Hospitals with June 30 fiscal year ends squeeze out a profit

The fiscal pounding hospitals took last year from labor and other pressures nearly erased the fiscal 2021 recovery for hospitals operating margins that have June 30 fiscal year ends, with the full and bleaker accounting of last year's strains still to come, Fitch Ratings said.

The not-for-profit hospital sector's bruising margin wounds last year are well known as it confronted inflationary costs along with ongoing supply-chain issues, volume declines, labor shortages and wage pressures. The latter was most acutely felt in the use of expensive agency nurses.

But with audited results now in for hospitals that operate on June 30 fiscal year ends, medians are coming into focus.

Fitch Ratings said the median for margins barely landed in positive territory at 0.9% compared to 3.8% for the same group a year earlier. Stronger results in the first half of hospitals' fiscal year which fell in the second half of calendar year 2021 propped up the fiscal 2022 results.

"Operations are still profitable, but the initial fiscal year 2022 median margin eroded to barely breakeven," Fitch wrote in a report "Early NFP Hospital Medians Show Expected Deterioration: Will Worsen" from analysts Richard Park, Kevin Holloran, Mark Pascaris, and Sarah Repucci.

Net patient revenue growth was offset by a reduction in other revenue, most notably waning federal COVID-19 pandemic stimulus funds, with a median year-over-year decline of 49.0%. Year-over-year increases to salaries, wages, fees and benefits and as well as other expenses were11.1% and 7.4%, respectively.

Hospitals that close their books in December will see more pronounced scars as those balance sheets will have borne the full brunt of intensifying pressures last year that also extended to market volatility which hit investment returns.

Of Fitch's rated acute care hospital portfolio, 34% run on a fiscal year that ends June 30 while 23% have Sept. 30 fiscal year ends, and 36% run in tandem with the calendar year with 7% having other dates.

Some signs of recovery are afoot from rising patient volume revenues, but staffing woes continue to pose capacity constraints and slow the ability to discharge patients.

"Fitch does not expect a rapid financial recovery for most providers, although hospitals under operational pressure will begin to see breakeven results on at least a month-to-month basis at some point in 2023 with revenue growth and expense pressures easing," analysts wrote. "Nevertheless, margins are not expected to return to pre-pandemic levels for quite some time."

Liquidity metrics also suffered, but Fitch said the damage is less severe as balance sheets had been built up to provide some cushion. The median on liquidity fell by 7% and median days cash on hand of about 221 compared to a peak of 266 days in fiscal 2021.  "Cash to adjusted debt decreased to a still robust 157.6% from a high of 190.3%," Fitch said.

The median debt ratios to operating income was up, reflecting the combination of increased debt and lighter cash-flow generation. "Given sector pressures, Fitch expects investments of capital assets to continue at a modest pace, near depreciation, with a focus on outpatient and technology investments that drive profitability improvements and cost-efficient growth," analysts wrote.

Hospitals closed out the first month of 2023 on more stable footing as some pressures in recent months have begun to ebb but the same strains do persist, Kaufman Hall said in its monthly National Hospital Flash Report on margins published last week.

Hospitals saw improved performance in January compared to January 2022 when they struggled with a COVID-19 surge due to the Omicron variant. But patient volumes, emergency department visits, discharges and total revenues were down by 3% in January compared to December. Expenses rose by 1%.

"While we have seen a stabilization in operating margins over the past several months, the trendline continues to show that hospitals will be in a tough spot financially for the foreseeable future," said Erik Swanson, senior vice president of data and analytics at the financial advisory firm. "With future COVID surges possible and challenging financial months ahead for hospitals, managing cash on hand will be critical to weathering the storm."

The report draws data from more 900 not-for-profit and for-profit hospitals from Syntellis Performance Solutions.