Grow, Optimize, and Automate: Solving The Healthcare Workforce Shortage

Executive Summary

‍The US healthcare workforce is in crisis and there are simply not enough people to meet demand. An aging population in the US is driving higher demand for healthcare services, creating a projected shortage across 31 out of the 35 physician specialties and 500,000 nurses by 2037. Over 3 million healthcare jobs remain open today, with critical shortages across: physicians, nursing (APRNs and RNs), allied health, technicians/technologists, home health, and behavioral. On the supply side, burnout has pushed average turnover among hospital staff to over 20%, while structural barriers prevent more people from entering the industry.

‍Education and licensure bottlenecks are the largest hurdles to solving the current workforce shortage crisis. 40% of all healthcare professionals require specialized licenses, the highest across any industry. Solving for education and licensure challenges that slow the entry of new professionals into the workforce is particularly difficult due to state-by-state regulations and highly controlled accreditation boards.

‍We believe that technology solutions are necessary to meet demand. And, we think these solutions have an enormous potential to liberate employers from third-party contract staffing altogether. We are interested specifically in solutions that (1) grow the workforce, and (2) make the existing workforce more efficient.

1. Grow the workforce. We like solutions that grow and strengthen the healthcare talent pipeline. Specific areas of opportunity include: upskilling existing workers to higher need roles, ed-tech or a reimagining of higher education for healthcare careers, and predictive analytics for strategic workforce planning‍
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2. ‍Optimize the workforce. We are most interested in AI-native automation tools for administrative tasks, and AI-powered internal redistribution of work.

‍The opportunity is massive. Healthcare is the largest employment sector in the U.S., covering 11% of the workforce (17 million people). The cost of labor-driven primarily by contract staffing-has continued to rise post-Covid, putting immense pressure on employers. Labor costs at hospitals alone were $820 billion in 2023, according to the American Hospital Association. These costs have increased from 50% of OpEx (2011-2019) to 60%+ of OpEx in 2023, meaning labor costs are no longer predictable and are eating away at margins. We have heard from large health systems that contract staffing fees account for over half of recruitment costs, and that total costs of labor shortages are estimated into the hundreds of millions of dollars when accounting for lost revenues alongside direct costs of attrition and replacement.

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I. Mapping The Healthcare Workforce

Over 17 million people in the U.S. work in healthcare, representing 11% of the total workforce and more than any other employment sector (BLS). Given that $4.5 trillion was spent on healthcare in the U.S. in 2022, totaling 17.3% of GDP, it makes sense that healthcare is our largest employer. More than 1 in 10 American workers are powering the critical infrastructure of a healthcare system that provides and pays for hospital care, physician and clinician services, and prescription drugs to over 300 million people. Notably, this large, diverse, and geographically dispersed workforce has some unique characteristics that shape the industry and its impact on society:

• It is a predominantly female workforce: 76% of all healthcare professionals are women.
• It is an aging workforce: a large portion of the healthcare workforce is nearing retirement. The average age of an RN is 52, with over 25% of nurses expected to retire or leave nursing within the next 10 years (AACN).
• Nursing is the largest profession within the healthcare industry. 5.4 million nurses-including RNs (3.1 million), NPs, LPNs/LVNs, and Nursing Assistants-make up 32% of the healthcare workforce (BLS). Nursing is considered "the backbone of the U.S. healthcare system".
• Over 40% of healthcare professionals require specialized licenses, making it the most licensed industry in the U.S. followed by education and law (BLS).
• While we often associate healthcare professions with clinical roles, the majority (~60%) of the healthcare workforce is dedicated to administrative functions, most of which do not require specialized licenses or certifications.

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II. The Problem: When 17 Million People Is Not Nearly Enough

The growing demand for healthcare professionals has outpaced the existing supply, leading the industry into a workforce crisis that has become an existential challenge for providers. Today, there are an estimated 3 million open healthcare jobs. That number is expected to be 4 million by 2031 (Bain). The Association of American Medical Colleges predicts a shortage of between 37,800 and 124,000 physicians by 2034-a shortage of up to 12% of total practicing physicians. Similar shortages are evident in nursing, where the American Nurses Association projects a need for over 1.2 million new RNs by 2030 to address both increased demand and to replace retiring nurses. Advanced practice nurses (APRNs) are also in increasingly high demand due to regulatory shifts, including scope expansion and loosening of physician supervision requirements. Other professions facing critical shortages include home health aides, mental health professionals, pharmacists, licensed medical assistants, and pharmacy, surgical, lab and radiologic technologists.

