Children’s hospitals continue to face financial pressures

Children’s hospitals are seeing stronger financial performances than other hospitals, but they are still facing some formidable challenges, according to an analysis by Fitch Ratings.

Median cash flow metrics for children’s hospitals have dropped to the lowest level in the past 10 years, Fitch said in a report issued this week. Last fall and winter, children’s hospitals were packed with patients with COVID-19, RSV, and the flu, a combination that was widely dubbed as the “triple-demic.”

Like other healthcare providers, children’s hospitals have faced staffing shortages and higher labor costs, driven by a greater need for contract labor. And children’s hospitals have had to cope with investment losses.

Children’s hospitals have also admitted many more young patients with mental health emergencies, and that will remain a thorny problem for some time, says Richard Park, a director with Fitch Ratings.

“The sector will continue to be faced with the pediatric mental health crisis that was exacerbated by the COVID-19 pandemic,” Park said in a statement. “Additionally, children's hospitals will have to be prepared for the downstream effects of declining births in the nation.”

In 2021, there were 3.66 million births, well below the recent high of 4.36 million births in 2007, the report states.

Children’s hospitals' median days’ cash on hand dropped 22% in 2022, from 416 to 323, according to the Fitch report. Still, cash levels remain fairly close to pre-pandemic levels, the report notes.

Overall, Fitch’s median rating for children’s hospitals remains “AA-”, which is above the “A+” overall median rating for nonprofit hospitals and health systems.

“Children's hospitals continue to be able to drive positive operating results as a result of favorable reimbursement for higher acuity services and distinct market positions that provide for more consistent volumes compared to the overall acute care sector,” Park said in a statement.

Children’s hospitals continue to boast unique positions in their markets, solid profitability, and they enjoy generous philanthropic support from donors, Fitch says. With that strong support from contributors, children’s hospitals can move on capital projects without incurring as much debt as other hospitals.

In addition, children’s hospitals maintain the “strong financial flexibility” to adapt to changes in the healthcare industry, according to the report. Children’s hospitals are better positioned to weather new challenges than general acute-care hospitals, Fitch projects.

“Despite significant operating challenges, standalone pediatric facilities remain well positioned through their key market roles as the only providers of highly specialized pediatric tertiary and quaternary services in their respective service area,” the report states.

While analysts say 2022 was the worst year financially for hospitals in years, hospitals and health systems are beginning to show signs of improvement in the past few months.

However, analysts, including Kaufman Hall, suggest that most hospitals will have to cope with razor-thin margins for the foreseeable future.