Twin Cities area hospitals experience financial stress of 'labordemic'

Hospital operators in the Twin Cities say they're feeling the same stress from rising expenses that Allina Health System cited last week when announcing about 350 job cuts.

But HealthPartners, Fairview Health Services and North Memorial don't have current plans for large layoffs, the health systems said in statements to the Star Tribune.

When Allina announced the cuts, the Minneapolis-based health system called financial challenges across the industry "unprecedented."

There are modest signs of financial improvement this summer across the sector, but most medical centers in the U.S. continue to struggle with high labor costs amid a scarcity of caregivers, said Kevin Holloran, an analyst with Fitch Ratings.

Holloran expects other health systems in the U.S. could cut jobs this year, as well, with layoffs focused on administration and, to some extent, less profitable services like pediatrics, obstetrics and mental health.

"We expect 2023 to be better than 2022, but ... it's not going to be this full reversal and suddenly everything is back to normal," he said. "2023 is going to be another very challenging, very difficult year."

There have been a few other examples this year of large job cuts at health systems across the country, said Rick Gundling, a senior vice president at the Healthcare Financial Management Association. In other cases, health systems don't make big announcements of layoffs, he said, but instead cut positions gradually over time by eliminating open jobs.

There aren't a lot of short-term fixes right now for hospitals, Gundling said.

"It's expenses that are a challenge to get under control. Drugs, supplies, labor — those are the big things."

Allina's cuts came after a first quarter that saw operating losses balloon compared with the start of 2022. The health system has halted plans to build a replacement hospital in Cambridge, although other capital projects are moving forward.

Last year, the board at Allina approved spending $1.2 billion on construction for a new 10-story building at Abbott Northwestern Hospital in Minneapolis. The 575,000-square-foot building for surgery and critical care will replace the hospital's existing operating rooms while providing new space for patients, visitors and staff.

"There is not one specific driver behind the unprecedented financial challenges we are seeing," Allina's Chief Financial Officer Ric Magnuson said in a statement to the Star Tribune. "Allina Health, like many other non-profit health care systems, is experiencing challenges such as increased costs for labor and supplies and bottlenecks when discharging patients to other appropriate care settings."

Minneapolis-based Fairview cited similar problems when explaining this spring why its first-quarter loss was worse than last year. But Chief Executive James Hereford said during a May interview with the Star Tribune that "our belief is we've turned a corner."

The health system credits a three-year plan adopted in December for making March "the most financially healthy month in the organization's recent history."

Filings with bondholders show that during the 12-month period ending Sept. 30, 2022, Fairview's market share grew for hospital inpatient volume across the Twin Cities while Allina's market share contracted.

HealthPartners also posted an operating loss during the first quarter that was worse than the previous year. The health system, which includes hospitals, clinics and a large health insurance company, said labor and medication costs increased while hospital discharges to step-down facilities like nursing homes were "still not optimal."

North Memorial's first-quarter loss was smaller than during the year-ago period, but the health system said: "There is no avoiding the rising cost pressures of supplies and services in health care."

Hennepin Healthcare said it's keeping all management options open, but noted its first-quarter loss was smaller than during the same period last year.

On Tuesday, Fitch Ratings released its annual report on key financial indicators for nonprofit hospitals. The numbers for 2022 were "significantly weaker" than the previous year, the rating agency concluded in a report describing how hospitals have gone from "pandemic to 'labordemic.'"

"Labor shortages, both clinical and non-clinical, will continue through 2023, and likely longer in many markets, with high-growth markets generally better able to mitigate staffing shortages."

The good news, Holloran said, is that hospitals, slowly but surely, are reducing the amount of pricey external contract labor they've been using to fill staffing gaps.

A lot of nurses left the field in late 2021 and 2022 because of burnout and/or retirements, he said. It's taken awhile, but many hospitals now report that the ratio of new hires to those leaving is greater than 1-1, Holloran said.

Hospital balance sheets have taken a hit, he said, but the numbers don't look substantially different than they did from 2014 through 2019.

"That's why there's some reason for optimism here," Holloran said, "despite kind of the dire tone right now."

The 350 jobs being eliminated at Allina are less than 2% of the health system's 28,500 full- and part-time employees at the end of last year.

Hospitals have faced financial challenges for many years and large organizations like Allina typically make some adjustments in workforce from time to time, said Allan Baumgarten, an independent health care analyst in St. Louis Park.

"Would it surprise me if Fairview or HealthPartners announced layoffs, or announced one or two clinics shutting down? It would not surprise me," Baumgarten said. "But I'm not sure that that's more than the normal ebb and flow of trying to match your revenue and expenses like any well-run organization should be doing."