Rising labor costs and the COVID-19 pandemic’s uncertain course loom large for the not-for-profit hospital and healthcare sector next year.
Fitch Ratings last week assigned a “neutral” outlook for the sector while Moody’s Investors Service assigned a “negative” outlook to the NFP and Public Healthcare sectors.
Growing labor expenses due to a myriad of factors from employee burnout and vaccination mandates to rising demand for services as well as rising supply costs due to shipping delays all pressure hospitals.
The national labor crisis is being felt across the economy but for healthcare it’s an especially acute wound with little leeway to offset the balance sheet impact.
“Personnel shortages in the sector remain particularly concerning and will reduce margins in 2022 as the sector struggles with added costs," Fitch’s not-for-profit healthcare sector lead Kevin Holloran said in the rating agency’s sector outlook.
"Expenses are already difficult to predict and very challenging to manage amid the current wage-war taking place with staffing and supplies," Holloran said. “While our strongest credits are expected to weather these challenges with minimal rating disruption, weaker credits in the portfolio may struggle."
Similar to 2021, Fitch anticipates a balanced number of upgrades to downgrades in 2022.
The pressures create longer-term strains than those of the
The warnings come as hospitals are dealing with new
“The outlook for the not-for-profit and public healthcare sector remains negative for 2022 as expense growth, driven by nursing shortages and increased labor costs, will outpace revenue gains, resulting in a decline in operating cash flow,” Moody’s said. “Other factors pushing expenses higher are supply chain disruptions, increased drug costs, higher inflation and increased investment in cybersecurity.”
Labor contributed more than half of health systems' expenses in 2020, according to Moody's medians.
Some states and the federal government have responded to the labor crisis by attempting to provide different forms of direct relief or provide local or military staff, deploying National Guard to aid in nonclinical work such as cleaning and assisting with COVID testing, but Moody’s expects those measures to have just a minor impact.
Hospital margins for October underscore the strains of labor costs on balance sheets as they marked a second consecutive month of margin declines, according to the advisory firm Kaufman Hall’s
“Hospitals and health systems nationwide are feeling the pain of stubbornly high expenses,” said Erik Swanson, a senior vice president of data and analytics and author of the report. “Broader economic trends such as U.S. labor shortages are adding to the extreme pressures of the pandemic. Hospitals face greater uncertainties in the coming months as a result, as COVID-19 cases and hospitalizations appear to once again be on the upswing before many have even had a chance to recover from the last surge.”
The median change in operating margin was down 12.1% from September to October, and 31.5% compared to pre-pandemic levels in October 2019, when not counting CARES Act funding. Total labor expense increased 2.7% from September to October.
Hospitals will struggle to offset labor cost strains because they face limited revenue prospects from a worsening payer mix, lingering pandemic strains, and the continued shift of care to low-cost settings and rising costs to deal with the growing number of cyberattacks, Moody’s said.
Repayment of advances received by hospitals under the March 2020 CARES Act for future Medicare services will cut into providers' liquidity, as will payment of payroll taxes deferred through the end of calendar 2020, Moody’s said. Legislative, regulatory and judicial activity also loom large.
Medicare sequestration, delayed because of the pandemic, was set to resume in January, but lawmakers are moving to delay that strain. The Senate last week passed
The bill extends the moratorium on the 2% Medicare sequester cuts until April 1 and reduces the cuts from 2% to 1% from April 1 through June 30, 2022, according to a bulletin from the American Hospital Association.
With most federal relief included in various packages beginning with the March 2020 CARES Act already distributed or in the process of being finalized, Moody’s warns the primary benefits will be felt in the 2020 and 2021 fiscal results and “additional funds beyond this are unlikely.”
With improving liquidity this year as balance sheets feel the impact of equity market gains, reduced capital spending and good cash flow, Fitch said it expects capital spending that may or may not involve borrowing to be “robust” in the coming year.
The merger and acquisition trend could accelerate as hospitals seek to leverage scale and solidify partnerships, but pushback is expected from President Biden’s administration
