Jodi’s Journal: Math problem with mixed messages in healthcare

November 6, 2022

I didn’t do the best job reporting on one of the biggest business stories bubbling beneath – and sometimes on – the surface of this community.

But I’m trying today.

The collision of financial factors hitting the healthcare industry is significant. It is not clear when or how it will all end and the potential impact on this community needs to be recognized. It’s also an evolving and complex landscape that can make it difficult to capture in a single message or even a series of it.

But let’s start here. Before the pandemic, most healthcare systems were making a 1 to 3 percent margin each year. During the worst of the pandemic, some were inflated with help from the federal government, but those dollars are gone.

Now health care systems are experiencing an inflationary increase in spending of 25 to 40 percent year after year.

“There are probably three components here: medical equipment, medical supplies, and the largest staffing,” said Tim Rave, president of the South Dakota Association of Healthcare Organizations.

“The math doesn’t work. That right there sums up exactly what’s going on.”

I was fortunate to recently moderate a discussion for the Sioux Falls Development Foundation that included the CEOs of both healthcare systems — Bill Gassen of Sanford Health and Bob Sutton of Avera Health — as well as Dana Dykhouse, CEO of First Premier Bank.

The focus of the event was on human resources development and the talk included, among other things, an open discussion on the situation the healthcare sector is facing.

You can watch much of it for yourself here – audio starts at 3:58.

“The workforce permeates almost every decision we make strategically,” Sutton said. “I would tell you that it is without question the No. 1 priority now.”

Here’s the irony you need to understand when trying to make sense of the landscape: at the same time, both systems are reluctant to fill some positions, reclassify some and eliminate others, and aggressively seek staff in areas where there are about direct patient care.

“On the one hand, we scale an organization to the right size from an administrative point of view, and on the other hand, we hire every person we can to take care of people. In the same organization. Same day,” Sutton said. “And if you think we don’t think that’s a mixed message, you’re wrong. And we also have to struggle with it as managers.”

For example, Gassen recently sent an email to all employees addressing Sanford to “complete programs outside of our core function and reduce administrative costs.”

At the same time, he announced that the system had 6,000 vacancies.

“We have a unique convergence of some challenges that are happening right now,” he said on the podium. “The difficulty around these messages is particularly challenging because it’s very, very true that … we’re hiring absolutely 6,000 people. We need 6,000 people. We probably need more than 6,000 staff today, and most of them will be in patient-facing areas.”

However, people come with a lot of costs. At least half of a hospital’s expenses are staff-related.

Now recall the multiple times during the pandemic when we reported that both healthcare systems have made unprecedented investments in their populations.

Weeks into the pandemic, Sanford Health waived employees’ health insurance premiums for months, paying most of them one-time “stability” payments. A year ago, every Avera Health employee received a portion of a $50 million investment in the workforce, which includes a minimum wage of $17 per hour and raises of at least $2 per hour per employee.

To me, this all made sense to retain and reward people whose services were vital. But that’s just a snapshot of how personnel costs have skyrocketed. Salary increases don’t go away; Instead, they pay interest year after year.

But the biggest strain came from paying contract staff — nurses and other support staff who worked for outside agencies and traveled across the country to fill staffing gaps during the worst of the pandemic. Traveling staff had been around for years, but consumption – and costs – had skyrocketed. It’s not uncommon to pay hundreds of dollars an hour for a traveling nurse. Of course, the nurse cannot keep the entire amount, but the payment is higher than what would be received in a more permanent position.

Utilization has declined, but these employees are still needed. Without that, how else do you even come close to filling thousands of vacancies?

“You still have your temps that you pay a premium for; regular employees see that and want more money,” Rave said. “Having to pay people more is a good thing… but that money has to come from somewhere. This must be a well thought out financial plan. Doing that spontaneously during the year just triples the problem everyone is facing.”

So you start with these personnel costs. Then put on medical devices and consumables that cost more. And the food needed for patients. And the fuel needed for vehicles. And next, spending is up 25 to 40 percent. But unlike some companies, healthcare can’t simply ramp up the revenue it brings in to try to break even.

“Hospitals can’t swing around in the middle of the year and change their prices,” Rave said. “But those contracts with insurers and Medicare and Medicaid, which are designated payers by the government, don’t change throughout the year either. So you wait until now when you negotiate those deals, or a month ago, and see what you can do for next year.”

But nobody expects payments to increase by 25 percent. A healthcare system member who was recently on another panel I moderated guessed maybe 3 percent. As Rave said, the math just doesn’t work.

This is not a problem unique to South Dakota either. Not even close.

The Minnesota Hospital Association recently released new data highlighting what it calls “slumping hospital and health system finances, exacerbated by the mounting health care workforce crisis.”

With job openings up nearly 250 percent in a year, acute hospital finances down 172 percent year-on-year, “labor and utility costs rising exponentially, and the need to rely on temporary workers, there is a severe strain on the workforce hospitals and state health systems,” the organization said.

“Our hospitals and healthcare systems strive to be there when Minnesotans need them, and they need help as the perfect storm — the financial impact of the pandemic and labor shortages — gets worse by the day,” said Dr. Rahul Koranne, MHA President and CEO.

The association’s 2022 MHA Workforce Report is based on a nationwide analysis of MHA members that includes Minnesota’s large healthcare systems and small rural hospitals. Show data:

  • The overall vacancy rate is 21 percent this year, compared to 6 percent in 2021.
  • More healthcare professionals are choosing to work part-time, making it more difficult for hospitals and healthcare systems to meet operational needs. For the first time, more than half – 57 percent – of registered nurses are not working full-time.
  • Overall, 44 percent of all hospital workers work less than full-time, up from 37 percent in 2016. This trend is higher among select occupations, including 68 percent of nursing technicians and 64 percent of certified nursing assistants.

And at the same time, our healthcare systems in Sioux Falls are navigating this environment from a human resources perspective, but must also continue to plan for future needs. Think solving this financial conundrum is as easy as not building any new buildings? It is not. Population projections and anticipated demographic needs show that we will not be able to take care of this growing region without continuing to invest in the projects that you see underway today and which I expect – and hope – you will see will see as early as next year.

“You need the buildings because you know a lot of people are going to be coming, and everyone wants, needs and expects those services to be there,” Rave agreed. “So you have to build the buildings and then try to staff them to take care of that volume.”

What does all this mean for us as a church? I think there needs to be an acknowledgment of the environment healthcare is facing and perhaps an adjustment of certain expectations. There are many organizations that have benefited tremendously from the trickle down effect and the generosity of these two large organizations being such an integral part of the community. But to ensure they’re sustainable and able to do their core job, which is supply, they’ll likely need to make adjustments. I would urge both businesses and nonprofits that receive significant support from healthcare systems to take a look inside, including ways to diversify their own customer or donor base. And I encourage them to be open to hiring health professionals whose jobs may have been disrupted as they seek new opportunities and bring coveted skills.

I have no doubt that there will be healthcare systems that come out of this economic period that don’t look the same as they did when they started. There will be mergers and even closures. It has already started nationwide. It is critical that Sioux Falls remains the strong locally-based health center that has shaped our economy for the past two decades or more. Whatever combination of public and private support, adaptation and innovation it takes to get there, it will be worth it.



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