Hospital operations have stabilized after a tumultuous few years, with the chasm between revenue growth and expense growth leveling out, but headwinds remain amid ongoing staff shortages, intense wage pressure and high inflation, Fitch Ratings said in an Aug. 15 report shared with Becker's.
On average, hospitals saw a 7.6% expense growth versus a 7% revenue growth in 2023, compared to 9.5% expense growth and 5.8% revenue growth in 2022. However, a "trifurcation" of credit quality emerging from ongoing staffing and financial challenges is likely to be an issue well into 2025, with a credit "bifurcation" emerging soon after, according to Fitch,
The ratings agency expects most hospitals to 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 portion 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 Fitch. A third group of hospitals will be most vulnerable to rating downgrades this year, when bond covenant breaches will be another area of concern.
Mark Pascaris, senior director at Fitch, said most nonprofit hospitals (65%-75%) will fall somewhere in the middle, steadily working to improve their operating margins. Challenges may intensify for 5% to 10% of hospitals and an equal number on the top end of the spectrum are positioned to thrive in stronger markets.
"Median days cash on hand continues to decline, dropping to 211.3 in 2023 from 216.2 in 2022, and down from a high of 260.3 in 2021," Fitch said in an Aug. 15 report. "The imbalance between revenues and expenses remains a structural issue for the sector. Although the labor situation is improving, it still falls short of pre-pandemic levels."