Hospitals are seeing better margins and are getting labor costs under control, but labor expenses remain high and some providers are struggling mightily.
Nonprofit hospitals are seeing some positive financial trends, even as the recovery of providers remains uneven.
There are also persistent gaps among nonprofit hospitals between those performing at a high level, those who are holding their own, and those that are struggling.
Still, after a long stretch of dismal financial forecasts during the COVID-19 pandemic and in the following months, hospital analysts see reasons for optimism. Kevin Holloran and Mark Pascaris of Fitch Ratings highlighted key trends for nonprofit hospitals during a webinar Thursday.
Fitch has maintained a negative outlook for the nonprofit hospital sector, but the analysts noted that the outlook could be revised to neutral in the future.
Reviewing data from 2023, hospitals saw revenue growth move closer to increases in expenses. Nonprofit revenues grew by 7%, while expenses grew by 7.6%.
Here are some highlights from the webinar.
Labor expenses
Labor costs remain high and continue to be a challenge, but hospitals are seeing less reliance on staffing agencies.
“The labor situation definitely is settling down. No one's declaring victory or anything … but what we've seen is, you know, you've got more new hires versus leave-ers,” said Holloran, senior director and head of nonprofit healthcare at Fitch Ratings.
Many hospitals and health systems have reached new contracts with their staff. Even with those deals leading to higher expenses in salary and benefits, some in the range of 10-20%, providers are gaining some predictability in future expenses.
They’re also finding more success in locking down top talent.
“Everybody I talk to says, ‘Look, I'll make that trade off every single time if I can have someone permanently on staff and keep them here,’” Holloran says.
Hospitals that are seeing more success in retention also enjoy other benefits.
“It’s great for the culture,” Holloran says. And in turn, it’s likely leading to better patient care.
Incremental improvement
Nonprofit hospitals typically saw incremental improvement in 2023, compared to 2022.
Most hospitals are “operating at somewhere between a relatively modest operating loss to a relatively modest operating gain,” said Pascaris, a senior director and analytic lead of U.S. nonprofit healthcare at Fitch.
Overall, the median operating margin rose to 0.4% in the 2023 fiscal year, compared to just 0.2% in 2022, Fitch says.
Nonprofit hospitals had a median of 211 days of cash on hand in 2023, which was actually a slight dip compared to the year before, but still healthy on historic levels.
Some hospitals received a bump in long-awaited payments from the federal government’s 340B drug discount program. The government paid out $9 billion in delayed payments to providers stemming from a legal battle that went to the Supreme Court.
“There's no question that that was a significant boost to many, if not most, of the health systems that we rate,” Pascaris said.
Construction
After delaying some projects due to the COVID-19 pandemic, hospitals and health systems are making new facility investments.
But hospitals are also putting more money in more outpatient options.
“I think the type of capital spending is shifting away from the traditional inpatient tower to more access points, ambulatory,” Pascaris said.
Given the need and demand, he said, “We will continue to see a pretty robust pace of capital spending.”
More patients are demonstrating a preference to have procedures done in an outpatient setting, analysts have said.
Mergers and acquisitions
The analysts say they expect to see more hospitals and health systems striking deals to acquire other providers.
Pascaris said he expects to see more deals involving health systems acquiring hospitals outside their market, such as the merger of Atrium Health and Advocate Aurora Health to create Advocate Health.
Regulators continue to exercise more scrutiny of healthcare mergers, analysts say. But they expect to see more hospitals looking at mergers, especially struggling providers who are having trouble staying afloat.
“At the end of the day, I think just from a community perspective, it's better that a hospital merge with a bigger partner than completely closed. That's not going to do that local community any good,” Pascaris said.
Reasons for optimism
Given stronger revenues and better balance sheets, the analysts see reasons for optimism for nonprofit hospitals. And there’s a more upbeat view among hospital leaders.
“I do think there's a lot of optimism, surprisingly, in the industry,” Pascaris said. “Maybe this is part of the resilience, actually. Part of being resilient is being optimistic about where they as an individual health system and where the sector is going in the future.”
Plus, hospital leaders have learned to weather storms and are equipped to deal with the headwinds they are facing.
“There are a lot of people that we talk to that have blown through 2022, and 2023 and, you should never say this in a healthcare format, but they've been killing it,” Holloran said.
Analysts say they see the potential for artificial intelligence to help health systems reduce some administrative burdens on staff. Hospitals are using AI solutions to automate some business functions.
“You can't have a management meeting without hearing AI at least 10 times,” Holloran said. “And I think we're going to start seeing incremental and then eventual widespread application of what that technology can do. And it's exciting, where we can go from there.”
Reasons for concern
While noting signs of improvement, hospitals continue to see higher expenses in labor and supplies. The pressure is on to maintain revenue growth to keep pace with the higher expenses.
“The industry as a whole may need to prepare itself for operating at tighter operating margins,” Pascaris said.
The nation’s population is aging, and that’s a looming problem for the healthcare industry. By 2030, all the members of the “Baby Boom” generation will be at least 65 years old.
“We just don't have as many younger people in the workforce to cover that,” Pascaris said. “And I don't really see that changing anytime soon.”
There will be a greater percentage of people using Medicare and fewer on commercial insurance plans, which offer higher reimbursements to hospitals.
Plus, the federal government is going to have to address the rising federal debt, Pascaris said.
“When the federal government does, at some point, decide to pare back on the deficit and maybe get the debt under control, it's hard to imagine that healthcare spending won't be a part of that conversation,” he said.
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