Average contract labor expenses 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.

During the COVID-19 pandemic, some traveling nurses 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. Data is sourced from the Medicare Cost Report and aggregated from the last five fiscal years of hospital financial performance tracked in our database. The most recent full fiscal year of data available at the time of publishing is for 2021.

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.

What is the average hospital contract labor expense?

Based on data from nearly 3,000 hospitals in the Definitive Healthcare HospitalView product, the average amount spent on contract labor in 2021 for U.S. hospitals was $7.6 million.

Average hospital contract labor expense

Fig. 1 Data is from the Definitive Healthcare HospitalView product and sourced from the Medicare Cost Report. Accessed July 2023.

How much do hospital contract labor expenses increase each year?

Costs associated with contract labor at U.S. hospitals have nearly doubled between 2017-2021. The largest increase was between 2020 and 2021 when the average increased by $3 million. From 2016 to 2020, average hospital contract labor expenses increased by about 6% each year.

In comparison, hospital expenses have risen about 7% each year from 2017 to 2021. Even average salary expenses for hospital employees and healthcare providers rose only about 4% each year in the same time frame.

Healthcare staffing shortages continue to affect the industry and the demand for medical professionals is pushing the need for contract labor, and therefore the spend on it, up.

In addition, the percentage of total hospital operating expenses made up by contract labor has increased. The average hospital operating expense in 2021 was about $209 million, so contract labor accounts for 3.6% of total expenses. Contract labor expenses only made up 2.3% of total operating expenses in 2017.

Contract labor expenses by hospital bed size

Fig. 2 Data is from the Definitive Healthcare HospitalView product and sourced from the Medicare Cost Report. Accessed July 2023.

Hospitals with 25 beds or fewer spent only about $717,000 on contract labor in 2021 compared to hospitals with more than 250 that spent more than $18 million on average.

Hospitals with more than 250 beds had the highest average annual increase in contract labor expenses since 2017 at more than 19.6%. Interestingly, contract labor expenses made up about 2% of total operating expenses for both the smallest and largest hospitals. Meanwhile, at hospitals with 26 to 100 beds contract labor accounted for 3% of total expenses in 2021.

Contract labor expenses by region

Fig. 3 Data is from the Definitive Healthcare HospitalView product and sourced from the Medicare Cost Report. Accessed July 2023.

Hospitals in the western United States have the highest contract labor expenses, with an average of $13.6 million reported in 2021. Factors such as large cities, high cost of living and high salary rates in the region contribute to this high average.

Between 2017 and 2021, hospitals in the northeast and southeast had the highest average annual increase in contract labor expenses at 25.2% and 24.8%, respectively. Hospitals in the west had an annual increase of only about 13%, however, contract labor is a higher percentage of the hospital’s overall operating expense compared to other regions at 5.2%.

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