Will rising nurse pay mean higher healthcare costs? It’s complicated

Erica Carbajal and Jakob Emerson – Friday, December 15th, 2023

The year 2023 was full of labor union wins — in healthcare and beyond. Now hospitals nationwide must grapple with higher nurse salaries, teeing up further tensions with insurers, employers, and the potential for increased premiums.

From Hollywood writers to healthcare workers, nearly 900,000 unionized U.S. employees secured double-digit pay increases throughout the year, according to data analyzed by CNN.

“I would say this is the best run of wage increases won by labor since the period right after the end of World War II,” Art Wheaton, director of labor studies at Ithaca, N.Y.-based Cornell University, told the news outlet.

As of Dec. 13, 967 strikes and labor protests happened this year across 1,347 locations nationwide, according to a labor action tracker managed by Cornell’s School of Industrial and Labor Relations. Zooming in, 183 of those actions occurred in the healthcare and social assistance sector and 46 were strikes.

The labor movement across healthcare has garnered widespread support from Americans. According to an AFL-CIO poll of 1,200 registered voters from both major parties in August, 75% of respondents said they are in favor of “workers going on strike to negotiate for better wages, benefits and working conditions.”

Nurses and other clinicians secured historic pay raises this year, such as a 37% increase to the average base wage at Oregon Health & Science University in Portland and an average raise of 40% over four years for employees at Providence Cedars-Sinai Tarzana (Calif.) Medical Center. Several health systems also moved to raise their minimum wages for employees.

“While it is very difficult to predict what will happen next, I think that the recent uptick in healthcare strikes will continue for at least the near future,” Johnnie Kallas, a PhD candidate and director of the Cornell labor action tracker, previously told Becker’s. “Many of these recent strikes have emerged from the first set of contract negotiations for unionized workers since the beginning of the pandemic, which obviously exacerbated many of the issues, like understaffing, already confronting healthcare workers.”

Of the nation’s 16 most populated industries, registered nurses are projected to see the greatest increase in hourly pay by 2033 when accounting for inflation, according to October research from telecommunications company TollFreeForwarding, which sourced data from the Bureau of Labor Statistics. RNs are projected to earn an adjusted $58.31 per hour by 2033, an increase of nearly $13 per hour. Physicians are estimated to earn $118.62 per hour in 2033, the highest of all the professions researched, though nearly $3 less per hour than what they currently earn.

Such raises are playing out against the backdrop of a financial atmosphere for hospitals and health systems that is still recovering from COVID-19. On average, hospital finances appear to be stabilizing following 2022, which by some estimates was the worst operating year on record. Now, 2024 has been categorized as another “make or break” year for healthcare finances, with high labor costs and widespread staff shortages expected to drive the persistence of weak margins.

Meanwhile, the healthcare workforce’s demands around improved staffing and compensation are unlikely to waver anytime soon, especially as the nation faces an estimated shortfall of 800,000 nurses by 2027. So what will all of this mean for the cost of healthcare going forward?

A complex question

Labor costs typically make up more than 50% of an average health system’s total expenses, so there is no equation in which a double-digit increase of those costs would not lead to higher prices for consumers and patients down the line, former health system leaders say.

“The ultimate impact here is it will drive up the overall cost of care,” Marvin O’Quinn, former president, and COO of Chicago-based CommonSpirit, told Becker’s during a July podcast. “There’s no avoiding that. As the unit cost goes up, that cost at some point is going to have to be passed on.”

Stephen Klasko, an adviser at General Catalyst and the former CEO of Philadelphia-based Jefferson Health, and Robert Pearl, MD, former CEO of Kaiser’s Permanente Medical Group, echoed that sentiment.

“It’s ridiculous to say in an algebraic way that if [labor costs] go up 20 to 25% that it’s not going to have an effect on either my ability to survive or coming up with some way that healthcare is going to get more expensive. That’s a fact,” Mr. Klasko told Becker’s.

“Nursing costs are no different than any other cost,” Dr. Pearl, MD, a professor at Stanford (Calif.) University School of Medicine, told Becker’s. “With everything we do that adds cost, it either gets passed on to the insurer or to the patient.”

Hospitals’ contracts with payers typically arise every two to four years, meaning higher worker pay secured this year would not appear in reimbursement negotiations just yet. In the short term, self-insured employers will likely accept higher healthcare costs, according to Dr. Pearl. For 2023, annual family premiums for employer-sponsored health coverage reached an average of nearly $24,000, up 7% from 2022, according to KFF’s 25th annual Employer Health Benefits Survey published in October.

“The real question is, what are we going to see in the long term?” Dr. Pearl asked. “Because if insurers negotiate harder or refuse to agree to the coverage in contracts, which we’re already seeing happen, hospitals are going to have to respond. The unknown is, will that pressure happen or not?”

During third-quarter earnings calls with investors, executives at some of the nation’s largest health systems were not shy about discussing “increasingly aggressive behavior” they say is coming from insurers. In the third quarter, at least 21 contract disputes became public and were covered in the media compared to 11 during the same period in 2022, a 91% increase, according to data published in October by FTI Consulting.

“Hospitals will find a way to shift the costs; they will not eat into profits,” Ge Bai, PhD, professor of accounting and health policy at Baltimore-based Johns Hopkins University, told Becker’s. “I would be surprised if higher labor costs don’t translate to higher costs for consumers.”

