As hospitals and health systems look to trim expenses, many have seemingly flipped the narrative with minimum wage raises.
Systems including Atrium Health, Advocate Aurora Health, Cleveland Clinic, Hartford HealthCare, Jefferson Health, UPMC and Trinity Health have bumped up their base wages in recent months. More are expected to follow, a trend that is poised to boost the broader economy as pay hikes in the economic powerhouse industry of healthcare have wide-reaching impacts. Hospitals nationwide directly employ nearly 6 million people, according to the American Hospital Association.
At face value, the trend seems counterintuitive. Wages and benefits, which typically make up about half of a provider’s expense portfolio, are often the first area executives hack away at to cut costs.
But while healthcare organizations are upping investments that will weigh on their balance sheet over the short term, they are betting that they will save money if fewer employees leave the company—not to mention improve efficiency and care quality.
“Stabilizing the workforce through minimum wage increases and some career advancement programs are actually saving us money because the churn and cost of managing turnover is higher than the cost of investing in these programs,” said Scott Laws, vice president of total rewards at Atrium Health. “This is actually alleviating some of the cost pressure.”
Atrium invested a total of $7.7 million last year as it increased wages of more than 16,500 nurses and entry-level employees. But the organization has been keeping a close eye on turnover that’s been inching up, hovering around 20% for minimum-wage workers and between 10% to 12% for nurses.
“The effect minimum wage increases have on the next level of roles is not insignificant,” Laws said. “We are investing in these supporting roles. But if we don’t, the turn and churn absolutely impact more direct patient-facing roles.”
Turnover is expensive. Providers have to pay a premium for temporary staff. Other employees typically have to pick up the slack as managers fill the position, which can weaken morale and accelerate the cycle of turnover.
Raising wages should limit temporary hires, overtime and other premium pay practices, said Kevin Holloran, a senior director with Fitch Ratings. It should also reduce turnover, which could provide long-term cost savings and boost patient care and quality, he said.
“Ultimately from a rating factor, one would essentially balance the other, so I do not envision any rating movement due to minimum wage increases,” Holloran said.
Still, as expenses eclipse revenue, cost-cutting is front and center for executives. Financial challenges topped hospital executives’ concerns in 2018, according to an annual survey from the American College of Healthcare Executives. And 70% of respondents cited the increasing costs of staff and supplies as an issue for their hospitals; 59% cited reducing operating costs.
The situation is especially acute for smaller hospitals and systems that generally do not have the resources to offer higher wages.
“It will make it more difficult for smaller organizations to meet competitive wages,” said Kenneth Hertz, principal consultant with the Medical Group Management Association’s Health Care Consulting Group. “If reimbursement continues to go down and organizations continue to have revenue issues, then salary increases like this are going to severely exacerbate the problem.”
That being said, smaller organizations could compete by offering flexible schedules, more generous benefits and other perks, Hertz added. More satisfied and higher-performing employees accrue directly to the bottom line, he said.
Although Guadalupe County Hospital, a critical-access facility in New Mexico, doesn’t directly compete with larger systems, it is constantly tweaking its pay structure so it remains competitive and provides a living wage, said Christina Campos, the hospital’s administrator.
“This sometimes means drawing from proposed top-tier or executive level pay increases to fund the lowest tiers,” she said. “It’s a zero-sum initiative, which benefits the lower levels a lot more than it hurts the top.”
Guadalupe also ensures that its most competitive positions, like nursing and some ancillary services, are paid competitively with other similarly sized hospitals by participating in state, regional and national compensation surveys, she added.
Executive compensation at hospitals and health systems continues to rise at a steady pace, which may be creating some dissension in the ranks, evidenced by recent protests outside of Providence St. Joseph Health’s Swedish Medical Center’s First Hill campus in Seattle objecting to skyrocketing executive pay amid job cuts.
Average total cash compensation across 39 health system executive positions rose 4.8% from 2017 to 2018, compared with a 3.6% annual increase for 12 hospital executive positions analyzed, according to Modern Healthcare’s 38th annual Executive Compensation Survey. Health system executives took home raises of 6% to 8% over three of the past four years, up from around 2% in 2014.
The minimum wage increases indicate a step in the right direction, Hertz said.
“It signifies the importance and recognition of the support staff in these organizations,” he said.
Pay hikes might also keep unions at bay, although many dismiss what they describe as a publicity stunt. When Advocate Aurora Health announced it would raise the starting wage for its workforce to $15 an hour by early 2021 in November, SEIU Healthcare Illinois Indiana responded by saying the motivation was hardly altruistic.
It is an attempt to put a pretty face on decades of paying poverty wages to workers who provide vital hospital services, union President Greg Kelley said in prepared remarks, adding that the organization’s hand was forced by hospital workers protesting low wages across the country, he said.
“There is absolutely no reason why Advocate Aurora Health can’t pay its service workforce a starting wage of $15 an hour starting today,” he said, particularly as the organization boasts that it is the 10th largest in the country. “Hospital service workers are the backbone of the healthcare system which allow hospitals to earn billions of dollars in profits, yet these workers receive none of the benefits.”
Many hospital workers can’t even afford their own health insurance on their wages, Kelley added.
Unions may have some leverage given how much the industry is poised to grow. It is one of the few sectors that grew during the last recession.
The healthcare industry will continue to drive the nation’s employment growth through 2026 by adding around 4 million new jobs, accounting for about a third of total job growth, according to Bureau of Labor Statistics data.
The fastest-growing sectors include healthcare support occupations (23.2% increase) and healthcare practitioners and technical occupations (15.2%), which entail home health aides, physician assistants and nurse practitioners, among other positions.
While jobs in the entire healthcare sector grew by 20% from 2005 to 2015, median earnings were held back by declining rates for outpatient workers. Median real wages of full-time workers in these facilities fell by almost 6% from $20.81 to $19.63 an hour, according to a 2017 study from the Center for Economic and Policy Research, a left-leaning think tank.
This trend will become even more significant as health systems build out their outpatient networks in lieu of more acute-care settings.
The minimum wage hikes are pre-empting major cities and states like California, Massachusetts, New York and Colorado that are incrementally increasing their legally allowed base pay.
About 17 million workers benefited from minimum wage hikes implemented across 20 states at the start of the year, according to a recentreport by the National Employment Law Project. A number of major cities and counties will offer a $15 minimum wage in the coming years as the movement to raise the federal minimum wage to $15 gains steam. Companies like Amazon and Target have pushed the discussion forward.
As providers continue to bump up wages, it’s important to remember that money alone doesn’t secure an employee’s loyalty, Hertz said. Relationships with supervisors, work environment, and aligned vision and values are all important, he said.
“Dollars alone won’t keep people for the long term,” Hertz said.