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.
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.
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"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
"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.