harm hospitals' reputations. These lawsuits often allege that hospitals cut costs and corners in patient care. A smaller nursing staff can lead to more patient falls, late delivery of medication, undertrained nurses and unsanitary conditions.