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The stormy U.S. economy has drawn a silver lining for some hospitals, which are able to hire more nurses directly and rely less on costlier contract-nurse businesses.

That development, however, is taking a toll on nurse staffing companies such as AMN Healthcare Services Inc. (AHS) and Cross Country Healthcare Inc. (CCRN), which have reported deteriorating business conditions as the recession has deepened.

A nationwide nursing shortage in recent years was exacerbated by the booming economy, as many nurses were the secondary wage earners in their households and could work fewer days or hours, Trevor Fetter, president and chief executive of hospital operator Tenet Healthcare Corp. (THC), noted in an interview this week.

"Now that the economy is weaker, we are seeing the nursing shortage abate a little bit, where nurses are willing to work longer hours, come back into the work force, maybe work longer days than they did before," Fetter said. "Anyone with a nursing degree in this country does not need to worry about having a job."

Steve Filton, chief financial officer of hospital operator Universal Health Services Inc. (UHS), made a similar observation during an interview with Dow Jones Newswires this week. The use of temporary nurses, a more expensive option, tends to decline as the economy weakens, and "we're certainly finding that dynamic at play," he said.

The recession, with its rising unemployment and expectation of greater numbers of uninsured Americans, is hardly seen as an overall boon to hospitals. The industry already has struggled for years with pressure from caring for uninsured and underinsured patients and with soft admissions of commercially insured patients. The increased ability to hire nurses on their staffs, however, can help ease labor costs for hospitals.

The use of a nurse from a staffing agency can cost a hospital 20% more than employing one on staff, Tenet's Fetter said, citing fees that the hospital must pay for those services.

The pressure of the nursing shortage started to abate in the third quarter of 2008, as Tenet was able to reduce its use of contract labor, he said.

"We prefer to have continuity with our employees," Fetter added.

That trend is hitting the nurse staffing industry.

"While not as impacted as many other sectors, the slowing economic conditions and higher unemployment have negatively impacted demand for our services, most notably in nurse staffing," Susan Nowakowski, president and chief executive of AMN Healthcare Services of San Diego, the nation's largest heath-care staffing company, said this week after the company posted a 9.5% decline in fourth-quarter profit.

In 2009 so far, demand has slowed for most of AMN's business lines, most significantly for nursing, with volume declining by double-digit percentage amounts both sequentially and year over year, the company said. AMN also noted a moderation in price increases, although it said it doesn't expect pricing erosion.

Based on those trends, the company forecasted that revenue would decline by a low- to-mid-teens percentage year over year in the first quarter. AMN said it will continue to share general business trends while no longer providing specific financial guidance, explaining that the current economic environment makes it more difficult to forecast financial performance.

AMN has taken cost-cutting measures in the past three months, including a work-force reduction, minimal replacement for attrition, and brand and facility consolidation. The company, though, increased market share last year, and in previous recessions has been able to build market share, Nowakowski noted on a conference call. "While orders are significantly down, we believe we still have about twice as many assignments to offer (nurses) than our closest competitors," she said.

Cross Country is set to report its fourth-quarter results on Wednesday, after the close. On Cross Country's third-quarter call in November, President and CEO Joseph Boshart noted that the company's operating environment had deteriorated significantly, with demand for travel nurses going from being up more than 20% at the start of the period to being down more than 30% at the end. Boshart said at the time that demand was its lowest since late 2003.

The changing dynamic doesn't necessarily mean hospitals will see a big windfall in labor costs. On a conference call in early February, Richard Bracken, chief executive of once-public hospital chain HCA Inc., which issues corporate debt, said that "obviously we maybe get a little help in a tough economy in terms of turnover, and the overall pricing of wages tends to moderate in difficult times. But nonetheless, we need more nurses next year than we do this year to take care of an increasing volume level."

AMN Healthcare shares are down 54.5% year over year, while recently trading up 11%, or 71 cents, to $7.01. Cross Country shares are off 31.5% year over year, and recently traded up 3.7% to $7.52. Both companies are trading well below their historic valuations.

AMN traded recently at 12 times projected earnings for the next 12 months, while Cross Country traded at 11.8 times. Over the past several years, in contrast, AMN traded at an average of nearly 18.5 times projected earnings for the subsequent 12 months, while Cross Country traded at more than 21.7 times.

AMN didn't immediately return calls for comment and Cross Country had no immediate comment.

- By Dinah Wisenberg Brin, Dow Jones Newswires; 215-656-8285; dinah.brin@dowjones.com