Hospitals should brace for difficult 2023, but there’s ‘light at the end of the tunnel,’ analysts say.

There are plenty of headwinds for health systems in the coming year, but there are signs that better days are coming, Fitch Ratings analysts said in a conference call.

Hospitals hoping for better days in 2023 are going to have to wait a while longer.

After hospitals endured one of their worst financial years ever in 2022, health systems should anticipate more headwinds in the year ahead, analysts with Fitch Ratings said in a conference call Wednesday afternoon.

“It’s going to be another difficult year,” said Kevin Holloran, senior director and sector leader for the non-for-profit healthcare group at Fitch Ratings.

However, he also said, “We think we are beginning to come out of the worst of it.”

“Somewhere in 2023, we will get … closer to back to normal,” Holloran said, adding later, “There is some light at the end of the tunnel.”

Fitch revised its outlook for the non-profit hospital sector as “deteriorating” in August. But Fitch analysts on the call said they didn’t see another downgrade for the hospital sector as a whole in the coming year.

The percentage of hospitals with negative ratings outlooks more than doubled last year, rising from 3% in 2021 to 7% in 2022.

More hospitals could see downgrades in the year ahead, said Mark Pascaris, analytic lead of Fitch Rating’s U.S. not-for-profit healthcare team.

“I'd expect more negative outlooks as we head into this year, as these headwinds continue,” Pascaris said.

Operating margins may also be slow to recover. More than half of all America’s hospitals were projected to finish 2022 with negative margins, according to Kaufman Hall, a healthcare consulting firm.

It’s likely that 2023 could be a transition year, when health systems begin recovering and could see more improvements in 2024, Pascaris said.

“The sector may have to adapt to a new era when operating margins don’t match expectations we were accustomed to pre-pandemic,” he said.

Headwinds continue

While inflation will pose more headaches for health systems in the coming year, hospitals will face far more difficulties with higher labor costs.

“The expenditures, it’s clearly labor, labor, labor,” Holloran said. “The labor story just dwarfs the inflation story.”

Hospitals will have to deal with “contentious” battles with labor over new contracts in the coming year, Holloran said. Thousands of nurses in New York City went on strike this week; they reached an agreement to end the walkout early Thursday.

Health systems will also see difficult negotiations with payers in 2023, as some pacts that were negotiated before the COVID-19 pandemic will expire this year.

“I expect this to be extremely contentious,” Holloran said.

For systems that are struggling financially but aren’t reaching the end of their contracts with payers, Holloran said it’s not a bad idea to try to renegotiate rates.

“You need to be asking for rate increases,” Holloran said, even if it’s not the year to negotiate.

Hospitals have seen improved volume in recent months, but the numbers don’t tell the full story, Holloran said.

Hospitals are struggling with “the wrong kind of volumes,” he said.

Health systems have seen a large number of patients with respiratory viruses, such as RSV, the flu, and COVID-19, forming what some have dubbed a “triple-demic.”

“These are all medical cases, and not surgical cases,” Holloran said. Hospitals aren’t seeing a sustained rebound in elective surgeries, which generate more revenue, he said.

Reasons for optimism

While hospitals won’t see short-term fixes for their challenges, the analysts noted that health systems are making progress.

Hospitals have been seeing some success in improving their margins in recent months, Holloran noted. While Kaufman Hall’s Year-To-Date Operating Margin Index has remained negative for 11 consecutive months, health systems have been closing the gap.

“I'm a little bit optimistic” with the margin improvement, Holloran said. “We keep chipping away at it.”

Hospitals are also starting to have more success in hiring to fill staff shortages, including bringing back some who left their positions during the pandemic, he said. Some systems are focusing on recruiting and retention efforts, including efforts to strengthen their human resources departments.

To move away from more expensive temporary staffing agencies, a key driver in hospitals’ higher labor costs, some systems are employing creative solutions, he said.

Some hospitals are creating their own internal staffing agencies, and some are also recruiting more healthcare workers from other countries, he said.

The analysts also offered their thoughts on other projections for healthcare in the year ahead.

Capital expenditures

When asked if hospitals will increase capital expenditures, Holloran said it would be a mixed bag.

In many areas, capital expenditures will be more muted, he said. But in markets with growing populations, “you’ll have a voracious appetite,” Holloran said.

In fast-growing markets, Holloran said, “You have to keep up with the demand, and if you don’t do it, you’ll really regret it later on.”

Mergers and acquisitions

With more hospitals and health systems in weaker positions, there could be more mergers and acquisitions, Pascaris said. Analysts have said some struggling organizations may need to find partners in order to stay afloat.

“I think we’ll continue to see plenty of M&A activity out there,” he said.

While regulators are taking a closer look at proposed deals, particularly involving organizations in the same markets, federal and state officials have signed off on some high-profile mergers, including the merger of Atrium Health and Advocate Aurora Health, he noted.

If some mergers happen, that could boost the credit outlook for some ailing hospitals, he said.

Philanthropy

Some hospitals can put more effort into philanthropy, and that could be a growing area of focus, Pascaris said. While children’s hospitals tend to excel at fundraising, other hospitals haven’t done as much as some may expect.

“At a macro level, this is an area where a lot of health systems have underperformed and maybe underinvested,” Pascaris said.

However, hospitals aiming to do more in philanthropy have to contend with the overall state of the economy. “There is a correlation between the health of the equity markets and philanthropy,” Pascaris said.

Factors affecting performance

Hospitals and health systems that are fortunate enough to be in fast-growing areas, such as Texas and Florida, are poised to do well, Holloran said.

In addition to having more potential patients, those systems also have more people to hire to fill positions, he said.

Hospitals with provider-sponsored health plans also are well positioned, he said. Those systems can benefit from alternate sources of revenue, which can lead to better ratings.

Health systems in regions with robust population growth, and a diverse mix of payers, are likely to have more success, Pascaris said.

“Local economics very much matter,” he said.