Labor shortages have led to significant financial challenges for many hospitals, according to a report from Moody's Investors Service released Monday—and these challenges are expected to continue as hospitals struggle to offset growing labor costs.

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Labor costs increasing with worker shortages

Due to labor shortages, many hospitals have faced increasing labor costs as they turn to new strategies, such as wage increases and other incentives, to retain their current workforce and attract new employees, Modern Healthcare reports.

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For example, a Kaufman Hall poll found that around 75% of surveyed health system administrators said they raised clinicians' base salaries, and almost 90% said they raised wages for support staff. In addition, nearly 60% said they paid staff for more overtime hours, and more than two-thirds said they offered signing bonuses to attract new workers.

According to Moody's report, these incentives and other retention strategies will likely help reduce the long-term impact of labor shortages, but they will also "cause hospitals' costs to increase in 2022 as salaries and benefits typically represent at least half of a hospital's expenses."

In addition, Moody's wrote that hospitals could face higher costs from new contracts if labor shortages "spark an increase in unionization efforts or lead to more difficult negotiations between unions and providers."

Hospitals will likely face long-term financial challenges

According to Moody's, the current shortage of health care workers will continue and "erode financial performance for both not-for-profit and for-profit hospitals into 2022," making it difficult for hospitals to return to their pre-pandemic profit margins.

Operating cash flow margins for not-for-profit hospitals fell from 8.3% in 2019 to 7% in 2020, and Moody's projected that this negative trend will continue over the next few years.

In addition, Moody's noted that hospitals will have limited opportunities to offset the increasing cost of wages, in part due to staff shortages for lucrative elective procedures and an inability to charge more for their services.

"Given their substantial reliance on government reimbursement sources, such as Medicare and Medicaid, most healthcare providers maintain limited pricing flexibility to offset the costs of higher wages," Moody’s report said. "While there are opportunities for more lucrative commercial insurance contracts, rates are the subject of intense negotiations, limiting providers' pricing power. Providers with strong liquidity and diversified cash flow will remain better positioned to manage stress from cost constraints." (Gillespie, Modern Healthcare, 10/26; American Hospital Association, 10/26; Muoio, Fierce Healthcare, 10/26)