Labor costs continue to be a major challenge for healthcare providers, even as the industry has experienced some financial stabilization. A recent report from Kaufman Hall highlights the growing pressure medical groups face due to rising expenses tied to employed physicians. For the first time ever, the median investment per employed physician surpassed $300,000 in the third quarter of 2024, reaching a staggering $304,312. This surge in costs is raising concerns about the sustainability of current physician employment models, and administrators may need to rethink strategies to maintain financial stability.
The Impact of High Labor Costs
Healthcare systems and medical groups have been grappling with heightened labor expenses since the pandemic, which resulted in temporary staffing shortages and increased reliance on contract labor. Although the cost of contract labor has decreased recently, the broader labor market remains tight. Hospitals and clinics are still feeling the effects of these elevated labor costs, which are squeezing operating margins and making it harder to achieve pre-pandemic financial targets.
According to Kaufman Hall’s Physician Flash Report, the total direct expense per full-time provider has increased by 5% compared to the same quarter in 2023, with physician productivity rising by 6%. This means that while physicians are working more, the revenue they are generating per hour is not increasing at the same rate, which creates an unsustainable financial model.
The Growing Cost of Employed Physicians
The report from Kaufman Hall underscores a key issue: the rising cost of employing physicians. The increase in the median investment per employed physician indicates that healthcare systems are spending more on their physician workforce, but the return on that investment may not be keeping pace. As expenses grow, hospitals and medical groups are finding it increasingly difficult to manage the cost-effectiveness of their staffing models.
Matthew Bates, managing director at Kaufman Hall, suggests that this financial trend is unsustainable and may require a reevaluation of current employment models. “Revenue is increasing, but physicians and providers are working more while generating less revenue,” Bates noted. He suggests that healthcare systems need to rethink their operations to align provider costs with the current healthcare environment.
The Future of Physician Employment Models
As labor costs continue to climb, healthcare administrators must explore alternative employment models to ensure long-term sustainability. Kaufman Hall recommends considering several key adjustments:
Rewarding Efficiency: By incentivizing more efficient work practices, healthcare systems can optimize physician productivity without incurring excessive labor costs. This could involve aligning compensation models with efficiency metrics or creating performance-based incentives.
Utilizing Advanced Practice Providers (APPs): Expanding the role of advanced practice providers—such as nurse practitioners and physician assistants—can help reduce labor costs while maintaining high-quality patient care. APPs can take on a broader range of responsibilities, allowing physicians to focus on more complex cases and improving overall workflow efficiency.
Reevaluating Staffing Models: Healthcare administrators should consider hybrid models that balance in-person and virtual care, as well as shift workloads to optimize staffing levels. Incorporating telehealth and other digital health technologies can also provide more flexibility and reduce the need for in-person visits, potentially alleviating some of the pressure on staffing resources.
The Path Forward
As the healthcare sector continues to recover from the pandemic, labor expenses remain a key area of focus. The rising costs associated with employing physicians are pushing healthcare systems to adapt and innovate in their approaches to staffing and compensation. With the median investment per employed physician surpassing $300,000 for the first time, administrators must consider how to balance the need for a highly skilled workforce with the financial realities of the current healthcare landscape.
The good news is that hospitals and medical groups are starting to see improvements in their financial outlook, with increased inpatient revenue and a reduction in costly contract labor. However, the industry’s long-term financial health will depend on finding sustainable models that align labor costs with revenue generation, while ensuring that patient care remains a top priority.
As healthcare administrators navigate this challenging environment, the key will be to foster a culture of innovation, efficiency, and adaptability. By embracing new models and being proactive in managing labor costs, healthcare organizations can ensure a future where both physicians and healthcare systems thrive.
Comments