Many health systems will continue to wrestle with staffing challenges, volumes, and debt concerns. Kevin Holloran of Fitch Ratings tells us why he expects another difficult year.
Nonprofit hospitals could be facing another challenging year financially in 2024.
Fitch Ratings released its annual outlook for nonprofit hospitals Tuesday, and says hospitals are facing a triple threat of problems: ongoing staffing challenges, higher wages and inflation. Fitch's outlook for nonprofit hospitals remains "deteriorating."
Kevin Holloran, senior director for Fitch Ratings, tells Chief Healthcare Executive® that 2024 “is going to be another tough year for a lot of people.”
Holloran says he usually tends to be more optimistic in assessing the nonprofit hospital sector, but he expects a difficult road ahead. “It’s tough out there right now,” he says.
Many hospitals made progress financially in 2023, especially compared to the previous year, which was calamitous for some organizations.
But many are still struggling with modest margins, and Fitch notes some didn’t return to a break-even point until the latter part of 2023, which was later than anticipated.
“I think if you had to rank them all, 2022 would be the worst year, ’23 was a little bit better, but still a pretty bad year, and ’24 will be better than ’23, but still a very tough year,” Holloran says.
“So there's no V-shaped recovery here, there's no ticker tape parade, nothing like that,” he adds. “We're still going to be really struggling for every dollar we make in the sector.”
Many health systems will start 2024 in a better place than they did a year ago, either breaking even or with positive albeit modest operating margins.
But at the end of 2024, it’s unclear if nonprofit hospitals will get back to consistently healthier margins of 2.5% or 3%, or if they’ll be lingering at or slightly above 1%, Holloran says.
Holloran has been optimistic about hospital volumes returning to pre-pandemic levels, but he says the prospect that volumes won’t rebound to those levels “is starting to look more like a possibility.”
“I still, on some fundamental level, want to reject that. I keep saying that but, you know, the longer this trend goes on, the more I'll have to say, ‘Yeah, I'm not sure we'll ever make it there,’” Holloran says.
Controlling labor costs
For hospitals and health systems to succeed, they’re going to have to keep labor costs under control, Holloran says, viewing that as the key differentiator in financial performance.
“The thing that's going to make or break you is, how well do you do recruiting and retaining key staff? And we always say nurses, but it's everybody, up and down the spectrum from executives to nurses,” Holloran says.
While health systems are curbing their use of staffing agencies to a degree, many continue to rely significantly on contract labor. Hospitals have struggled to fill nursing jobs, but Fitch notes that staffing challenges persist in a number of healthcare jobs.
Some health systems have battled with unions over contracts, with some disputes leading to high-profile strikes. More than 75,000 Kaiser Permanente workers walked out in October, and they threatened a second strike before both sides reached a deal. The new Kaiser contract includes raises of 21% over four years.
Hospitals with unions will likely see growing wage pressure in the coming year, Holloran says.
“We've really seen unions sort of flexing their muscles a little bit, and we mentioned it in the outlook, that unions have been on the decline for quite some time, and they've really kind of come roaring back in various different sectors,” he says.
Given the current financial climate, Holloran sees what he calls a “trifurcation” of nonprofit hospitals: the thriving systems, those who are holding steady, and those who are struggling.
Most hospitals are expected to see mixed results, with some seeing weaker margins, but they should avoid downgrades, Fitch projects.
A small group of hospitals should find success in attracting and keeping workers and will enjoy higher volumes. Many of the hospitals that are doing very well hold dominant positions in their markets or are based in regions that are seeing higher population growth, Holloran says.
However, Fitch expects some hospitals to continue to see disappointing volumes while struggling with recruiting and retention, and those systems could see ratings downgrades.
In 2023, Fitch issued more downgrades than upgrades, with three downgrades for every ratings increase. Fitch expects downgrades to continue to outpace upgrades, but isn’t projecting widespread downgrades across the nonprofit hospital sector.
“We're definitely expecting more downgrades than upgrades in ’24,” Holloran says, but he adds that the disparity should be less dramatic.
But some hospitals in slow-growing areas are going to continue to struggle, Holloran says.
“There are a lot of places that kind of keep me up at night, that you're just not going to overcome the payer mix, you're not going to overcome the fact that there's no population growth, maybe even depopulation in some areas,” he says. “And that's tough to do business in, and inexorably your expenses are going to keep going up. And you need more patients to serve and to charge for, quite frankly, in order to balance it all out.”
Worries about bond covenants
More hospitals could have concerns with bond covenants in 2024, Fitch projects, and that appears to be a growing concern of hospital executives. With bond covenants, organizations agree to make progress on debts and maintain a certain level of financial performance.
Roughly one in four executives (24%) said their hospitals had problems meeting the obligations of their debt covenants in the past year, according to a report by Kaufman Hall, the healthcare consulting firm. However, one in three (34%) hospital leaders said they could fail to meet their debt covenants, or come very close to falling short, in 2024.
For organizations that are falling short of their bond covenants and have less cash and a lot of debt, bondholders could take aggressive steps, Holloran says.
“There's going to be a few that are made examples out of and bondholders are going to exercise all of their remedies,” Holloran says.
“You don't see it very frequently, but it is a growing worry point for us,” he adds. “And I put it down as one of the things that keeps me up at night.”