Healthcare providers are grappling with persistently high labor costs, with medical groups’ median investment per employed physician surpassing $300,000 for the first time in the third quarter of 2024, according to Kaufman Hall. 

The consultancy’s reports highlight that while financial stability has improved for many health systems since the pandemic, labor expenses remain a pressing concern. Even though reliance on expensive contract labor has decreased, the overall labor market remains tight. 

Unsustainable Physician Employment Costs

Medical groups’ median investment per employed physician reached $304,312, reflecting a financial strain that may render current physician employment models unsustainable. “This increase suggests that organizations need to reassess how they manage and compensate physician workforces,” said Matthew Bates, managing director and physician enterprise service line leader at Kaufman Hall.

Labor costs surged during the pandemic due to staffing shortages and the need for temporary hires, which severely impacted health system margins in 2022. Although hospital financial performance has steadily recovered since then, the sector is still struggling to meet pre-pandemic financial benchmarks.

Mixed Financial Indicators

The Hospital Flash Report shows that inpatient revenue and average lengths of stay have increased, indicating that hospitals are treating more acutely ill patients. Despite these gains, hospitals’ operating margin index stood at 4.3% for the year to date, slightly down from the nearly 5% margin seen earlier in 2024.

Erik Swanson, senior vice president and data analytics group leader at Kaufman Hall, emphasized the need for cost containment. “If this trend of higher expenses and sicker patients continues, organizations must find ways to manage their financial health proactively,” Swanson said.

Rising Costs for Medical Groups

The Physician Flash Report underscores the ongoing challenges for medical groups, where total direct expenses per full-time provider increased by 5% compared to the third quarter of 2023. At the same time, physician productivity rose 6% year over year, though revenue generation has not kept pace.

Kaufman Hall suggests rethinking physician employment models to reward efficiency and incorporate more advanced practice providers into care teams. “Revenue is increasing, but physicians and providers are working harder while generating less income,” Bates noted. “Health systems must realign their operations to match the evolving healthcare environment.”

This persistent imbalance underscores the need for innovative solutions to address labor expenses and sustain healthcare delivery in a changing landscape.