Nonprofit hospitals need 'transformational' changes to reverse inflation's bite, Fitch says

Nonprofit hospitals’ bad financial situation is likely to get worse if they don’t take action to counter ongoing upward pressure on their expenses, Fitch Ratings warned in a recent market sector update.

Labor, supply and capital cost increases have been rampant across the industry this year thanks to broader inflation pressures and other pandemic factors, the ratings agency wrote.

Reversing the margin trends will likely require nonprofit hospitals to take on a combination of rate hikes in the short term, “relentless” cost-cutting and productivity initiatives for the medium term and “transformational changes to the business model” for the long term, Fitch wrote.

Fortunately for those hospitals, many organizations already have the means to weather the storm as they overhaul their operations.

“The vast majority of our rated credits have strong balance sheets that will offset lower margins for a period of time and allow for operational improvements,” Fitch wrote. “Without more substantial changes to the current business model, or with additional coronavirus surges this fall or winter, this balance sheet cushion could eventually erode.”

Rate negotiations with payers will likely be an upward battle, the group wrote.

Commercial payers are subject to many of the same inflationary pressures challenging nonprofit hospitals and, thanks to recent consolidation, could be bargaining from a stronger position. Fitch also wrote that it doesn’t expect Medicare or Medicaid rate adjustments to match inflation due to federal budget deficits.

“Nevertheless, providers may be able to pursue rate increases above those achieved in recent years, considering the interdependent relationship of providers and payors,” Fitch wrote. “Recently, both the University of Vermont Health Network and Rutland Regional Medical Center asked their state’s healthcare cost regulator for a near 20% rate increase.”

Whereas hospitals have historically looked to merger agreements of their own to offset high inflation, Fitch said a similar consolidation push is unlikely in light of the Federal Trade Commission’s recent commitment to clamp down on hospital mergers.

In the meantime, nonprofit hospitals could choose to postpone pricey expansion and renovation plans until costs come under control, Fitch wrote.

Hospitals and health systems have logged five straight months of operating margin declines on the national level, according to Kaufman Hall’s most recent industry report for May. These hits came despite a steady uptick in patient volumes and revenues that failed to outpace a 10.7% year-over-year increase in expenses.

More details on health system financial trends will come in the next few weeks as the country’s largest public for-profit systems report their second-quarter earnings. The end of June already saw one of these companies, Universal Health Services, cut down its annual forecast due to continued cost pressure and a slower-than-hoped-for return of non-COVID volumes.