Nonprofit healthcare systems are in for a tough year, but a Fitch Ratings report released Wednesday projects even the hardest-hit providers may start to see improvement in the coming months.
The industry ended 2022 with depressed margins, and some health systems saw billions of dollars in operational losses. High labor costs, along with ongoing supply chain issues and inflation, continue to drag on systems’ financial performance. The challenges have no short-term fix, and labor expenses are expected to stay elevated through at least 2023, said Kevin Holloran, senior director at Fitch.
The credit ratings agency downgraded the nonprofit health system sector to “deteriorating” in August and maintains that outlook in its latest report, acknowledging the likelihood that negative outlooks for health systems will outnumber positive ones for a time.
Holloran said hospitals still need a better balance between medical and surgical volumes. The so-called “tripledemic” – COVID-19, respiratory syncytial virus and flu – means fewer inpatient beds are being used for revenue-driving services like elective surgeries.
“It’s almost a running joke that ‘I lose money for every case I do’ because the labor is so expensive, particularly in those medical cases,” Holloran said.
But 2023 could be a turning point, according to the report, which projects many providers will be able to break even in their operations on a month-to-month basis sometime this year, with “gradual improvement” from there.
“We think that we are beginning to come out of the worst of it and towards the end of the year, sometime during this year, we’re going to break through that barrier and get more and closer to back to normal,” Holloran said.
That doesn’t mean providers will leave their financial challenges behind. More systems are at risk of defaulting on credit agreements this year – a situation exacerbated by declining cash flow and growing interest expense. In December, Moody’s Investors Service reported 34 healthcare organizations were rated B3- or lower, holding nearly $65 million of combined outstanding debt. Improvements in the investment markets or debt waivers would soften some of the hit to credit ratings, the Fitch report noted.
Holloran said he expects more systems to exit payer networks and contracts, as well as push for shorter contract periods, as providers continue to navigate expenses.