Elevated inflation, Medicaid expansion, the reinstatement of Medicare sequestration and significant waves of M&A all have intensified a long-term trend of credit divergence, splitting hospitals into stronger and weaker segments, Fitch Ratings said in a Dec. 9 report.
This "credit split" is evolving into a "trifurcation" of credit quality, which the ratings agency expects to dominate in 2025. A credit "bifurcation" is projected to emerge soon after.
Success increasingly depends on recruiting and retaining talent in a hypercompetitive labor market, improving productivity and investing in key areas like artificial intelligence and IT infrastructure. Hospitals excelling in these areas — often with strong market share in growth markets — are likely to reach the top of the rating scale.
"These very successful organizations will also have a predisposition to maximize that market essentially with annual payer negotiations, in a 'mind the gap' mentality that keeps them at the upper end of the payment scale," according to the ratings agency said in its report.
Fitch expects most hospitals to achieve moderate success, constrained by ongoing workforce challenges and the need for external cash liquidity. While sufficient to sustain operations, their margins will remain below historical levels, with limited movement in ratings.
The weakest hospitals, facing severe staffing issues and declining volume demand or challenging payer mixes, will rely heavily on external cash liquidity and continue to move toward the lower end of the rating scale. Fitch anticipates further operational decline for this group before they stabilize at a "new normal."