Nonprofit hospitals need to control labor costs, Fitch Ratings says

Even with hospitals starting to see more patient volume, most nonprofit hospitals continue to see weak operating margins, Fitch Ratings said.

Health systems are going to have to find ways to control their labor costs, Fitch said in a report this week.

“Controlling expenses, especially labor costs, will be critical for not-for-profit hospitals to return to stronger margins and alleviate credit pressure,” Fitch said in the report.

Nonprofit hospitals are expected to have weak operating margins for the rest of 2023 and into 2024, the credit rating agency has projected. Median operating margins dropped from 3% in 2021 to 0.2% in 2022, while operating EBITDA margins tumbled from 8.9% to 5.8%, Fitch says.

Another indicator of the struggles of nonprofit hospitals can be seen in Fitch’s downgrades. So far this year, Fitch’s downgrades of nonprofit hospitals have outnumbered upgrades by a 3:1 ratio.

With many health systems grappling with staffing shortages, some hospitals continue to rely on contract labor or travel nurses to fill positions, adding to their labor costs.

For hospitals to continue to recover and improve their operating margins, they need to focus on recruiting and retaining permanent staff. Hospitals that can hire and keep their workers are more likely to maintain or improve their credit ratings, while those relying more on contract labor are more likely to struggle with their margins and could see ratings downgrades, Fitch said.

Most hospitals are likely to have some success in hiring permanent staff but will still need to fill some gaps with temporary staff, and Fitch expects the bulks of nonprofit hospitals won’t see changes in their credit ratings.

More hospitals are starting to see some improvement in their operating margins, according to a report this week from Kaufman Hall, the healthcare consulting firm. In August, hospitals saw improved revenue, particularly in outpatient care, although margins remain below historical levels.

Hospitals could see additional financial stress as more states reduce the number of people covered by Medicaid, which could lead hospitals to provide more uncompensated care. About 5 million Americans have lost coverage as states review who should be getting Medicaid, according to an analysis by the Associated Press.

The American Hospital Association has repeatedly stressed that many hospitals are still recovering from the financial difficulties they have suffered during the pandemic.

In a blog last week, the association stated, “Hospitals and health systems are still recovering, and will need to be financially strong and healthy in order to keep their patients and communities healthy.”