Not-for-profit hospital outlook upgraded to neutral
The sector has seen improved operating margins while the escalation of labor expenses has slowed, says Fitch.
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U.S. nonprofit hospitals have made some meaningful strides over the past few months – enough for Fitch Ratings to revise its outlook from deteriorating to neutral, the rating agency said this week.
While there are still headwinds, the not-for-profit hospital sector has seen improved operating margins following a tough three years of compression. In particular, the escalation of labor expenses has slowed somewhat, along with an ease in inflationary pressures.
Hospitals' balance sheets have seen improving operating cash flows and strong equity market returns, Fitch said.
WHAT'S THE IMPACT?
The current forecast from Fitch, based on these slowly improving operating margins, is a median operating margin of between 1 and 2%, assuming things remain stable. Volumes are still healthy, especially in growth markets, and so there's been an increased focus on access and capacity.
Labor shortages are still a struggle, but staffing has stabilized somewhat compared to 2022, when staffing challenges reached their peak.
Fitch did anticipate a few potential headwinds. Major policy shifts could result in a steep decline in health insurance coverage for many Americans; meanwhile, a decline in cash flow from supplemental funding streams could shift the outlook back to "deteriorating."
Senior director Mark Pascaris added that "a macroeconomic disruption leading to a combination of payor mix deterioration, volume softening, or equity market losses could lead to Fitch revising the sector outlook back to deteriorating."
THE LARGER TREND
While hospital and health system financial performance was relatively stable in September, expenses remain high, especially when compared to 2021-2023, according to Kaufman Hall's September Flash report released this month.
Contract labor rates and utilization have decreased, but the overall labor market is still tight, data showed.
Labor expenses account for about 84% of medical groups' total expenses, while the median investment per employed physician was more than $304,000. And provider and physician compensation per full-time employee increased 3% over the prior year.
Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.
