Core credit drivers for the nonprofit hospital sector are expected to remain challenged for the rest of 2024, according to a report published June 25 by Fitch Ratings.
While macro staffing and inflationary pressures are cooling, workforce shortages and salary and benefit pressure are still compressing margins for a sizable portion of the hospital sector. The good news is that many health systems are seeing patient volumes rebound above pre-pandemic levels and balance sheet positions remain robust, according to Fitch.
Labor costs remain by far the biggest component of hospital expenses and have emerged as the most meaningful differentiator between stronger and weaker operating performance.
"Organizations that have successfully attracted and retained all staff categories, not just nursing, have experienced reductions in both usage and cost per hour of external contract labor," the ratings agency said. "Many issuers in the sector have maintained a pace of net new hires exceeding 'leavers.' These are positive signs and contribute to savings and improved patient outcomes."
However, Fitch noted that the "base rate" for many labor categories has reset at a higher level, which will remain elevated for at least the medium term.
Larger macroeconomic headwinds, specifically labor supply shortages, became more prominent in 2022 and remained a pressure point for many hospitals and health systems in 2023. While this pressure will remain elevated for the foreseeable future, the labor "cost curve" seems to be leveling and month-over-month operating margins are improving.
"At a macro level, margins continue to show improvement, although not uniformly across thesector, and the pace of improvement for many remains sluggish," according to Fitch. "A select few health systems continue to enjoy strong operating margins, which remains a mark of distinction in the current sector landscape. A subset of the industry continues to struggle [year to date] 2024, with much of that concentrated at the lower end of the rating scale."
Fitch noted that liquidity remains a rating cushion for most providers to weather the current environment and any future shocks to the healthcare system. Liquidity improved over the last 18 months as the equity market rebounded from losses experienced through much of 2022, and cash flows have generally begun to improve.