Hospitals can expect weak margins for the rest of 2023, and into 2024

Nonprofit hospitals are seeing some signs of light, but they are facing financial pressures that are likely to continue over the next year, according to Fitch Ratings.

Nonprofit hospitals are still at least a year away from some kind of "normal," according to Fitch Ratings. (Image credit: ©WavebreakMicroMedia - stock.adobe.com)

In an analysis of the nonprofit hospital sector released last week, Fitch said that nonprofit hospitals are still struggling with higher labor costs, inflation and thin operating margins.

Even after a tremendously difficult year in 2022, nonprofit hospitals appear to be another year away from some level of “normal,” Fitch said in the report. Hospitals can expect weak margins for the rest of 2023 and moving into 2024, the report states.

Hospitals are beginning to make gains, but the recovery is taking longer than expected, says Kevin Holloran, senior director of the nonprofit healthcare group for Fitch Ratings.

“We continue to expect a return to monthly break-even in 2023 for the majority of the rated portfolio, albeit at a slower pace than anticipated heading into the year,” Holloran said in a statement. “While we believe 2023 financial results will be better than those of 2022, this will not represent a full rebound, given the tremendous ongoing pressures on many credits in the sector."

Fitch released its 2023 median ratios for nonprofit hospitals and health systems (the medians use audited data from 2022). About half of the nonprofit hospitals rated by Fitch had a negative operating margin in 2022, with margins ranging from a high of 27% to a low of -21.5%. Fitch reported the median operating margin is now 0.2%.

Other analysts have said 2022 was the worst financial year for hospitals in a long time, as they faced higher costs and the end of federal COVID-19 relief aid. Hospitals have also said federal payments from Medicare are inadequate, particularly as they face higher costs.

Labor costs remain high for hospitals, and Fitch suggests that hospitals should be prepared to accept that they are going to have to spend more on staffing. Many hospitals are still struggling to recruit and retain workers, including nurses.

“Labor shortages, both clinical and non-clinical, will continue through 2023, and likely longer in many markets, with high-growth markets generally better able to mitigate staffing shortages,” the report states.

Some health systems continue to see less volume compared to pre-pandemic levels. Fitch notes the continued shift as health systems are providing more care on an outpatient basis.

Nonprofit hospitals are also dealing with having less cash on hand. The average cash-on-hand for hospitals dropped to 216 days, a drop of 44 days from the previous year. However, Fitch notes that hospitals’ cash-on-hand levels remain comparable with pre-pandemic levels, which is an encouraging sign. From 2013-2019, cash-on-hand levels averaged about 206 days.

But hospitals should expect weak margins for another year, Fitch says, unless the federal government and commercial payers raise payments.

The vast majority (2%) of the hospitals rated by Fitch remain stable, but the hospital downgrades are outpacing positive ratings (6% to 2%, respectively).

More hospitals and health systems are expected to pursue mergers and acquisitions in the difficult financial landscape, Fitch projects. However, Fitch also notes some regulatory hurdles for systems exploring partnerships in the same region. Fitch says more mergers may occur with systems in different markets, a trend other analysts have seen. Atrium Health and Advocate Aurora Health completed their merger last year to form Advocate Health, and other systems could follow a similar path.

Hospitals are likely going to have to find ways to transform their operations and move away from fee-for-service models and begin shifting to value-based care, Fitch suggested in its report.