Dive Brief:
- After enduring their worst operational year on record in 2022, nonprofit hospitals are expected to face ongoing weak margins through 2024, according to a new report out Tuesday from credit ratings agency Fitch Ratings.
- Labor shortages, inflationary pressures, shifting patient volumes and a depletion of pandemic-era relief funds contributed to hospitals’ financial pain last year, and it remains to be seen whether the challenges will represent a sidestep or a “new normal” for nonprofit hospitals, the report stated.
- To navigate through financial hardships, hospitals may engage in mergers and acquisitions, while others will find “transformative ways” to shift from a fee-for-service model to first-dollar coverage. Although margins are projected to improve in 2023 and 2024, the gains will not represent a “full rebound,” Fitch said.
Dive Insight:
The deterioration observed in 2022 was not a surprise to Fitch, which noted last year that the impacts of the COVID-19 pandemic and nationwide labor shortages were likely to cause continued financial problems for health systems into 2023.
Fitch Ratings initially anticipated the recovery would begin this year. Now, analysts have said, “the negative associated pressures have lingered longer than expected.”
Though hospitals have begun to report stabilizing margins in 2023, the report says that it’s far from a full return to normalcy.
Fitch pointed to a “significant need” for additional staffing, particularly nurses. The report labeled the staffing shortage a “critical weakness in the sector,” and suggested that hospitals are likely another year away from some level of normal labor availability.
The report found that hospital systems have “massively” increased staffing expenditures to fill staffing shortages, in part by increasing their reliance on contracted labor — a practice which the AHA has found often comes with a hefty price tag.
Policy makers in several states are stepping in to help hospitals address the strain of staffing shortages directly. Some states, including Minnesota, have passed legislation to forgive healthcare workers’ student loans in hopes of helping health systems recruit and retain talent. Other states are considering laws that would cap how much staffing agencies can charge healthcare systems or ban the practice of raising prices for temporary nurses during declared health emergencies.
In 2021, hospitals had strong balance sheets, which provided some cushioning amid unfavorable financial conditions, the report said. While 2022 liquidity levels are comparable to pre-pandemic levels, hospitals’ excess reserves have depleted.
Days’ cash on hand declined by approximately 44 days in 2022, down 17% since 2021. Cash to debt also declined.
As the differences in performance between major and smaller systems become more pronounced, analysts at McDermott hint at the possibility of more M&A activity across the industry — a prediction echoed in this week’s Fitch report.
The report noted that, as margins continue to remain weak, many providers may seek to engage in M&A, although the regulatory and legislative landscape may “limit activity for health systems operating in the same market, encouraging more out-of-market mergers.”
