Children's hospitals' operating environment continues to present challenges because of increased labor costs and year-to-year fluctuations from respiratory virus cases.
Despite a positive median operating margin for the sector, profitability is at its lowest level in 10 years, with no easy levers to pull to help generate a "v-shaped" recovery, Fitch Ratings said in an Aug. 14 report shared with Becker's.
"While children's hospitals did not encounter the same operational challenges initially faced by adult hospital peers during the pandemic, the elevated labor expenses faced by the industry are an unavoidable reality that providers will have to continue to face through creative solutions, as rate increases will not make up the gap on their own," said Richard Park, director of the nonprofit healthcare department for Fitch.
Children's hospitals median operating margin and cash flow metrics declined to their lowest points in 10 years, according to Fitch. The median operating margin and operating EBITDA were 2.7% and 8.1%, respectively, in fiscal 2023 versus 3.9% and 9.2% in fiscal 2022 and 5.3% and 11.9% averages for 2013–2022.
Inflated base salary and wage expenses that helped reduce reliance on high-cost contract labor is one of the key drivers of this profitability drop.
Despite this, Fitch said standalone children's hospitals' median rating remains strong at "AA-".
"Healthcare still remains a service industry centered around person-to-person interactions. Finding a way to augment a human's capabilities while improving the patient experience will be key to the industry's adoption of technology going forward," Mr. Park said.