Why the healthcare industry could face an ultimatum: Keep hiring or lower costs

By Beth Jones Sanborn for Healthcare Finance News

While the healthcare industry has been much-lauded for continued job growth, adding jobs on a consistent basis, experts say that economic boost may be a double-edged sword, bolstering one of the most lamented aspects of the healthcare industry, rising costs.

In a JAMA Viewpoint post, authors Jonathan Skinner and Amitabh Chandra argued that the focus must be right-sizing jobs to employees, closing inefficient facilities and resisting the urge to take unexpectedly healthy operating margins for a ride by expanding employment haphazardly. Skinner is a healthcare economist and professor at in the Department of Economics at Dartmouth College Geisel School of Medicine. Chandra is an economist, professor of public policy and director of health policy research at the Kennedy School of Government at Harvard University.

After an unprecedented decline in U.S. healthcare spending noted in 2013, that experts and the media alike partially attributed to the slowing of healthcare cost growth, one thing experts at the time didn’t note was that the decline in spending was accompanied by the continued increase of healthcare job growth.

Skinner and Chandra said that in reality, healthcare job growth was a predictor of cost growth still to come. Since 2013, healthcare costs have gone from 17.3 percent of GDP to 18 percent in November 2017. Healthcare jobs have continued their march as well, rising to an annual rate of 2.1 percent, adding 2.8 million jobs from December 2007 to December 2017, meaning nearly one in every three new jobs in the United States is in healthcare, the authors wrote.

“It is not surprising that employment growth should be a bellwether for rising healthcare expenditures because salaries and wages account for an average 55 percent of operating expenses for hospitals, physician offices, and outpatient care, and nearly 70 percent of hospital expenses. The problem is that the United States cannot reduce growth of healthcare costs without a corresponding moderation in the growth of healthcare employment,” they said.

The association is especially strong for nonprofits, which makes up the majority of most U.S. hospitals. Unlike for-profit industries that will cut employment and return those gains to shareholders, nonprofits can’t return gains and so they often will expand services and technology or add staff. All of these can raise costs in the short or long term. New technologies might require new or more staff. New staff must be paid salaries and new services will often require new staff to perform them.

The Affordable Care Act also had several strategies in place that, though designed to cut costs, may have necessitated new hiring.

“Employees of hospitals and clinics are busy and because they do not have time to effect cost-saving innovations, these organizations often hire new employees to implement the cost-saving innovations….These new tasks such as care coordination and population health may improve health outcomes but represent new salary expenses, thus reducing the likelihood that overall spending will decline or plateau,” Skinner and Chandra wrote.

Ironically, improved cost controls need a slowdown in growth that might jeopardize the overall stability healthcare workers have enjoyed. Though certain large systems that are seeing reorganizations have instituted layoffs, like Tenet’s recent job cuts.

Skinner and Chandra said the industry must fix its eyes on “the human resources department.” Hiring freezes are unlikely to be successful because they perpetuate ineffective worker allocations, prevent the hiring of needed workers, and the fallout can mean more strain on current employees. The authors also suggest analyzing and potentially reducing “excessive salaries” for hospital administrators.

More than anything though, Skinner and Chandra said overall hiring needs to be appropriate. Right-sizing jobs to employees who will perform the duties well and at the lowest cost and closing inefficient or unneeded facilities are other suggested measures. Resisting the urge to take advantage of “unexpectedly healthy profit margins” and hiring additional staff as it could mean future layoffs when the financial outlook changes. If profit margins have proven healthy over a protracted period of time and are concretely forecasted to continue, those opportunities should be evaluated.