Healthcare’s Biggest Challenge: Keeping up With Rising Labor and Operating Costs

May 29, 2024

Close-up of tablet computer with graphs, diagrams and charts on screen in hands

Operating costs for hospitals and health systems are skyrocketing, and the cost of labor is at the center. In fact, labor accounts for approximately half of a hospital’s operating budget, and recently, HFMA reported that 96% of CFOs identified labor costs as a top margin challenge they are facing.

Just how bad is the problem? Between 2021 and 2023 alone, hospital labor costs increased by more than $42 billion. When coupled with the growing gap between supply and demand for health care workers – including revenue cycle staff – labor costs will likely continue to be an issue for the foreseeable future.

While this is a nationwide issue, regions with high wage growth are being hit especially hard. Currently more than half the country has a minimum wage above the federal minimum wage. Along the West Coast for example, Washington, Oregon and California are all in the top ten highest minimum wage states – with Washington and California in the number one and two spots respectively. In these areas, the wage battle is even more challenging for health systems as they navigate this rising expense while facing lower reimbursements.

Michele Forgues-Lackie, CFO at UW Medicine’s Valley Medical Center in Renton, Washington, recently talked about this issue. “Our wage inflation in Washington is over 20% and payers have a very hard time keeping up. They don’t usually shell out increases that are that large, so it has been a really rough road.”

In this high wage environment, operating sustainability is even harder for safety net hospitals, as much of their reimbursement comes from Medicare or Medicaid. According to new American Hospital Association data, Medicare reimbursement recently hit a new low of 82 cents for every dollar spent by hospitals. Medicaid reimbursement rates are even lower, usually equaling only 78% of Medicare reimbursements.

“We’re a safety net hospital with 76% of our patients a part of Medi-Cal. It’s a challenging place to be,” Trevor Wright, CEO at Loma Linda University Health recently told R1. “Safety net hospitals are always right on the razor’s edge in terms of operating sustainability and we’re no different.” He says operational efficiency is key for these types of hospitals.

Watch the video

If you’re navigating challenges in the California market, listen to what Jeremy Eaves, former CEO of Sutter Shared Services, has to say about operating in California.


How can outsourcing help?

Revenue cycle outsourcing helps reduce operating expenses by using scaled technology, AI and automation, and staffing solutions.

Scaled technology, AI and automation

Hospitals and health systems are more focused on delivering high-quality patient care – not honing their revenue cycle capabilities. As such, many are learning their internally built revenue cycle technologies can no longer keep up with the speed of technological advancements and regulatory changes. In a recent survey, we asked health system executives about their biggest automation concern and 49% cited an “inability to support and maintain automations.”

As most revenue cycle teams do not employ the type of staff necessary to support and maintain automations, this concern reflects the staffing limitations they face. Similarly, health system IT teams, who may have the necessary skills, are heavily focused on maintaining technology to support clinical functions.

In comparison, revenue cycle organizations are solely focused on revenue cycle management. This means they spend millions of dollars and years of investment on ways to optimize the revenue cycle and make it more efficient, starting with technology, AI and automation. Outsourcing can provide health systems with access to this much-needed technology without constant financial reinvestment and technology maintenance.

Revenue cycle teams can benefit from this technology and use it to reduce or eliminate manual administrative processes. Dan Liljenquist, Chief Strategy Officer at Intermountain Healthcare, recently talked to R1 about how technology and AI can improve productivity. “The opportunity with technology and generative AI models is a really good example of how we can streamline the administrative aspects of healthcare.”

Reducing manual processes can offer health systems an opportunity to invest in upskilling staff to take on more complex assignments or high touch areas that improve the patient experience.

Workforce management

Revenue cycle organizations focus on ways to streamline people, processes and technologies in a way to make the biggest impact. When it comes to streamlining staff, outsourcing partnerships can involve a workforce transition, in which some hospital employees transition their employment to the revenue cycle organization. This workforce transition can provide significant savings in labor costs and improve the overall operating budget.

For health organizations who go through this, they should be thoughtful about how their agreements are structured to ensure the employees are well cared for both during and after the employment transition, including the presence of a dedicated change management team. This level of detail can create trust and transparency between the health system and revenue cycle partner, ensuring long-term success.

These types of workforce transitions can provide several employee benefits. First, due to the size of many health systems, there can be limited career opportunities for revenue cycle employees. However, in a large organization with a singular revenue cycle focus, individuals can experience more career and growth opportunities.

A second benefit is that with a strategic, tech-forward revenue cycle partner, employees will have additional access to tools, software and automation resources that can allow them to do their jobs better, faster and more efficiently.

Get to know us

Meet five R1 associates who experienced a workforce transition. Hear their stories and how they’ve grown in their careers.


Scaled global resources

To reduce operating costs using flexibility and scalability, many revenue cycle companies use a global delivery model, in which certain parts of the revenue cycle occur in offices outside the US. Utilizing a revenue cycle global delivery model can help reduce costs while maintaining high quality for tasks such as coding and chart review.

The right approach to RCM outsourcing includes full transparency and control, which can best be achieved by using an outsourcing partner that keeps global delivery within its own company. This preferred model includes team members utilizing best-of-breed tools and industry-standard processes to maintain high standards for HIPAA compliance, data security and regulatory compliance. These processes reduce security risks and address dynamic threats.

By utilizing scaled technology, upskilling and streamlining the workforce and using a global delivery model, outsourcing can provide operational efficiency to combat rising labor and operating costs.


  1. Health care labor costs, from clinical staff to those in the revenue cycle, account for approximately half of a hospital’s total operating budget. For high wage markets and safety net hospitals, it is even harder to keep up with increasing expenses.
  2. Revenue cycle outsourcing can help reduce operating costs by using scaled technology, AI and automation, and staffing solutions.
  3. Outsourcing can provide access to unmatched automation technologies without the hospital incurring ongoing costs related to tech reinvestment and staff maintenance.
  4. Workforce transitions can provide significant savings in labor costs and provide staff with career and growth opportunities.
  5. The use of global resources can reduce costs. For this approach, it is important to prioritize partnering with a company that keeps global delivery within its own company and not an RCM partner that contracts with an outside organization.

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