Dramatic margin fluctuations characterized 2022, which was one of the worst financial years for hospitals in decades. Despite a modest positive turning point in 2023 for some hospitals and health systems, 2024 will be categorized as another "make or break" year for a significant portion of the sector, Fitch Ratings said in its annual outlook report.
Nonprofit hospitals are battling an ongoing "labordemic" with widespread staff shortages, intense wage pressure and heightened inflation, according to the report, which pointed to a "trifurcation" of credit quality emerging from these struggles that will likely become more prominent in 2024.
"Much of a hospital's ability to be successful, will depend on their ability to recruit and retain staff in the currently hyper-competitive landscape for personnel," Kevin Holloran, senior director and sector head at Fitch, said in the report.
Fitch projects that most hospitals will fall into the middle of the trifurcation pack with mixed results in the form of lower margins — though not enough to warrant widespread downgrades — and, despite some success in obtaining staffing, a still-heavy reliance on external contract labor.
A small percentage of hospitals will be successful in recruiting and retaining staff while seeing improved patient demand versus hospitals that will struggle to recruit and retain talent while facing volume demand challenges, according to the report. This last group of hospitals will be most vulnerable to rating downgrades in 2024, when bond covenant breaches will be another area of concern.
"Second year violations, which would occur in calendar 2024 as fiscal 2023 audits are finalized, may intensify the potential for bondholders to declare an event of default and accelerate payment of bonds," Mr. Holloran said.