Economy stokes tensions between hospitals, labor

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UPMC's battles with the Service Employees International Union in Pittsburgh and with the hospital's nurses in Altoona aren't outliers -- they are signs of the times, and illustrative of the cost pressures and labor issues that health systems are facing nationally.

Those cost and revenue pressures will get worse over the next several years, leading to more frequent layoffs and clashes with union-represented employee groups, experts say.

"There's only so many ways you can address it," said Jim Smith, a senior vice president with The Camden Group, a national health care consultancy. In most health systems, staffing accounts for around 55 percent of total costs. Half of that is tied up in nursing personnel, Mr. Smith said. It's why nursing employees often bear the brunt of hospitals' cost-cutting moves.

But no one is immune, Mr. Smith said. Non-clinical administrative personnel are particularly at risk and could be staring at pink slips or, at the very least, frozen wages and more expensive health benefits.

Hospitals already work on thin operating margins -- 3 percent is the national median, according to Fitch Ratings. And those margins figure to get thinner still without some serious cost-cutting, thanks to a variety of factors.

Most of the factors can be explained with simple math: Hospital clinical and supply costs are outpacing payment increases from Medicare, Medicaid and private insurers. Overnight hospital admissions are declining.

Per-capita health spending and health insurance use are stagnant, forcing hospitals to spend big money buying or creating new patient entry portals, such as urgent care clinics. Information technology costs will also eat up a larger piece of health system budgets, thanks to new federal mandates.

And, perhaps most significantly, Medicare -- as well as private insurers -- is trying to overturn the traditional payment model, demanding high quality care and punishing those hospitals that don't perform.

The upshot, according to the Studer Group of Florida, is that hospitals will need to cut costs by 20 to 40 percent over the next decade if they want to stay in the black. And much of that cost cutting will come out of employee hides.

In a forecast issued last year by The Camden Group, the language was blunt: "Employees will see smaller salary increases and will pay a greater portion of their healthcare insurance premiums and co-pays. Staffing reductions will continue, especially in non-clinical areas."

In cases where cost pressures could lead to outsourcing, reduced salary and benefits, or new metrics by which to measure employees' efficiency and bedside manner, there will be friction with the labor force, said Michael Moschel, partner with Bass, Berry & Sims, a Nashville, Tenn., law firm.

"If there [are new] accountability measures and people are being held to a different or higher measures, that could lead to more organizing activity," Mr. Moschel said. And in health systems where unions already have a toehold, there will be more frequent standoffs, as guild members seek to preserve benefits and install minimum staffing ratios.

But it's not just the union-represented nursing and service employees who will be affected. The formation of new "accountable care organizations" -- partnerships that put the onus on clinics to manage care and keep costs down at the risk of financial penalties -- could result hospitals being forced to deal with "underperforming doctors," Mr. Moschel said.

In fact, it may be the doctors, more than the rest of the clinical staff and non-clinical, who are helping drive increases in hospital labor costs nationally.

Despite the fact that hospitals have been reducing raw labor force numbers over the last few years, the share of the total budget devoted to personnel costs -- about 54.2 percent in 2012 -- is on the increase.

A recent Fitch report said, "Fitch analysts believe the high labor spend is due to two prevalent trends: physician practice acquisition and health IT."

Bill Toland: or 412-263-2625.

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