Moody's: Rising costs will slow hospitals rebuilding margins to pre-COVID-19 levels

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A shortage of nurses and other workers will continue to erode hospital financial performance into 2022, according to a new Healthcare Quarterly report from Moody's.

A rise in COVID-19 cases in various regions of the United States has contributed to a wave of nurses, often burned out, resigning to take care of family, to work in less acute healthcare settings such as ambulatory care or to pursue higher-paying contract opportunities, such as becoming a travel nurse.

Hospitals are also having difficulty finding other types of healthcare workers, such as respiratory therapists and imaging technicians, as well as nonclinical workers in areas such as dietary, housekeeping and environmental services.

WHY THIS MATTERS

The report holds no surprises for hospital executives, who already know the financial affect labor shortages are having on revenue. But Moody's confirms projections that rising costs will make it difficult for hospitals to rebuild margins to pre-COVID-19 levels. 

Labor shortages are driving up costs and also may be limiting the number of lucrative elective procedures, resulting in lost revenue. Not-for-profit hospitals saw operating cash flow margins fall to a median 7% in 2020, from 8.3% in the three prior years, according to Moody's median data.

Hospitals using contract nurses report that hourly wages are very high, in some cases higher now with the Delta variant than during earlier COVID-19 surges. Many hospitals and health systems have also increased minimum wages for nonclinical workers and are finding they must compete with other service sectors, such as the food industry, to attract nonclinical staff.

Given their substantial reliance on government reimbursement from Medicare and Medicaid, most healthcare providers maintain limited pricing flexibility to offset the costs of higher wages. While there are opportunities for more lucrative commercial insurance contracts, rates are the subject of intense negotiations, limiting providers' pricing power, Moody's said. 

Providers with strong liquidity and diversified cash flow will remain better positioned to manage stress from cost constraints. Hospitals are taking steps to retain nurses, including developing "float pools" of nurses who can work in multiple departments, increasing retention and merit pay, and expanding healthcare benefits such as mental health and child care services. 

LifeBridge Health, a not-for-profit health system operating in Baltimore and Carroll County, Maryland, paid its nursing staff retention bonuses in December 2020 as the labor market tightened. To recruit nurses, many systems are offering signing bonuses in exchange for multi-year work commitments as well as scholarship and loan forgiveness programs with local nursing schools.

While these strategies will ease the effect of labor shortages over the long term, they will cause hospitals' costs to increase in 2022 as salaries and benefits typically represent at least half of a hospital's expenses. Labor shortages will also likely spark an increase in unionization efforts or lead to more difficult negotiations between unions and providers, potentially increasing costs via new contracts.

THE LARGER TREND

The quarterly report focused on the impact of labor shortages and cost pressures for various sectors, including hospitals, insurers, pharmaceuticals, healthcare services such as staffing firms and health insurers.

Health insurers are less affected by labor shortages, wage pressure and potentially burgeoning inflation than many other healthcare sectors, Moody's said. Insurers reset premiums each year, which helps them to offset inflation. But if the government does not keep up with payment, providers will look to insurers to make up the shortfall. 

Large physician staffing companies, such as Envision Healthcare Corporation and Team Health Holdings, will experience pressure on their profitability as it becomes harder and more expensive to fill open positions as burnout and retirements decrease the number of doctors available to work.

Travel nurse staffing has higher profit margin resilience compared to physician staffing, the report said. 

For real estate investment trusts, worker shortages are slowing net operating income growth for REITs to invest in senior housing and skilled nursing facilities.

Growth in salaries and benefits has exceeded hospitals' expense growth, a trend likely to continue for the remainder of 2021 and into 2022, Moody's said in an earlier October report.

In one bright spot in the earlier report, Moody's noted recent rises in nursing school enrollment indicating a more robust long-term staffing pipeline. However, the aging population, combined with a healthcare workforce that may be retiring from their jobs or quitting due to burnout, represent long-term healthcare staffing challenges nationwide.

Twitter: @SusanJMorse
Email the writer: susan.morse@himssmedia.com