Hospital Intelligence Brief
What to Investigate When Labor Costs Rise Faster Than Volume
If labor cost is growing faster than activity, either each unit of work costs more or more work is needed per unit. Finding which is the whole investigation.
Short answer
When labor cost rises faster than patient volume, investigate wage rates, hours per unit of service, overtime and contract labor, vacancies and turnover, and skill mix. Compare each department’s labor cost per adjusted discharge or visit over time to isolate where the gap opened, then decide whether the cause is price, productivity, mix or staffing instability.[1][2][3]
Why does the pattern matter?
Labor cost growing faster than volume means labor cost per unit of work is rising. That is either a price effect (each hour costs more), a productivity effect (more hours per unit), a mix effect (a costlier staffing mix) or a combination. It is a warning sign because labor is the largest hospital expense; the American Hospital Association reports that compensation and related expenses account for 56 percent of total hospital costs.[1] If unit labor cost keeps rising while revenue per unit does not, margin will fall.
Step 1: Is it price, hours or mix?
Decompose the change. Price: average hourly cost, including wage rates, benefits and premium pay. Hours: worked hours per unit of service, such as per adjusted patient day or per visit. Mix: the share of hours by role and by employment type. Compare periods and departments. If average hourly cost is flat but hours per unit are rising, the issue is productivity or acuity. If hours per unit are flat but cost per hour is rising, the issue is rates or premium pay.
Context helps interpret the price effect. The AHA reports that advertised salaries for registered nurses grew 26.6 percent faster than inflation over the past four years in its analysis of Lightcast data.[1] A hospital whose wage growth exceeds the market may have an internal pay issue; one that matches it faces a market problem.
Step 2: How much is premium labor?
Overtime, agency and contract labor are the most volatile components. MedPAC reported that growth in hospitals’ labor costs slowed to under 2 percent in 2024 from about 9 percent in 2023, driven by an $8 billion decline in hospital spending on direct patient-care contract labor, a drop of about 25 percent.[2] A hospital that still relies heavily on contract labor is likely paying a premium for vacancies or turnover, and the remedy is recruitment, retention and scheduling, not wage control.
Quantify premium hours as a share of total hours by department and the premium paid. Combine with vacancy and turnover data. A unit with 20 percent vacancy and heavy agency use has a different problem from a fully staffed unit with high overtime.
Step 3: Is volume the right denominator?
Volume must be measured appropriately. Adjusted discharges or adjusted patient days account for outpatient activity. Acuity matters: a unit with sicker patients needs more hours per patient. Census variability matters: units must be staffed to peak demand, so low average occupancy raises hours per patient day. MedPAC reported average hospital occupancy of about 71 percent in FY 2024, with wide variation, which indicates that many hospitals carry staffing for capacity they do not fill.[2]
Also check scope changes: new services, longer hours, added coverage, new regulatory requirements or documentation needs add hours without adding volume.
Step 4: Is labor really the only driver?
Check other costs. Kaufman Hall reported that non-labor expense per adjusted discharge rose 6 percent year to date through August 2026, with supplies up 5 percent and drugs up 6 percent.[3] A margin decline blamed on labor may have other causes. Rank categories by contribution to the total cost increase.
An invented example: labor cost rose 7 percent and volume 2 percent. Decomposition shows hourly cost up 3 percent, hours per adjusted discharge up 1.5 percent and a mix effect of 0.5 percent, with the rest an increase in agency hours in two units. The two units become the focus. The numbers are illustrative only. The interactive example below shows how such a decomposition works.
Frequently asked questions
Why is hospital labor cost growing faster than volume?
Because of higher pay rates, more hours per unit of service, more premium labor, a costlier staffing mix, or added scope without added volume.
What share of hospital costs is labor?
56 percent, according to the AHA.[1]
How much did contract labor spending change recently?
MedPAC found an $8 billion decline, about 25 percent, in 2024.[2]
What is a good measure of labor productivity?
Hours per adjusted discharge or per adjusted patient day by department, compared over time.
Could something other than labor explain a margin decline?
Yes. Kaufman Hall reported supplies up 5 percent and drugs up 6 percent year to date in 2026.[3]
What to do next
- Decompose labor cost change into price, hours and mix by department.
- Quantify overtime, agency and contract hours and their premium.
- Check vacancy and turnover by unit.
- Confirm volume is measured on an adjusted basis.
Optional · interactive example
See it in an interactive example.
Hospital Financial Investigator: a working dashboard, scenario simulator, evidence-linked answers from APIS, and a sample executive brief, all on synthetic data.
The experience below is built on a synthetic hospital, “Demo Community Hospital,” with two fiscal years of data. Nothing in it is real, so you can explore freely.
- Select the Labor row in the expense table. Note its share of the increase and its growth versus volume.
- In the Scenario tab, raise volume by 4.5% (as in the sample), then raise the labor cost rate by 3%. Which moves operating income more?
- Ask APIS “Tell me about labor costs” and open the evidence it cites.
Explore Your Hospital’s Opportunities
Two Pillars can help hospital leadership investigate market, financial, operational and strategic questions using relevant organizational data, public information and a structured assessment process. A good first step is a revenue cycle and operations review that measures leakage, denials and bottlenecks against standard indicators and traces each to its cause.
Sources
- American Hospital Association, The Cost of Caring: Challenges Facing America’s Hospitals in 2025. Accessed October 2026.
- Medicare Payment Advisory Commission (MedPAC), Report to the Congress, March 2026, Chapter 3: Hospital inpatient and outpatient services. Accessed October 2026.
- Kaufman Hall (Vizient), National Hospital Flash Report: August 2026 Data (October 13, 2026). Accessed October 2026.
Sources checked October 2026. This guide is general information for healthcare leaders and is not legal, financial, clinical or compliance advice. Figures and rules are cited to the sources below and may have changed since they were accessed, so confirm anything you rely on against the current source. Two Pillars & Co is independent of the organizations cited. See our editorial policy.