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We believe that the most intractable driver of the current workforce crisis in healthcare is education, training, and licensure bottlenecks.

There is a widening gap between the demand for licensed healthcare professionals and the ability of educational institutions to meet that demand. "80% require a post-secondary degree or credential beyond a high school diploma. Yet only 47% of Americans 25+ have any 2- or 4-year college degree. Of these degrees, less than 18% are in health professions" (Bain). Constraints on medical and nursing school enrollment, residency slots and fellowships, due to factors such as faculty shortages and limited clinical placement opportunities for training, create a bottleneck that slows the entry of new professionals into the workforce. Additional roadblocks to meeting demand include:

• Highly regulated and industry-controlled accreditation processes which make it extremely difficult and slow to add new accredited training programs.
• Licensure is regulated state-by-state, placing constraints on the scalability of online degree and training programs.
  
  • State-to-state compacts regulate interstate licensure requirements. Many states are responding to the workforce crisis by loosening restrictions on needing multiple licenses to practice in multiple states, which is good.
  • Many states have long processing periods for new physician licenses. The average waiting time for a physician license in CA is 3-6 months.
• Most Americans are income and schedule-constrained, making it difficult to pay for degree and training programs upfront, or make time for traditional college/technical college coursework. Greater affordability and flexibility to pursue healthcare careers while continuing to work, is needed.
• Credentialing, which holds up the hiring process for licensed clinicians before they can begin working at a new facility, can take anywhere from 30 days to 6 months to complete, almost entirely due to inefficient and manual verification processes.

For all of the above reasons, staffing is a hair-on-fire problem for healthcare employers: there are simply not enough workers licensed and credentialed for critical shortage roles. Couple this with inflation and competitive labor markets, and nearly all provider organizations are struggling to recruit for critical open roles and retain high-performing employees. The costs of both high turnover and need-to-fill contract staffing contribute precariously to margin compression on the business level and quality and safety concerns on the patient care level.

Labor costs increased by $42.5B between 2021 and 2023, accounting for upwards of 60% of total operating expenses at most hospitals and health systems (AHA). This change is a dramatic increase from pre-pandemic labor contribution to OpEx, when labor costs consistently hovered around 50% of total hospital expenses.

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While it is clear that Covid had a destabilizing effect on the healthcare workforce, we have not yet seen a reversion to the norm post-pandemic, and are instead contending with a paradigm shift that has enterprise healthcare employers across the board placing workforce challenges at the top of their priority list. This is something we have heard from every health system we regularly speak with: workforce is a top priority, if not the top priority. And, there is one culprit that is routinely called out: contract staffing.

Rising labor costs are untenable, and provider organizations are responding with a willingness to invest in and outsource solutions that stop the bleeding and cut back on contract staffing, which we were told can cost 2-2.5x staff rates due to shortages (the typical quoted price for contract staffing is 15-30% of annual salary per placement). One large health system we talked to shared that their direct cost of recruitment is $70mm per year, $40mm of which is on contract staffing fees. Making data-informed decisions about solutions that meaningfully move the needle on recruitment and retention (and tracking ROI on those solutions) remains challenging, however.

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III. Solutions, Two Ways: Grow Your Workforce, or Optimize Your Workforce

We see solutions for the workforce crisis falling into two buckets: solutions that grow the workforce externally for an organization through direct staffing and improved internal recruitment; and solutions that optimize the existing workforce within an organization through automation and redistribution.

• Growing the workforce focuses on alleviating the bottlenecks of education, licensure, and credentialing to expand an organization's immediate talent pool, and reducing costs associated with recruitment and hiring, mainly due to over-reliance on contract staffing.
• Optimizing the existing workforce leverages technology to automate, redefine, and redistribute work without directly impacting staff inflows or outflows, improving OpEx margins by reducing or eliminating labor shortages altogether.
• Improved retention can be achieved with both as a second-order impact.

