Nonprofit hospitals and health systems are likely still a year away from “normal” finances, volumes and in particular labor availability as the sector claws its way back from “what will likely be defined as operational all-time lows,” Fitch Ratings wrote in a new report.
The median operating margin of nonprofits rated by Fitch during 2022 was 0.2%, according to the agency’s 2023 Median Ratios report based on nonprofit hospitals and systems’ audited 2022 data.
That number, Fitch wrote, ranged widely from as high as 27% to −21.5% and indicates that about half of Fitch’s portfolio logged a negative margin during 2022.
“When we released last year's medians, there was a belief that the sector had peaked in 2021 and would experience stress in 2022, with recovery beginning in 2023,” the agency wrote in its report, released Tuesday. “As we have seen year to date, the negative associated pressures have lingered longer than expected due to continued labor shortages, inflationary expenses and shifting volume composition.”
Portfolio nonprofits’ deteriorating margins were seen “across the board,” but the losses were generally worse among those given below-investment-grade ratings and “more modest” among those with higher, AA ratings, Fitch wrote.
Major declines were also seen among lower-rated providers’ cash to adjusted debt (37.5% to 47%) and other key balance sheet metrics such as days cash on hand, though those numbers are now roughly on par or better than pre-pandemic, according to the report.
Much of the issue is a clinical and non-clinical labor shortage that will continue through the rest of the year “and likely longer in many markets, with high-growth markets generally better able to mitigate staffing shortages,” the agency wrote. In some cases, this has led to curtailed services.
Further complicating the issue is inconsistent volume recovery across the sector. Some providers in Fitch’s portfolio still haven’t returned to pre-pandemic volumes while others have increased their numbers, the group wrote.
“More notable is the shift from surgical to medical [volumes], particularly for the first half of 2022, combined with the longstanding inpatient to outpatient migration,” the agency wrote.
Fitch also noted that certain risk-based business “still appears to be on the back burner” for nonprofit hospitals and systems due to their unpredictable expenses. On the other hand, the agency was surprised to see there were no significant, sector-wide changes in payer mix triggered by the pandemic.
“Fitch still believes the sector will see a gradually eroding payer mix overall with Medicare and Medicaid volumes accounting for an increasing percentage of inpatients,” it wrote in the report.
Other predictions for the sector outlined in the report included a continual widening in the credit gap of Fitch’s portfolio, providers’ increased interest in pursuing out-of-market mergers and acquisitions and pressures to shift from traditional fee-for-service reimbursement.
More broadly, Fitch said it expects the sector to see its weak margins extend into 2024 due to a combination of hospitals and health systems’ static revenue model, labor issues and other inflationary pressures, “unless payers, governmental or otherwise, begin to hike annual rate increases more in line with this new normal.”
“That said, the worst may be approaching an end with most [nonprofit] hospitals likely to see a return to monthly break-even in 2023, though by no means can it be categorized as a full rebound,” Kevin Holloran, senior director at Fitch and one of the report’s authors, said in a statement.