Average contract labor spend at U.S. hospitals

Staffing shortages and physician burnout are pressuring hospitals to rely on contract labor and temporary healthcare staffing agencies to supplement their care teams.

Rates for contract workers are usually higher than employee salary rates since the organization doesn’t have to cover income, social security or Medicare taxes. During the COVID-19 pandemic, some traveling nurses have made up to $300 an hour and these types of rates will continue to affect hospital financial spreadsheets.

In this Healthcare Insight, we review average contract labor expenses at U.S. hospitals and compare metrics by hospital bed size and location.

What is the average hospital contract labor expense?

Based on data from more than 3,000 hospitals in the Definitive Healthcare HospitalView product, the average amount spent on contract labor in 2020 for U.S. hospitals was $4.6 million. This is based on an analysis of hospitals that reported the figure in their Medicare Cost Report.

Fig. 1 Data is from the Definitive Healthcare HospitalView product. Data is sourced from the Medicare Cost Report. Results based on 3,008 U.S. hospitals with reported contract labor expenses in 2020. Data accurate as of July 2022.

How much do hospital contract labor expenses increase each year?

Costs associated with contract labor at U.S. hospitals have increased by nearly 7% on average from 2016 to 2020. In comparison, hospital expenses have risen about 5% each year from 2016 to 2020. Even average salary expenses for hospital employees and healthcare providers rose only about 4% each year in the same time frame.

In addition, the percentage of total hospital operating expenses made up by contract labor has increased. The average hospital operating expense in 2020 was about $202 million, so contract labor accounts for 3% of total expenses. Contract labor expenses only made up 2.1% of total operating expenses in 2016.

Contract labor expenses by hospital bed size

Fig. 2 Data is from the Definitive Healthcare HospitalView product. Data is sourced from the Medicare Cost Report. Results based on 3,008 U.S. hospitals with reported contract labor expenses in 2020. Data accurate as of July 2022.

Just as higher bed counts correlate with higher average operating expenses, contract labor expenses by bed size show similar trends. Hospitals with 25 beds or fewer spent only about $460,000 on contract labor in 2020 compared to hospitals with more than 250 that spent nearly $11 million on average.

Hospitals with more than 250 beds had the highest average annual increase in contract labor expense since 2016 at more than 10%. Interestingly, contract labor expenses made up about 2% of total operating expenses for these large hospitals. Meanwhile, at hospitals with 26 to 100 beds contract labor accounted for more than 3% of total expenses in 2020.

Contract labor expenses by region

Fig. 3 Data is from the Definitive Healthcare HospitalView product. Data is sourced from the Medicare Cost Report. Results based on 3,008 U.S. hospitals with reported contract labor expenses in 2020. Data accurate as of July 2022.

Hospitals in the western United States have the highest contract labor expenses, with an average of $9.6 million reported in 2020. Factors such as large cities, high cost of living and high salary rates in the region contribute to this high average.

Between 2016 and 2020, hospitals in the northeast and southeast had the highest average annual increase in contract labor expenses at 13.2% and 12.4%, respectively. Hospitals in the southwest had an annual increase of only about 4.5%, however, contract labor is a higher percentage of the hospital’s overall operating expense compared to other regions at 3.6%.

What is included in hospital contract labor expenses?

Sourced from the Medicare Cost Report, total contract labor is the amount of money a hospital paid for services furnished under contract, rather than from employees, for direct patient care. This includes intern and resident services, pharmacy and laboratory wage costs, and other direct patient care services such as nursing, diagnostic, therapeutics and rehabilitative services.

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