Nonprofit health systems will likely wrestle with higher labor costs and revenue difficulties. Suzie Desai of S&P talks about those headwinds and other challenges ahead for hospitals.
Hospitals leaders who are expecting sunnier financial days in the new year may be disappointed.
S&P Global Ratings released its 2024 outlook for nonprofit hospitals and said it has a negative view for the sector. Hospitals continue to wrestle with higher labor and operating costs and revenue challenges, S&P notes. Hospitals should see some improved revenue, but revenue gains could be matched or outpaced by expenses.
“Performance for many places is improving, but we're still operating in a constrained environment,” Suzie Desai, a credit analyst for S&P Global Ratings, tells Chief Healthcare Executive®.
Labor costs continue to be the key difficulty for many nonprofit hospitals. Health systems are paying more, even as they struggle to fill vacancies for nurses and other key positions.
“It's still the pressure point, and it's certainly better than it was last year,” she says. “But in some places, what we're hearing is that mismatch is still going to be there, in terms of just the demand.”
Hospitals are relying less on contract labor, but they still continue to see higher labor expenses, analysts say.
While labor represents the bulk of expenses, hospitals are seeing higher costs for drugs and other supplies, and those hikes are having an impact. Desai says it’ll be worth watching to see reimbursement rates for some specialty drugs that are gaining in popularity.
“As we hear about more of these drugs that are very expensive and more people are starting to use them for various things, it'll be interesting to see how the payers reimburse for some of that and how that gets factored in,” Desai says.
Along with the rising costs, hospitals are seeing more revenue woes as more Americans grow older and move to Medicare, “which traditionally does not pay as well as your commercial contracts,” Desai says. In addition, more care is shifting from inpatient hospital stays to outpatient treatment.
Expect ‘uneven’ performance
S&P’s continued negative view for the sector as a whole stems partly from the high number of organizations with negative outlooks. Almost a quarter of S&P’s rated entities had a negative outlook on Oct. 31. Hospitals downgraded to negative outlooks are outpacing those with improved outlooks by 3 to 1 in 2023, S&P says.
“I think that is also signaling that again, there is some pressure, that we are trying to see where that all shakes out over the next year,” Desai says.
In 2023, many hospitals and health systems saw some gains but still were hovering around the break-even point. Desai didn’t speculate what margins could be expected in the coming year.
“I think it's going to be uneven,” Desai says. “But we are hearing from providers, they're looking for some improvement, continuing through as they make some strides on the staffing and labor side, but we'll see kind of how much improvement we get.”
Hospital and healthcare leaders say patient volumes remain below pre-pandemic levels, although they have improved somewhat. But Desai says for many hospitals, volumes are solid.
“In general, we've seen the volume and the demand there for most places,” Desai says. “Now there may be pockets in areas where it hasn't, but overall, when I think about the conversations we're having, it seems to be there, and it's a matter of servicing it with the staff that you have.”
More capital projects
Health systems are also expected to move forward with long-delayed capital projects in the coming year, but that could bring some financial challenges as well. Health systems will need to borrow for deferred construction projects, adding more pressures.
“We have seen that average age of plant kind of creep up a little bit,” Desai says. “So at some point, we believe that hospitals and healthcare systems will have to maybe pick up a little bit on spending.”
With those bigger projects, hospitals will have to decide how much cash they want to preserve, and how much debt they want to carry as borrowing gets more expensive, she adds. Hospitals are likely to move forward with projects in areas where they have heavy competition from other providers, including non-traditional rivals, Desai says.
As hospitals continue to deal with staffing shortages, more organizations are turning to telehealth and artificial intelligence, but “the industry is still in the beginning stages, with limited scaled efficiencies,” S&P says in its report.
Hospitals have less cash on hand than they did two years ago, according to S&P. Hospitals have, on average, 183 days of cash on hand in 2023, down from 250 days in 2021, S&P said in its report.
Health systems could encounter other headaches as more Americans have lost Medicaid eligibility as part of the end of the COVID-19 Public Health Emergency. With more people off Medicaid rolls, hospitals may end up providing more charity care and face more bad debt, S&P says. More than 11.7 million Americans have lost Medicaid enrollment as of Dec. 1, according to an analysis by KFF.
Desai says the reduced Medicaid rolls could be “an incremental pressure point” for now, but the greater impact will need to be assessed over time.
On Tuesday, Fitch Ratings issued its 2024 outlook and said nonprofit hospitals are likely to face a difficult year. Fitch said its outlook for nonprofit hospitals continues to be “deteriorating.”
Moody’s Investors Service offered a more optimistic outlook for hospitals in 2024, raising its outlook from “negative” to “stable.” Moody’s projects that hospitals will see improved revenues in the coming year, but also said health systems must manage their finances wisely to continue their recovery.