Dive Brief:
- Nonprofit hospitals are expected to experience a financial recovery in 2024 as patient volumes — particularly for outpatient care — increase, according to a new report from credit ratings agency Moody’s Investor Services.
- The firm updated its 2024 outlook for nonprofit hospitals from negative to stable, anticipating a 10% to 20% increase in the sector’s median operating cash flow next year.
- However, while median operating expense growth will slow, Moody’s cautioned that baseline expenses will “remain structurally higher” and require “diligent cost controls” from nonprofit hospitals.
Dive Insight:
Nonprofit hospitals have been battling to get into the black since 2022, when a combination of higher labor and supply costs, soaring inflation levels and lingering unfavorable contracts with payers caused them to have the worst operational year on record.
The industry entered this year with a negative outlook, per Moody’s, on the backdrop of “ongoing difficult operating conditions,” including labor shortages and inflation in “the high single-digit range.”
However, due to rising patient volumes and heightened cash flow, the sector is beginning to rebound. The ratings agency said an increase in patient volumes, particularly outpatient admissions, and higher reimbursement rates from insurers will push revenue growth in 2024.
Although the credit ratings agency anticipates that the sector will rebound next year, it urged nonprofit hospitals to exercise caution regarding costs to ensure revenues continue to outpace expenses.
Authors noted a substantial rise in labor or supply costs or a disruption in volume recovery could lead to a negative outlook.
“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,” the report said.
While nonprofit hospitals’ total admissions have surpassed pre-pandemic levels, Moody’s noted the composition of volumes has shifted toward outpatient services — which are often reimbursed at lower rates from insurers than inpatient services.
To compensate for this trend, Moody’s recommends health systems shift their focus on growing “high-margin outpatient service lines,” in fields like oncology and orthopedics.
The report underscored the importance of collecting claims from insurers, noting that revenue growth may be constrained by denied claims or payment delays as demand for extensive documentation by payers ticks up.
Payment denials are predicted to be worse among managed care plans like Medicare Advantage, where insurers have a greater denial incentive than plans in which they simply administer payments with no insurance risk, according to the report.
This is in addition to continued coverage losses as a result of the Medicaid redetermination process, which began in April. Already, 10 million Americans have been removed from the safety net program amid enrollment checks.
However, Moody’s noted state initiatives, such as states’ Medicaid directed payment programs, could help offset losses.
Nonprofit hospitals, like Kaiser Permanente, have reported improved finances during third quarter earnings this week. The health system reported a $239 million profit for the third quarter — an improvement from a loss of $1.5 billion during the prior-year period.
