The hiring surge combined with slow revenue growth could challenge hospital budgets, say industry observers.

Oct. 30—Even as hospitals brace for lower reimbursements from government and commercial payers, new projections predict healthcare employment will increase by four million by 2026 and healthcare will account for one-third of all projected new jobs.

The Bureau of Labor Statistics (BLS) forecasts that healthcare will become the largest employment sector by 2026, growing from 12.2 percent of all U.S. jobs in 2016 to 13.8 percent.

An aging Baby Boomer population, longer lifespans, and growing numbers of Americans with chronic conditions that require care and treatment are driving the trend, BLS said. Five of the 10 fastest growing jobs are in healthcare.

While some healthcare researchers and economists were not surprised by the ongoing trends, most predicted difficult financial challenges ahead for hospitals. Labor accounts for more than half of all hospital expenses.

Meanwhile, hospitals face planned cuts of more than $300 billion in disproportionate share hospital (DSH) payments and trims in annual Medicare inflation rates over the next decade, advocates note.

Beth Wexler, vice president and senior credit officer for Moody’s Investors’ Service, said the BLS projection of increased healthcare hiring did not surprise her.

“Health care is very labor intensive and increasingly relies upon technology. The more sophisticated the technology, the greater the need for more sophisticated labor,” Wexler said in an interview.

“There’s not just a growing need, but a growing expensive need. Hospitals are contending with the biggest piece of operating budget, which is growing faster than revenues,” said Wexler, citing an August Moody’s report. ‘We’re seeing a rise in costs in a time of slower growth. Organizations are turning to consolidation and mergers to combat the growing expense side.”

Hospitals are taking a variety of approaches to curbing rising labor costs, Wexler said. Those range from re-examining employee benefits and pension packages to reducing the cost of employee health insurance.

Unsustainable Growth

Bob Kocher, MD, a partner with the venture capital firm Venrock and an adjunct professor at the Stanford University School of Medicine, said lowering healthcare costs in the long term will require cutting the number of healthcare workers, lowering wages or improving  labor productivity.

Kocher, a former special assistant to the President for healthcare, predicted more layoffs in the short term, even as hospitals continue to raise prices.

“At some point Americans won’t be able to afford hospitals or the insurance to pay for their healthcare,” Kocher said. “If you’re running a health system and you’ve been raising prices 5 to 17 percent per year, how long can you do that before the system breaks or you get excluded from insurance contracts?”

He suggested hospitals make salaries performance-based to offer strong incentives to improve productivity. On the clinical side, hospitals should focus on the profitability of physician activities.  

“As reimbursements shift, it becomes increasingly important to do better on quality measures,” he said.

David Muhlestein, PhD, chief researcher for Leavitt Partners, said in the 1990s health care was not a dominant industry.

“But now it’s the dominant industry in 35 states,” Muhlestein said in an interview. “This is a big opportunity for hospitals to increase their efficiency by decreasing the number of higher paid workers, with fewer physicians and more physician assistants and nurse practitioners. We will see fewer high cost employees at the top leveraged to extend the work of lower cost employees on the bottom of the pyramid.”

Muhlestein advised hospital executives to know their markets.

“While some geographic regions are contracting, others may be expanding,” Muhlestein said. “Know what changes are happening within your markets relating to demographics, employers, and payers. Know that the BLS will be accurate nationally, but take the time to customize a market plan for your own market.”

Changing World

John Romley, associate professor in the Price School of Public Policy at the University of Southern California and an economist at the Schaeffer Center for Health Policy and Economics, said in the past decade hospital employment has grown at double the rate of national growth.

“But there is reason for concern. The growth is moving away from hospitals to lower cost care settings. The Medicare Payment Advisory Commission tracked hospital profit margins and found between 2007 and 2015, average margins rose from 6 percent average to a 7 percent average. Hospitals are in better shape financially than they were a decade ago. But the future will be challenging in healthcare.”

Romley said hospital executives recognize the world is changing beneath their feet.

“So they are increasingly playing a greater part in systems of care for the populations they serve,” he said. 

Romley said he doubted the historic hospital employment rates will continue in the future.

"Hospitals need to figure out how to deliver higher value care, not only within the confines of their facilities, but within other partnering providers.”

In recent years, hospitals have done well at improving productivity compared to the rest of the economy, Romley said.

“But we do not see that those improvements have translated to cost reductions to payers and patients,” Romley said. “But improving the care can constrain costs. And hospitals will need to focus more on that than in past.”

Ani Turner, co-director of Altarum’s Center for Sustainable Health Spending, said hospitals continue to expand horizontally into owning or partnering with HMOs, ambulatory surgery centers (ASCs), and nursing homes.

“Depending on what happens with insurance coverage—and especially Medicaid—you will see different demands for staffing in hospitals,” Turner said in an interview. “We saw the effects on healthcare growth associated with expanded coverage under the [Affordable Care Act] ACA.”

 Shifts in demand are part of a broad, long-term underlying trend, she said.

“Hospitals are operating in a world where the demand will still be there, but the mechanisms for paying for it are less reliable,” Turner said.

Thomas Tobin, head of healthcare research for Hedgeye, an investment advisory firm, looked at the BLS report with skepticism.

“To me the overall growth in healthcare occupations is still not a very impressive number,” Tobin said in an interview. “It’s incremental growth, not big numbers.”

Tobin said a Hedgeye analysis found stagnant demand in the post-ACA climate. While he sees most growth in the Medicare population, he noted “there’s not a lot of profit in that sector.”

“What drives profit is commercial insurance and if your commercial insurance line is already low and threatened by high deductibles and premiums, that will slow as well,” Tobin said. “Over time we’ll still have many people employed in healthcare, but fewer in acute care settings and more in lower acuity settings.”

The trends in the post-ACA period aren’t temporary phenomena, Tobin said.

“We are heading into a deflationary environment for health care, especially for inpatient hospitals,” Tobin said. “There is going to be a big opportunity for those that can figure out how to survive and succeed and the only credible advice I can give is to run faster than the other guy.”

Mark Taylor is a freelance writer based in Chicago. 

Publication Date: Monday, October 30, 2017