Nonprofit hospitals' outlook downgraded to 'deteriorating' by Fitch
Severe volume disruption to operations appears to be waning, but expense pressures are still elevated and pronounced.
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Due to labor and other macro inflationary pressures, Fitch Ratings has revised its outlook for nonprofit hospitals and health systems to "deteriorating."
The biggest impediment to the sector has been labor, and broader macro inflationary pressures are rendering the sector even more vulnerable to future stress, according to Fitch. Investment losses have contributed to a rockier 2022 to date than anticipated for hospitals, and operating metrics are down significantly compared to last year.
Severe volume disruption to operations appears to be waning, but expense pressures are still elevated and pronounced. Senior Director Kevin Holloran said that even if macro inflation cools, "labor expenses may be reset at a permanently higher level for the rest of 2022 and likely well beyond."
WHAT'S THE IMPACT?
Where this will be the most felt is nurses, which were already in high demand prepandemic, with COVID-19 only exacerbating a glaring shortage of nursing staff.
As a result, many nonprofit health providers will violate debt service coverage covenants in 2022. As to what that scenario means for hospitals in the coming months, "We may be in a period of elevated downgrades and negative outlook pressure for the rest of 2022 and into 2023," Holloran said.
An earlier Fitch report in July found that expenses are eroding margins, and it's happening quickly due to the ongoing inflationary pressures of elevated labor, supply and capital costs. Some providers are reporting margins this year that are significantly lower than in 2019, and recovery could take years.
Most have strong balance sheets, which will help offset the lower margins for a time. But that cushion could evaporate without substantial changes to the business model, or if another coronavirus surge hits during the fall or winter.
Business models will have to go through "transformational changes" to survive long term, and in the short term, hospitals will have to manage cost pressures through a combination of rate hikes and relentless, ongoing cost-cutting and productivity improvements.
With ongoing margin pressures, providers may attempt to secure higher rate increases from their commercial payers, according to Fitch. This won't be easy: Commercial payers are also facing similar inflationary pressures and have consolidated in recent years, resulting in increased leverage over health systems.
Fitch does not expect to see Medicare or Medicaid rate adjustments offsetting inflation, given that federal budget deficits, and commercial rate increases are also likely to be well below inflation in the short term.
THE LARGER TREND
Inflation is one of the major factors likely to affect premiums this year, according to a recent report from the American Academy of Actuaries. It may have some effect on provider costs, but provider payments typically lag behind the rate of inflation, meaning the real effects may not be felt until later plan years. Still, workforce shortages could put upward pressure on provider payment rates.
Inflation has increased to levels not seen since 1982, the report found. Small-business owners are finding it necessary to increase employees' wages and the prices the companies charge for their goods and services. It remains to be seen whether employers will stop offering coverage, reduce levels of coverage or decrease employer contributions to mitigate increases in their other business expenses. Any changes could vary by industry.
The actuaries said inflation's impact is likely to also extend to individual and small-group premiums, and will affect providers' supply chains – which may affect negotiations over rate agreements with health plans.
Twitter: @JELagasse
Email the writer: jeff.lagasse@himssmedia.com
