How Will Scripps Health Manage the California Wage Increase?

"For an organization of Scripps' size, the cost of the minimum wage bill is measured in the tens of millions of dollars per year," its CFO says.

Eyes were wide when California Governor Gavin Newsom signed a new law that will gradually raise healthcare workers' hourly minimum wage to $25, a bill that has an estimated price tag of $4 billion for the 2024-25 fiscal year. 

But, that estimated $4 billion price tag is just at the state level and doesn't necessarily include the costs for private organizations or those in the non-profit healthcare world.

CFOs across the US have already been grappling with sky rocketing labor costs and workforce unrest, so CFOs in California in particular really need to strategize for this unknown added cost. 

In this exclusive interview, hear how Brett Tande, CFO of California-based Scripps Health, plans to strategize and budget for the new bill that could potentially cost the organization tens of millions of dollars per year.

Plan of action

While the new law factors in gradual wage increase schedules (rather than an immediate increase for all healthcare workers) CFOs in California need to start budgeting fairly soon. 

Luckily, Tande says, health systems that have focused on sustaining high credit ratings may find themselves with a slightly longer lead time to adapt to these higher, unfunded costs.

“For the last 20 or 30 years, healthcare systems have been building up these balance sheets, and the beauty of that is that it gives organizations like Scripps a little bit more time to find that point of stability,” Tande says. “But not every organization is similarly situated, and all will have to weather these higher costs at some point.”

“While Scripps doesn’t have to react overnight, we will need to respond and maintain. For an organization of Scripps’ size, the cost of the minimum wage bill is measured in the tens of millions of dollars per year. This will definitely have an impact on labor expenses, no matter how much you strategize.”

Labor expenses, Tande says, are the largest expense for healthcare systems.

"Depending on the health system, you're generally talking about 52% to 55% of your revenue that is going to be eaten up by labor expenses, and so that's the big one,” he says.

So, what’s the plan for making up for these added costs? Renegotiating with payers may be the key for Scripps.

On the consumer side, Tande says having seismically compliant hospitals and having higher minimum wages are both good things.

“But, we also have to recognize that there's a cost to that. And so, whether it's you or me, the way that is going to reflect itself is in higher premiums for patients over time,” Tande says.

But on the provider side, there's going to be quite a bit of pressure with the payers, he says.

“The way that cost pressure has manifested itself has been in payer contract terminations or more public negotiations between healthcare systems and payers. That's happened in the past and is almost certain to continue with greater frequency in the future,” Tande said.

So, he says the reality is that this new bill will continue to put pressure on the payer/provider relationship, especially as California healthcare systems will be looking to cut more costs. 

“Actually, no. It's not reality. It's just mathematics,” he says.

“This cost is going to be significant, and we can't go negotiate with Medicare or Medicaid. Broadly speaking, I would say these two payers represent 50% to 60% of patients in the state, so the remainder of that's left on commercial insurance negotiations,” Tande said.

Two medical groups affiliated with Scripps terminated their Medicare Advantage contracts for 2024, although Tande noted the move was made without regard to the minimum wage bill specifically. 

Tande said he thinks all health systems will more closely monitor their commercial contracts to ensure they are sufficiently priced. While this could include terminations in some cases, Tande said Scripps strives to avoid that outcome where possible.

What does the future hold?

“As we grow, the question will be: how can we grow and provide a higher level of care to patients in this growing market?” Tande said.

To balance out these added labor costs, aside from payer negotiations, Scripps will be looking to add in more technology across the board. 

“You know, it's funny, a couple of years ago, if someone said, you know, how realistic is it that you're going to be deploying AI within your organization? And I probably would have laughed. I've been really impressed by the speed with which this has taken off,” he said.

As for CFOs outside of California, while wage increases won’t be as high as California, many states are preparing for a wage increase on January 1. This means that budgeting for higher labor expenses in 2024 should be a top priority for CFOs in all states.