Growing the Workforce:

At its core, the workforce crisis is a people problem; it is not a technology problem. There are simply not enough healthcare workers to fill critical job openings. While this macro problem manifests differently for employers-depending on geography, size, and available resources dedicated to employee recruitment and retention-expensive contract staffing still remains prevalent across nearly all hospitals and large provider groups.

• Contract staffing has historically been (and still continues to be) the category where the most value has accrued to companies in the workforce solutions space.
• Legacy staffing companies (locum tenens, travel nurse staffing agencies, etc.) deliver clinical placements, generally for a fee of 15-30% of annual salary.
• These are services businesses with low margins (20-30% is typical), and have historically been very regionally focused. Public comps for staffing companies like AMN Healthcare are trading for <1.0x revenue. AMN's price-to-sales ratio is currently ~0.3 ($905mm market cap).

"Tech-enabled staffing" provides a more scalable model for the contract staffing industry, ostensibly through leveraging tech and AI to optimize matching, integrate marketplace efficiency, and speed up the hiring process. Tech-enabled staffing has attracted sizable venture investment since 2020, and there are many growth stage companies in this space that are taking market share away from legacy staffing companies like AMN and regionals. Leaders in this category include Aya Healthcare (a legacy staffing company that has been competing with newer entrants through acquisition and a tech-driven strategy), Nomad Health (a Company Ventures portfolio company), Trusted Health, Incredible Health, and Clipboard Health. While we believe that tech-enabled staffing will continue to disrupt legacy staffing, we believe this market is relatively matured, and are less bullish on new startups that focus on direct staffing as their core business model.

‍We are more interested in building and funding new companies that seek to liberate provider organizations from third-party staffing altogether. Contract staffing treats the symptom, providing an expensive solution to a desperate problem of need-to-fill in critical shortage situations, without controlling for costs. We want to work with founders who are interested in building solutions that target the root cause of the disease, and see opportunities for startups to dramatically improve supply side dynamics in two key ways:‍

1. Going after education, training, and licensure bottlenecks. ‍

While state licensure regulations and tightly controlled academic accreditation processes present high barriers to entry for startups seeking to build new talent pipelines into healthcare, these barriers also act as a defensible moat for those that do make headway in this arena. Stepful, a Company Ventures portfolio company, has built accredited online training programs for MAs, pharmacy techs, and surgical techs, and then works directly with employers to place newly licensed graduates into full-time roles. They have proven that high-margin, scalable business models can exist in the education and licensure space, and that online learning breaks open the market for people accessing new careers in healthcare.

Reasons we are excited about opportunities that grow and strengthen the healthcare talent pipeline, focusing on education and training:

• Traditional academic programs (i.e. traditional colleges and technical schools) are costly, inflexible, and geographically constrained. Online/hybrid learning and remote education make the path to licensure quicker and more affordable without sacrificing quality of training or NPS.
• Online coursework enables more flexibility for educators-of which there are not enough-to teach more students.
• Health systems are increasingly willing to subsidize the cost of education for a direct pipeline to newly licensed clinicians, and for upskilling their existing staff into higher need roles.
• Regulatory tailwinds that ease practice and licensure constraints on critical shortage providers (APRNs, for example) make these professions more desirable for career progression, and employers more incentivized to hire (and pay for education and training) for these roles.
• Continuing Medical Education (CME) that is required for clinicians to remain licensed can be streamlined and compliance automated through AI-native platforms. This is especially important for telehealth providers, who need to keep track of CME requirements in multiple states of licensure.

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2. Leveraging employer data to turn hiring into a proactive as opposed to a reactive process through predictive analytics.

‍To reduce reliance on contract staffing, provider organizations need to overhaul their departmentally silo'ed workforce planning and hiring processes. With integrated data across people, finance, and quality teams, employers can create hiring plans years in advance of critical need, beef up their internal recruitment efforts, and weigh costs of various outsourced solutions.

Reasons we are excited about opportunities that provide advanced business intelligence and predictive analytics for workforce planning:

• AI has the potential to cost-effectively unlock dynamic data intelligence that enterprises have historically hired consulting firms to make sense of. Calculating the cost of turnover, for example, by unifying data from an organization's HR and finance systems, should be table stakes.
• Role-by-role visibility into costs of workforce shortages (revenue losses and direct recruitment costs) enables employers to proactively calculate the financial impacts of third-party staffing and evaluate alternatives.
• Salary benchmarking is a bit of a black box. Health systems have shared with us that outsourced compensation data from legacy vendors is unreliable in competitive markets. Declination rates and exit surveys are a better real-time signal of market competitiveness.