According to Dr. Bai, the financial impact on patients once a hospital’s labor costs go up depends on the labor competition and cost variations among facilities in an individual market. If all hospitals in a market face increases in worker salaries, then the cost will be passed on as higher prices for patients. If higher salaries occur only in unionized hospitals, those hospitals will become less competitive with non-unionized hospitals in their market that may offer more competitive prices.

“This is really about markets and the cards a hospital holds,” Dr. Bai said.

Though higher labor costs are expected to trickle down on some level to consumers in the coming years, those increases will not necessarily correlate directly to higher care costs.

“Historically, we haven’t seen a direct correlation between healthcare labor costs and increases to consumers,” Tim Nanof, vice president of government affairs and policy at the American Nurses Association, told Becker’s. “When an input to the methodology of payment and cost increases, it could have an impact on the system, but it isn’t a direct correlation.

“If nursing labor costs increased by, let’s say 11%, that doesn’t necessarily correlate to an 11% increase in costs to consumers at the hospital, and it certainly also doesn’t mean that Medicare or private insurers or others are going to pay an additional amount either for the cost of care that’s there.”

Union activity in healthcare in 2023 was often about much more than pay, especially for nurses. Workplace safety, staffing levels and other work environment issues are also key drivers emboldening nurses to demand more from their employers.

“If we can improve the work environment, it might be a way to stabilize labor costs as well,” Mr. Nanof said.

Managing cost shifts

Rising care costs as a result of higher labor costs will ultimately depend on a health system’s ability to manage all of its expenses effectively. Rather than faulting nurses and other clinicians for the rising cost of care, leaders should focus on improving efficiency across their organizations to mitigate the level of increase that gets passed down, former system executives and nurse union leaders say.

“It’s laughable to talk about rising consumer prices as a result of a nurse getting a raise,” Renée Saldaña, a spokesperson for SEIU-UHW, told Becker’s. “Hospitals could be reinvesting into their workforce without making cuts elsewhere or raising premiums through payers.”

Costs could go up significantly, but “that’s assuming you’re not doing anything else” to reduce them, Mr. Klasko said.

When it comes to cost control, now is the time for health systems to look carefully at where to integrate or consolidate, reassess return on investment on different programs that show up on profit and loss statements, and consider ways to repurpose brick-and-mortar facilities as more care moves outside hospital walls.

“To make up for higher labor costs, hospitals often try to shed services that aren’t making a lot of money and refocus on the ones that are,” which organizations should be careful in doing so as not to create access barriers for patients within their communities, John Silver, PhD, RN, a healthcare policy expert, told Becker’s.

Managing these factors successfully will require leaders to get comfortable acknowledging that inefficiencies — perhaps many of them — exist within their organizations.

“The easy thing is to blame the nurses and the unions” — a position that absolves organizations from taking accountability and strategic action, Mr. Klasko said. “The smart health systems will look and say, ‘By definition, we are an inefficient organization, so how can we still provide quality care and make some of those appropriate cost shifting [decisions] that aren’t going to affect quality and aren’t going to affect burnout?”

Public sentiment is generally in nurses’ favor when it comes to higher pay. Among Democrats and Republicans, 59% believe nurses are underpaid, while only 11% say the same about physicians. Such findings suggest consumers may have some level of tolerability for a bump in healthcare costs, if they had information and resources to clearly lay out if and how they are picking up the tab for hospitals’ cost shifting.

Getting to a place where consumers can truly “shop” and make more cost-effective decisions on where to seek care will require more clarity on why there are cost differentiations between one facility and another, and how nurse staffing and quality fit into the equation.

“That level of transparency is important from both a quality as well as a cost perspective,” Mr. Nanof said.

Higher nursing labor costs may also be offset through enhanced efficiency and patient outcomes, studies suggest. Research has linked higher RN staffing levels with stronger hospital financial performance in more competitive markets.

Staffing models and technology

Moving forward, having everyone in the healthcare delivery ecosystem working at the top of their license will become increasingly important in improving nurse satisfaction and maximizing efficiency. Right now, there are sporadic examples of health systems embracing models that incorporate more licensed practical nurses and patient care techs to elevate bedside RNs, for example, though it is not yet a standard.

“It’s important to have healthcare staff operating at their highest level of capacity to get that really good value to the healthcare consumer, and to the hospital system and employer,” Mr. Nanof said. “That means allowing nurse practitioners and RNs to do everything that is within their scope of practice, and be focusing really at the top of that so that at each level, you’re getting the maximum amount of value for those professionals.”

A few years ahead, there will not be a world in which hospital and health systems’ strategies to maximize efficiency within staffing models and manage costs leave out technology, Mr. Klasko said. In his work at General Catalyst, he sees many advancements worth being optimistic about, including collaborative robots and artificial intelligence models that can support front-line clinicians with tasks that fall below what they are licensed to do, such as follow-up calls with patients.

“The ability to make 100 calls an hour to seniors to see how they’re doing has a transformative opportunity where nurses can then be doing more” of what they’re licensed to do, he said.

“The more that you can employ these collaborative robots or superstaff AI, we can have a rediscussion around ‘what is the right staffing model,'” Mr. Klasko said. “Because then what [nurses can be focused on] is really just directly taking care of patients. That, I think, will create different numbers, happier nurses, and will end up being less expensive. To me, that’s the optimistic piece.”