Staff shortages and supply chain woes threaten profit margins

Photo: Suriyapong Thongsawang/Getty Images

Labor shortages and supply chain challenges are a rising threat to profit margins for U.S. healthcare and pharmaceutical companies, according to a new report from Fitch Ratings.
 
The scarcity of workers is likely to increase pressure on some issuers' margins in the near term but is unlikely to trigger any credit downgrades, the report added.
 
Multiple factors are contributing to labor pressures, including staff burnouts caused by the enduring COVID-19 pandemic and an overall shortage of qualified help, which has resulted in higher costs to hire temporary staff, as well as wage inflation.
 
Furthermore, the report noted that lack of staff is forcing some in-patient behavioral health and senior housing operators to lower admission rates.
 
"Healthcare providers should be able to recapture some of the lost margin, but rate increases tend to lag, given the cadence of contract renewals," the report said. "Thus, cost mitigation efforts will initially focus on identifying cost savings elsewhere, more efficient utilization of existing staff and renewed efforts on recruitment."
 
Supply chain issues are also adding pressure to profit margins, mainly due to higher transportation costs incurred by distributors. The medical device subsector is also being impacted by the global shortage of semiconductors needed for their manufacturing processes.
 
"The risk that supply chain challenges become a greater headwind to revenue is rising but many issuers expect these issues to begin to subside in mid-2022," the report noted.
 
WHY THIS MATTERS
 
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 October report.
 
Kaufman Hall's 2021 Healthcare Performance Improvement Report also found supply chain disruptions and shortages have driven up prices and forced a return to the costs of carrying larger inventories of needed supplies.
 
THE LARGER TREND

The Fitch Ratings report follows the Healthcare Quarterly report from Moody's released in October, which also found that a shortage of nurses and other workers will continue to erode hospital financial performance into 2022.
 
Washington State healthcare workers have called on hospitals to mitigate the staffing crisis, with the union arguing there are a number of policies hospital administrators could immedi­ately enact that would help alleviate some of the issues.
 
Meanwhile, vaccine mandates for healthcare workers are also having an effect on the staffing shortage. For example, the state of Washington lost 2% of its healthcare workforce since mandating that all hospital and nursing home staff members receive COVID-19 vaccines.
 
ON THE RECORD
 
"Labor challenges are a margin headwind for hospitals, but they may pose a more material risk to the recovery in certain subsectors, such as skilled nursing and senior housing. Lower operating cash flows for these non-hospital settings, where staffing is insufficient to meet demand, is slowing the rate at which they recover from significant pandemic-induced declines," the report said. "Certain providers expect headwinds will remain a challenge but expect improvement as unemployment benefits expire and cite anecdotal evidence of more robust recruitment in late 3Q21 and into 4Q21."
 

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