Overall, we see enormous value in the opportunity to help healthcare employers break free from traditional staffing agencies and consulting firms, saving them millions of dollars per year on staffing, recruitment, and hiring costs. We are especially interested in solutions that empower employers to directly tap into new talent pipelines and proactively manage their workforce.

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Optimizing the Workforce:

We also see enormous potential for automation and redistribution of a significant amount of administrative work currently being done by critical staff experiencing the highest shortages and turnover.

• Administrative tasks account for approximately one quarter of total US healthcare spending (Citi).
• 30% of all administrative tasks are estimated to have the immediate potential for full automation with AI (Medical Economics).
• Challenges to building solutions in this area include:
  
  • Crowded market with many new entrants.
  • Trap of building point solutions that compete with embedded EHR tools (i.e. the "Epic roadmap" problem).
  • ROI expectation and learning curve for AI adoption is high. One large health system estimates that only 10% of its workforce is properly trained to use GenAI technology.

We have made investments in the admin automation category already, including portfolio companies Reverence Care (scheduling automation for home health clinicians), Elaborate (tackling physician burnout with inbasket management and messaging automation), UnityAI (operational workflow automations for hospitals), and Prosper (AI voice agents for RCM). We like this space because of how rapidly advancements in AI are bringing down the cost of automation while improving the outputs, how specialized knowledge and data in healthcare are necessitating vertical products, and how motivated on a cost basis enterprise customers are to readily adopt solutions.

Beyond administrative automation and the integration of AI agents into healthcare, many employers are also re-thinking the work itself: who does what and why? A hot topic in workforce management and retention has been how to better enable clinicians to work at top-of-license, solving for more patient interaction, less admin work, and higher job satisfaction. We think automation can solve some of this, but so can redistribution of tasks that don't require specialized licenses to non-licensed professionals. Redistribution of work through a redefining of roles and a reevaluation of scope-of-work within regulatory limits is an area we especially like.

What this redistribution of work can look like in practice includes:

• "Limited scope" roles within critical shortage areas (such as surgical techs, radiologic techs, MAs, RNs, and others).
• Internal shift pick-up pools, preference matching, and training programs.
• Overtime and other monetary incentives applied to internal "float" pools and/or training for new or dual roles.
• Built-in and automated regulatory compliance.

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IV. 10 Year Outlook

Over the past 10 years, venture-backed companies building workforce solutions for healthcare have been overwhelmingly concentrated in the direct staffing space. We believe the next 10 years of workforce solutions will be dominated by companies that are building to disrupt the direct staffing model, solving for shortages both through the expansion of tech-driven education and training programs that grow the volume of workers entering into licensed healthcare professions, as well as through the widespread adoption of AI to replace administrative burden and administrative roles altogether, and enable the efficient redistribution of necessary human resources within an organization.

We think solutions that grow and optimize the healthcare workforce will be accelerated by a few key market dynamics that we believe will have an outsized impact on the healthcare workforce problem:

1. Government regulation will increasingly support removing barriers to care due to workforce shortages. These regulations include:
   
   • Continued loosening of supervision requirements for NPs and PAs to practice independently.
   • Scope-of-work expansion across nursing and allied health.
   • More state licensure compacts allowing for licensed providers to work in multiple states, particularly important for telemedicine expansion;
   • More financial incentives for students to go into licensed healthcare professions (deferred loans and grants, for example);
   • Incentives and pressure on accreditation boards, schools, and residency/fellowship programs to expand enrollment for those pursuing critical shortage professions (physicians and nursing, for example).
2. Ed-tech and remote/hybrid learning programs will dramatically increase in market share relative to traditional higher education and technical colleges that graduate licensed healthcare professionals.
3. Contract staffing will still be used, but will be used primarily for specialty roles or for short-term staffing only. Legacy staffing agencies will shrink, while tech-enabled, marketplace staffing models will expand. Internal recruitment, work redistribution, and AI automation will negate a significant portion of direct staffing contracts, keeping labor costs contained and driving pricing down.

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If you would like to engage further on this topic, please reach out to [email protected].

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