Hospitals are starting to dig themselves out of a formidable operating trench, but results for the sector still lag far behind pre-pandemic levels, according to Fitch Ratings.
However, median operating margins will gradually improve, while a larger expense base is unlikely to see huge gains over the next two years, Fitch said.
This year "will not be markedly and certainly not the V-shaped recovery we're hoping for," Kevin Holloran, senior director and sector head at Fitch, said in a Jan. 4 news release. "Nonprofit hospital margins are still below both pre-pandemic levels, but more importantly they will tread below the 'magic number' operating margin of 3%."
Nonprofit hospitals continue to battle the "labordemic" with widespread staff shortages, intense wage pressure and heightened inflation. Fitch projects a "trifurcation" of credit quality emerging from these struggles that will become more prominent this year.
This translates to a larger risk of downgrades for hospitals already struggling to return to a degree of pre-pandemic normalcy, and follows a 2023 that saw a 3:1 ratio of hospital downgrades to upgrades, according to Fitch.
The report noted recent downgrades among hospitals and health systems of smaller size and scale and described Washington and Pennsylvania as challenging states in which to operate.
"IT implementation issues, significant capital spending and aggressive expansion initiatives that simply did not work out as intended will further cloud outlooks for smaller hospitals and some providers in Washington and Pennsylvania," Mr. Holloran said.
Fitch also raised concern about a "dreaded" second year of debt service covenant violations, which "may intensify the potential for bondholders to declare an event of default and perhaps accelerate bond repayment," according to Mr. Holloran.