Nonprofit hospitals, hammered by soaring expenses, have ‘deteriorating’ outlook: Fitch

Dive Brief:

High labor and supply expenses in addition to inflationary pressures will continue to batter nonprofit hospitals this year, contributing to a ‘deteriorating’ outlook for systems, Fitch Ratings said on Wednesday.
The outlook is a continuation of the ‘deteriorating’ nonprofit sector outlook that Fitch Ratings released in August last year, when the ratings agency downgraded the sector from a ‘neutral’ rating.
Still, Fitch sees some signs “that we are beginning to come out of the worst of it,” said Kevin Holloran, senior director at the agency.

Dive Insight:

Nonprofit hospitals that posted operating losses during the COVID-19 pandemic have been hit by higher labor and supply costs in addition to investment losses and declining or neutral admission volumes.

Last year was one of the “worst years ever” for nonprofit hospitals, Holloran said.

Labor will remain the largest hurdle for hospitals this year even as they struggle with inflation and spiking COVID-19 admissions that can dent revenue, he added.

“The labor story just dwarfs the inflation story,” Holloran said on a Wednesday conference call.

Systems have been forced to turn to staffing agencies for contract labor amid shortages. Some burned out healthcare employees and others have gone on strike to demand higher wages and better working conditions, or left the profession entirely.

Because of soaring labor expenses, hospitals should not expect to “grow our way out” of expenses by raising revenues or increasing hospital admissions, Holloran said.

There is no short-term fix for labor shortages, only medium- and long-term fixes, as expenses continue to rise and revenues stagnate or decline, the senior director said. He added that labor costs are expected to remain elevated for several years and hospitals are putting recruiting and retention efforts “on steroids” amid challenges.

Hospitals also can look toward commercial payer contracts to ease high expenses, Holloran said. Payer contracts fall in the approximately 25% to 30% of non-fixed revenue that hospitals have the ability to control.

Some hospitals have been stuck in unfavorable payer contracts during the COVID-19 pandemic. Payer contracts are usually multiyear, meaning that hospitals have been locked into rates while expenses and inflation soared.

The ratings agency now expects to see a shift from long-term contracts to single-year contracts as nonprofits attempt to ease expenses.

If system contracts are up for renewal, hospitals should negotiate and ask for rate increases, Holloran said.

However, Fitch also expects that negotiations could quickly turn combative.

“I almost expect this to be extremely contentious,” Holloran said. “You're going to see an above-average number of people exiting networks, exiting contracts and really toeing the hard line.”

Still, the ratings agency sees some bright spots for nonprofit hospitals in 2023. Fitch expects that sometime this year, hospitals in its rated universe will begin to break even on a month-to-month basis.

Another highlight going into 2023 is that contract labor use appears to be declining, Holloran said.