Counting the Costs: The Impact of the Nursing Shortage on Healthcare Budgets

Hospitals and health systems across the United States are navigating tough financial challenges. With rising costs and tight budgets, it remains a challenge for hospitals to invest in patient care initiatives, embrace innovative technologies, and fairly compensate nurses. As a result, many hospitals are turning to contract labor and relying on overtime to fill gaps and maintain access to care. While this approach increases costs, it can also add extra pressure on our hardworking nurses. Even with these costly solutions to fill shifts, the labor shortage remains a challenge. Fortunately, healthcare organizations have the opportunity to leverage technology and implement advanced staffing solutions, helping to create a more sustainable workforce and improve the quality of patient care.

The Growing Gap in Hospital Margins 

You might think that the financial burden is easing post-pandemic, but that is not entirely the case. While there is slight improvement in funding, 40% of hospitals are still operating at a loss. According to Kaufman Hall, top performing hospitals reported margins around 30% while the lowest hospitals are at -16.1% indicating a growing gap. This gap is worsened by the nursing shortage and the high costs demanded by agency nurses and labor contracts. The health systems that learn to navigate workplace flexibility will be able to offset the high financial burden caused by labor costs. 

The Cost of Labor 

While nursing salaries make up 30% of total expenses for hospitals, this number is inflated as contract labor is used to fill gaps and maintain access to care. The reliance on temporary staffing solutions can lead to high labor costs, as hospitals often pay premium rates to secure contract nurses and overtime for existing staff. Between expensive contract labor and overtime, hospitals are relying on the two most expensive forms of labor. 

The demand from the pandemic forced many facilities to absorb these additional costs. Although the immediate effects of the pandemic have decreased, the need for nurses continues to grow. This is even more true for smaller, rural hospitals where the workforce pool is smaller and recruitment is challenging.

 In addition, unexpected fluctuations in labor supply and demand can directly impact costs, driving up salaries and contract rates when shortages occur. As a result, hospitals are forced to pay these high premiums for labor, so much that the increase in wages and benefits of employees in medical care has outpaced inflation across the broader economy.  

The graph above shows that medical care prices have generally grown faster than overall consumer prices. In June 2024, medical prices grew by 3.3% from the previous year, higher than the 3.0% overall annual inflation right. 

Turning to Short Term Labor

Despite the increased compensation, labor shortages persist. Employee burnout, stressful working conditions, and the aging workforce have led to a mass exit of nurses in recent years. As a result, hospitals are forced to spend large sums of money to hire, train and recruit nurses to fill the gaps. According to the American Hospital Association, advertised wage rates for all hospital positions rose 10.1% in 2023. While hospitals invest more to fill the gaps, they still struggle to find qualified staff. Not only does this hurt the bottom line for hospitals, but short-term labor support can lead to an increased risk in errors, miscommunication and result in a decline in highly reliable practices. Nurses unfamiliar with hospital protocols can negatively affect care quality.

In our last blog post, we explored the concept of Community Connectivity, noting that nurses who understand their local hospital’s processes and reside in the surrounding neighborhoods provide better care in those settings. Hence contract labor can lead to increase errors.

The Consequences of Understaffing 

Some hospitals have been imposed high fines for not addressing the shortage, compounding the problem even more. Nurses at a large hospital in the northeast were awarded $2 million due to consistent understaffing. The ruling found that nurses worked understaffed shifts both day and night across multiple departments. It was found that understaffing had not improved in the current period compared to the previous six months. While the hospital blamed sick calls as the reason for understanding, the arbitrator rejected the argument and stated that the hospital’s efforts to recruit more nurses was insufficient. As a result, the hospital was ordered to hire enough nurses to comply with the union contract, provide meals breaks and periods free from patient assignment to make the workload more bearable.

As legislative bodies crack down on understaffing, fining is becoming increasingly common. Hospitals that don’t address understaffing are facing financial consequences, only exacerbating their already strained financial situation.

Filling Shifts Without the High Costs 

Between the high costs of nursing salaries, fluctuating demand and unexpected fines, hospitals are overwhelmed with rising costs. One of the solutions is to make sure critical shifts are filled without overburdening current nurses/staff. This can be a challenge as filling unexpected open shifts can be time consuming. Schedulers and staffing coordinators often have to rely on going to a few key nurses they know will say yes, or rely on contract labor to fill short term gaps. This only promotes burnout and drives up expenses. 

At Andgo, our automated shift filling solution offers a smarter way to manage staffing needs. Our software enables employees to call off shifts and pick up shifts without the need to contact a scheduler. In face of unexpected absences or high demand, automated shift filling software can quickly identify open shifts and send callouts to eligible staff. By automating that process, it significantly reduces the time it takes to fill a shift from 35 minutes to 3 or less. The scheduler who traditionally would be consumed with that task is relieved of the responsibility, freeing up time to focus on other tasks. With greater flexibility in employee schedules, employee satisfaction is likely to rise and therefore turnover will decrease. By using automated solutions like Andgo, hospitals can minimize reliance on contract labor and better utilize internal staff. By addressing understaffing, not only do hospitals boost morale and engagement, but reduce the risk of turnover and protect their bottom lines.