Dive Brief:
- Nonprofit hospitals’ operating margins have reset below traditional levels following the pandemic, according to a new report from credit agency Fitch Ratings.
- Operating margins are now in the 1% to 2% range, representing a “pain point” for the sector amid higher costs, including salary and wage expenses, according to Kevin Holloran, senior director at Fitch. Typically, hospitals need margins of at least 3% to be able to meet their obligations.
- Fitch does not predict it will downgrade nonprofits en masse. However, the agency maintained a negative outlook for the sector this year and said ratings downgrades will outpace upgrades.
Dive Insight:
Nonprofit hospitals are still struggling to rebound from the COVID-19 pandemic, when operators reported losses due to high levels of inflation, nationwide work shortages and investment losses.
Operating margins improved last year. However, recovery has been “notably slower” than expected, and some hospitals may never fully rebound, according to the report.
Last year, Fitch Ratings projected that the sector would experience a “trifurcated” ratings recovery. The agency maintained that analysis on Monday, stating some operators will excel operationally, some will report middling results and others will experience further downgrades.
Managing personnel costs is the “single most meaningful differentiator between operational success and failure,” according to the report.
However, key markets could also play a role in operational recovery. Providers in “high population growth markets,” such as Arizona, Texas, Florida, the Carolinas, Tennessee and Georgia, may be most likely to improve margins, according to Holloran.
These markets tend to have guaranteed growth for patient services and a pool of potential employees to fill lingering holes in employment rosters, Holloran said. Providers in markets with declining populations, or those with payer mixes skewed toward governmental payers, are more likely to continue to report diminished operating margins.
Hospitals will not be downgraded yet en masse as most nonprofits carry high levels of cash on hand, a metric that indicates hospitals’ liquidity and ability to withstand unfavorable operating conditions.
Hospitals will see a “slight uptick” in overall days cash on hand across the sector this year as investment returns and operations improve, according to the agency. In 2022, the last year of available data, the sector carried a median of 216 days of cash on hand.
Still, liquidity fixes may be a temporary solution to long-term profitability concerns. The industry could still experience some “slight rating deterioration over time” should operating margins never recover to the traditional 3% mark, Holloran said.
The year 2030 is a make-or-break year for the industry’s long term financial prospects, because the final Baby Boomers, who make up a sizeable percentage of workers across the sector, will reach retirement age, according to Holloran.
At that time, any unresolved labor pipeline problems could take on increased significance, as a smaller workforce contends with the heightened care needs of an aging population, Holloran said.
