This study examined the relationship between contract labor costs and hospital financial performance and tested whether that relationship differed by surgical volume. Using merged data from the NASHP Hospital Cost Tool, the American Hospital Association (AHA) survey, and RAND Hospital Data for 2011–2023, the authors evaluated operating margin, total margin, and financial distress across 22,366 hospital-year observations from 2,914 hospitals. Higher contract labor costs were associated with lower operating and total margins and increased odds of financial distress. Although high surgical volume was associated with better margins and lower distress overall, interaction tests showed surgical volume did not significantly modify the relationship between contract labor costs and financial performance.
Hospital expenditures in the United States have continued to rise, with hospital care representing a large fraction of national health spending. Labor costs are the largest contributor to hospital expenses; the article reports labor costs accounted for $890 billion and 56% of hospital expenses in 2024 and increased by $42.5 billion between 2021 and 2023. Staffing shortages since the COVID-19 pandemic have increased reliance on temporary or contract labor, which can carry higher prices. The degree to which increased contract labor spending affects hospital operating performance, total profit margins, and the risk of financial distress is not well defined. The authors aimed to quantify this association and to assess whether high surgical volume moderates the financial impact of contract labor costs.
The analysis merged three national datasets by Medicare Provider Identification Number: the National Academy for State Health Policy (NASHP) Hospital Cost Tool (based on CMS cost reports), the American Hospital Association annual survey, and RAND Hospital Data (HCRIS-derived financial details). The study included short-term general and specialty hospitals and excluded critical access hospitals. Observations with negative liabilities, assets, or expenses or missing key variables were removed. To reduce the influence of extreme values, operating margin, total margin, and Altman Z-score values were trimmed at the 1st and 99th percentiles. The final analytic sample consisted of 22,366 hospital-year observations representing 2,914 distinct hospitals across 2011–2023.
Main independent variable: direct patient care contracted labor cost expressed as a percentage of direct patient care labor cost, sourced from NASHP and referred to throughout as contract labor costs.
Surgical volume: extracted from the AHA dataset. Hospitals at or above the 75th percentile for annual surgical volume were defined as high-volume hospitals (HVHs); those below the threshold were low-volume hospitals (LVHs).
Primary dependent variables:
Covariates: rural status (rural or micropolitan CBSAs), teaching status (major or minor), bed capacity (1–99, 100–299, ≥300), ownership (non-profit, for-profit, government), market concentration (Herfindahl-Hirschman Index categorized as unconcentrated, moderately concentrated, highly concentrated), system membership, wage index, and case mix index.
The authors used generalized estimating equations to model associations between contract labor costs and each financial outcome while accounting for repeated hospital-year observations. They reported regression coefficients, 95% confidence intervals, and p-values for continuous outcomes (operating and total margins) and odds ratios for the binary financial distress outcome. Interaction terms between contract labor costs and high-volume status were included to test effect modification by surgical volume.
The study sample included 22,366 hospital-year observations from 2,914 hospitals. Key reported associations were:
Contract labor costs and margins:
High surgical volume and financial performance:
Interaction between contract labor costs and high-volume status:
The findings indicate that higher spending on contracted direct patient care labor is associated with worse hospital financial performance—both lower operating and total profit margins and a modestly increased risk of financial distress. Although hospitals with high surgical volumes had better margins and lower likelihood of distress overall, those advantages did not appear to offset the negative association between contract labor costs and financial outcomes; interaction tests were null. The authors note rising labor costs since the COVID-19 pandemic and increased reliance on temporary staffing as context for the observed associations. The study suggests that even hospitals with profitable surgical service lines may not be shielded from the financial pressures of increased contract labor spending.
Limitations noted in the article include reliance on administrative datasets (with some elements restricted by data use agreements), exclusion of critical access hospitals, and trimming of extreme values. Detailed calculations for the modified Altman Z-score and additional analytic details are provided in the article's supporting information.
Higher contract labor costs are associated with lower hospital profit margins and a small increase in the odds of financial distress. Although high surgical volume hospitals demonstrate stronger financial performance overall, surgical volume did not significantly moderate the negative association between contract labor costs and financial outcomes. The authors conclude that high surgical volume may not provide financial protection against the economic challenges posed by rising contract labor expenses.
The AHA and RAND datasets used in the analysis are subject to data use agreements and are available to researchers through those third-party channels; the NASHP Hospital Cost Tool is publicly available. The study reports that the authors received no specific funding and declared no competing interests. The Supporting Information contains additional methodological details and the modified Altman Z-score calculation.