Fitch puts 'deteriorating' label on NFP hospital sector

Fitch Ratings moved its mid-year outlook on the not-for-profit hospital sector to "deteriorating" as inflation and labor struggles set back a fiscal recovery from COVID-19 wounds.

"While severe volume disruption to operations appears to be waning, elevated expense pressure remains pronounced," said Kevin Holloran, a Fitch senior director. "Even if macro inflation cools, labor expenses may be reset at a permanently higher level for the rest of 2022 and likely well beyond."

Operating metrics are down based on an early look at mid-year numbers, but liquidity improvement from last year that boosted median cash-on-hand to 260 days is providing a cushion to help weather the near-term impacts, he said.

“While severe volume disruption to operations appears to be waning, elevated expense pressure remains pronounced,” said Kevin Holloran, a Fitch senior director.

Investment losses after healthy gains earned last year also are putting a dent in 2022 performance and operating metrics are down significantly compared to last year. Fitch said it expects some of the struggles to remain elevated into 2023 as labor expenses — especially given an ongoing nursing shortage — will remain high even if inflation cools.

The various strains could lead to debt service coverage covenant violations for some.  "We may be in a period of elevated downgrades and negative outlook pressure for the rest of 2022 and into 2023," Holloran said.

The sector entered the New Year with a neutral outlook from Fitch while S&P Global Ratings had assigned a stable outlook. Moody's Investors Service assigned a negative outlook to the NFP and Public Healthcare sectors. All cited growing labor expenses as well as rising supply costs due to shipping delays as major pressure points.

The challenges pose new threats as the sector's struggles to manage COVID ease. Hospitals have mastered the ability to maintain elective services while also dealing with COVID patients although the course of variants and potential case surges could cause some bumps.

"Nevertheless, traditional surgical and specialty care volumes have returned to near pre-COVID-19 levels in many markets," Fitch said.

In June, hospitals and health systems saw a sixth consecutive month of negative margins as rising levels of patient volumes and revenues couldn't offset higher expenses, according to Kaufman Hall's National Hospital Flash Report. That reverses the prior trend of positive margins for the last six months of 2021.

"Margins are rising but have a long way to go. Halfway through 2022, hospital margins are still in the red," the report said. June margins did improve from May by 30.8% as revenues ticked up and expenses were down month-over-month, but expenses remained high compared to pre-pandemic levels and so margins were stuck in negative territory with June numbers down 49.3% from June 2021.

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Not-for-profit healthcare
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