Dive Brief:
- Next year is set to be another “make or break” year for nonprofit hospitals as they continue to weather staffing shortages and heightened inflation, according to a report from credit ratings agency Fitch Ratings released on Tuesday.
- The outlook for the sector is still “deteriorating” — a rating that’s been in place since August 2022. Fitch does not forecast credit downgrades en masse in the coming year. However, downgrades and negative outlooks will likely continue to outpace upgrades and positive outlooks.
- The single largest differentiator in performance will be hospitals’ ability to attract and retain staff in a hypercompetitive landscape, said Kevin Holloran, Fitch senior director and sector head, in a statement.
Dive Insight:
Nonprofit hospitals struggled during the COVID-19 pandemic as systems incurred high labor and supply costs and suffered investment losses. Rising expenses led 2022 to be the worst operational year on record for many nonprofit systems.
Fitch Ratings initially anticipated organizations would report break-even operations on a month-to-month basis beginning in 2023. However, the agency acknowledged on Tuesday that the rebound occurred later in the year and “to a lesser extent than originally anticipated.”
The same macroeconomic headwinds of 2022 remain and operating metrics will continue to be a significant challenge for providers heading into next year — with some providers lagging “significantly” behind in recovery, according to Fitch.
Still, some hospitals may see incremental recovery next year. However, success will hinge on successfully recruiting talent — not just nurses — and managing labor costs.
Though the use of contract labor has abated from record levels, Fitch said that many providers continue to rely on “uncomfortably high” amounts of contract labor.
Providers who have successfully reduced their utilization of contract labor have paid in other ways, offering higher baseline salaries, wages and benefits to attract full-time employees, according to the report.
Most organizations can expect mixed operating results in 2024, with modest success in recruitment and retention and modest volume demand, the agency said.
However, a small portion of hospitals will be successful next year, likely on strong recruitment and solid patient demand. Such organizations typically have strong market share in demographically favorable growth markets, according to the report.
Some nonprofits will struggle significantly to recruit and retain staff, with volume demand and payer mix deterioration compounding the negative credit scenario.
Fitch does not anticipate revising the sector outlook to “neutral” absent significant improvement in labor productivity, such as gains that could be achieved through technology and artificial intelligence advancements.
However, credit agency Moody’s predicted a slightly sunnier sector forecast last month, revising the industry’s outlook to stable as patient volumes increase and expenses slowly abate.
Still, that report advised caution, noting, “With the labor market still tight and inflation high, expense growth could pull ahead of revenue without diligent cost controls and efforts to improve operating performance.”
