Hospitals looking at ‘very bumpy 2023’, Fitch Ratings analyst says

Health systems will struggle with higher costs, though there is room for optimism. Kevin Holloran of Fitch spoke with Chief Healthcare Executive about the challenges in the year ahead.

Hospital and health system executives are probably looking forward to changing the calendar.

Many hospital systems have been operating in the red this year, with expenses surpassing revenues. Kevin Holloran, senior director at Fitch Ratings, said 2022 has been “one of the worst years ever in healthcare.”

Health executives expecting a quick turnaround are likely to be disappointed. Fitch Ratings is projecting “a very bumpy 2023” for the hospital industry, Holloran told Chief Healthcare Executive.

Fitch released its outlook for the nonprofit hospital sector for 2023 last week and forecast some challenging months ahead. Hospitals are facing much higher labor expenses and a shortage of nurses and other key personnel, according to Fitch, a credit rating agency which examines hospitals and other industries for investors.

Fitch revised its outlook for the hospital sector as “deteriorating” in August. The percentage of hospitals with negative credit ratings more than doubled in the past year, rising from 3% in 2021 to 7% in 2022.

For healthcare leaders getting ready to reach for antacids, the outlook for hospitals isn’t entirely bleak. Most of the hospitals analyzed by Fitch should begin to break even in 2023, or at least be on a path to seeing revenues match expenses, Holloran said.

In an interview with Chief Healthcare Executive, Holloran outlined why hospitals are still facing some challenging times, looming troubles in 2023, and why healthcare leaders need to embrace change in the year ahead.

The economic headwinds hospitals are facing are “very intense at the moment, but starting to get better,” Holloran said. Fitch is projecting fewer ratings downgrades in 2023.

However, smaller hospitals, particularly those in rural areas, are still facing a “very challenging” environment, Holloran said. Many rural hospitals are struggling to keep their doors open, as their limited revenue isn’t matching their higher costs.

For smaller, rural hospitals, “the future looks very dim at the moment,” he said.

More labor pains expected

About three-quarters of hospital expenses are under heavy pressure, Holloran said.

Hospitals are going to deal with higher labor expenses in the year ahead and the foreseeable future. Hospitals are putting roughly 50% of their expenses toward labor, while supplies account for another 25% of hospital costs.

While inflation and supply chain issues continue to pose problems, Holloran said, “The biggest issue is the labor.”

Health systems are grappling with a shortage of nurses, and Fitch expects that to continue. The industry is still looking at a shortage of anywhere from 1 million to 2 million nurses, Fitch noted in its 2023 outlook. Hospital leaders argue that there’s a shortage of bedside nurses because hospitals need to provide better pay and working conditions, nursing leaders say.

While the shortage of bedside nurses commands the most attention, hospitals are also struggling to find enough other key workers, such as respiratory therapists.

“The labor supply shortage emerged as the largest single contributor to operational losses in fiscal 2022,” Fitch said in its 2023 outlook.

Hospitals are going to be negotiating with more contracts with nursing unions in the coming year, as some pacts are slated to expire. Some of those negotiations could be very difficult.

“We expect those to be protracted,” Holloran said of the contract talks.

In Minnesota, several health systems reached a tentative agreement this week on a three-year contract with the Minnesota Nurses Association, just days before nurses planned their second walkout this year.

Nurses at 21 Kaiser Permanente facilities in northern California reached an agreement on a new contract in November, just days before a planned strike. The California Nurses Association ratified the deal last week.

Hospitals are paying more to recruit and retain nurses, and health systems should be budgeting for higher wages.

“Higher labor costs are the new normal,” Holloran said.

Hospitals are facing dual challenges with labor shortages, Holloran noted. Because some hospitals have fewer nurses, they have fewer beds available for patients. In addition, some hospitals are keeping patients longer than they would like, even some ready to be discharged, due to a lack of staffing and available beds at nursing homes and other post-acute care facilities, he noted.

Deals with payers

Just as hospitals are dealing with thorny labor contracts, Holloran said more health systems are due to negotiate with payers on new deals.

“We expect those to be contentious,” Holloran said.

Health systems have been hammered financially this year, and more than half of all hospitals are expected to finish the year in negative margins, according to a report by the American Hospital Association.

Now, hospitals are going to be nearing the end of their deals with insurers and pressing them for substantial increases, while insurers aren’t expected to give hospitals what they want, Holloran said.

It’s likely that hospitals and payers are going to be “worlds apart” at the outset of talks, Holloran said.

Health systems and hospitals that command a greater share of their local markets will likely be in a stronger position to negotiate. Hospitals with over half of their markets have a greater advantage, while health systems with a smaller slice of their markets will likely face more difficult negotiations, he said.

Recession outlook

Many healthcare executives are worried about the impact of an economic downturn. Fitch isn’t overly concerned about a short-term recession hurting hospitals, Holloran said.

In fact, Holloran said a relatively short recession could help hospitals in some respects. Some nurses that are considering leaving may opt to stay in their jobs during a recession, while some nurses who walked away could be tempted to come back to their jobs. “They might come back into the market,” Holloran said.

In a shorter recession, some workers who could be worried about losing jobs, or recently lost jobs, could opt to schedule elective procedures while they still have their benefits, Holloran said.

Plus, unemployment remains low. If there is a lengthy recession and more people lose their jobs for an extended period and lose their health benefits, then hospitals could take a hit if they are treating more people without private insurance, he said.

However, Holloran said the COVID-19 pandemic remains the wild card for hospitals.

While hospitals relied on federal COVID-19 funds to help them in 2020 and 2021, they have exhausted that CARES aid. Hospitals have been urging the federal government for additional aid, noting they didn’t get extra assistance to deal with the Delta or Omicron variants. “There is no more bailout money,” Holloran said. “There is no CARES money coming.”

If hospitals face another new variant leading to an influx of patients, one that is as deadly as the Delta variant and transmissible as Omicron, that would be devastating to health systems, both operationally and financially.

“That’s a game changer for the sector if it happens,” Holloran said.

‘Be quick to change’

Facing substantial difficulties, healthcare leaders need to consider bold steps to transform their organizations.

“Be open to change. Be quick to change,” Holloran said. “Think transformational, not incremental.”

That’s a mindset that may not be easy for some hospital leaders. “We love incremental change in the healthcare business,” Holloran said. But health systems need more than slight improvements.

“We need transformational change,” he said. “I don’t know what they are, but I do know that’s what they need.”

Health systems must focus on living their mission, and they need to think about developing ways to take care of patients outside the hospital.

“Be nimble and be open to change,” Holloran said. “We get very wedded to our inpatient bricks and mortars.”

More patients are interested in outpatient care and care at home, so hospitals and health systems could look more to remote patient monitoring, he said.

“Embrace that change. Live your mission,” Holloran said, adding, “Folks that do well tend to live and embrace their mission.”