Many nonprofit hospitals will continue to struggle in the coming months, and it’s not clear when, or if, operating margins will return to pre-pandemic levels, Fitch tells investors.
America’s nonprofit hospitals should generally see some improvement in their financial performance, but it’s likely to be minimal, Fitch Ratings says.
In a new report released Monday that’s aimed at investors, Fitch says many nonprofit hospitals are going to continue to struggle with higher expenses.
The big question is when, or if, operating margins will rebound to pre-pandemic levels, and Fitch says that remains a mystery.
“Fitch has seen and expects further operating margin improvement among most providers, but the pace has been notably slower than we expected given past turnarounds in the sector,” Fitch said in the report.
Kevin Holloran, senior director for Fitch Ratings and leader of the nonprofit hospital sector, says some hospitals have seen progress in their staffing challenges, but higher salaries and wages are going to continue to put pressure on operating margins.
While some hospitals were at least able to return to positive margins in 2023, many will likely see modest margins.
“Margins remain compressed compared to pre-pandemic trends and 2024 will remain challenging and another ‘make or break’ year for a sizable portion of the sector,” Holloran said in the report.
Fitch generally says nonprofit hospitals should have operating margins of 3% so they can cover expenses and still have money to invest in capital projects.
However, operating margins have been hovering around 1% or 2%. Fitch notes that if those lower margins persist for an extended period, the nonprofit sector could see some slight rating deterioration.
Even if margins remain on the low end, Holloran doesn’t foresee a mass wave of nonprofit hospital downgrades. “Many systems have built up robust balance sheets and learned to economize on capital spending to a certain degree,” Holloran says.
Labor expenses are expected to remain high for the foreseeable future, and that covers all roles in health systems, including “less skilled jobs,” Fitch says. Nonprofit hospitals are using less contract labor, but still more than some would like, according to the report.
Hospitals and health systems in areas with high population growth, such as Arizona, Florida, Texas, Georgia, North Carolina, South Carolina, and Tennessee, are likely to fare better, according to Fitch’s report. With more population growth, these systems will likely see higher demand for healthcare services, and hospitals will have an easier time recruiting talent.
In markets with little or no population growth, nonprofit hospitals and systems are going to face more pressures, particularly in markets tilted to patients relying on Medicare or Medicaid. In those areas with more competition, the battle for talent also becomes more daunting.
Fitch has been projecting another year with some headwinds for nonprofit hospitals. In a December interview with Chief Healthcare Executive®, Holloran said that 2024 “is going to be another tough year for a lot of people.”
With nonprofit hospitals facing ongoing difficulties, some may have to weigh whether they move ahead with some improvement projects, which in some cases are overdue. Some hospitals may choose to wait a little longer on some desired capital projects. But as Fitch noted in its report, that also can carry a cost.
“Long-term deferral of capital spending can result in either an aged plant or strategically missing a potential opportunity,” the report states.
That’s also why it’s vital for hospitals to get to operating margins of 3%, so they can have some money to invest in needed projects, Fitch said.
Cash on hand
Nonprofit hospitals aren’t likely to see much improvement in their cash on hand, a critical gauge of financial health. The median cash on hand for hospitals is 216 days, based on 2022 data, Fitch says, and the outlook for a significant bump in that number isn’t great.
“Despite better profitability and inherent gains on investments, the days’ cash on hand metric will likely not improve much on a percentage basis due to the expense base also rising,” Fitch stated.
While some large nonprofit hospital systems have endured significant losses, ratings and outlooks for some of those systems haven’t changed, prompting questions from investors. From Fitch’s perspective, many of those systems have “sound balance sheet metrics, in particular cash to debt,” Fitch says.
Look for more mergers
Fitch expects to see more hospital mergers in 2024, while noting that regulators are also expected to continue to apply a great deal of scrutiny to deals.
Even with a challenging regulatory environment, the report states, “There is some pent-up demand for mergers among certain providers in the right circumstances. As a result, Fitch expects M&As to ramp up significantly.”
Many mergers involve large systems buying smaller providers, which generally doesn’t spark concerns from regulators, Fitch says. Some systems are also looking at mergers or acquisitions of hospitals in other markets, which typically haven’t rankled regulators.