The investor’s service projects a 'stable' outlook for hospitals in the next year, but says high costs will remain 'a trouble spot.'
Hospitals have been dealing with serious financial headaches, but Moody’s Investors Service sees some room for optimism in the coming year.
Moody’s revised its 2024 outlook for nonprofit hospitals, raising its forecast from “negative” to “stable.” In a forecast issued this week, Moody’s projects that hospitals will see modest gains in volume and higher reimbursement rates from payers next year.
In addition, hospitals should see a bit of relief in the higher labor costs they’ve been seeing, or at least more predictability. To be clear, Moody’s projects health systems to see increased labor expenses, but the growth will slow down a bit.
Hospitals can expect to see more revenue, Moody’s said. The investor service expects that median operating cash flow will grow by 10% to 20% in 2024.
Hospitals are expected to fare better with reimbursement from payers, Moody’s projects.
“Revenue growth drivers include a modest rebound in patient volumes, higher-than-average reimbursement rate increases for some providers, and improvements in revenue-cycle management, including reducing coverage denials by insurance companies,” the Moody’s report stated. “Still, while the expense growth rate is decelerating, high costs will remain a trouble spot.”
Hospitals will see growth in revenue, but revenue growth is expected to outpace cost increases by only a slight margin. Hospitals will need to manage their finances wisely to continue their recovery.
“With the labor market still tight and inflation high, expense growth could pull ahead of revenue without diligent cost controls and efforts to improve operating performance,” the Moody’s report stated.
Hospitals are expected to make progress in managing labor costs, with greater efforts to recruit and retain healthcare workers, Moody’s projects. Hospitals are also reducing their reliance on staffing agencies, a trend which should continue.
But the Moody’s 2024 outlook acknowledges the staffing shortages that have bedeviled hospitals and health systems.
Health systems could see more disruptive contract battles with their unions, Moody’s acknowledges. A host of strikes have taken place this year. Last month, more than 75,000 Kaiser Permanente workers went on strike before the health system struck a deal with unions on a new contract.
“With union activity on the rise nationwide, contract negotiations could become more contentious, resulting in work stoppages and hefty wage increases,” the report stated.
Hospitals can expect to see improved volume, but Moody’s expects most of the growth to come in outpatient services. Health systems have seen faster growth in outpatient services than inpatient services.
Insurers typically offer lower reimbursements for patients treated on an outpatient basis, Moody’s notes. Health systems will likely focus on expanding outpatient services in areas with higher margins, such as oncology and orthopedics, the report stated.
While seeing an improved outlook, Moody’s projects that higher costs for drugs and medical supplies will continue to be a problem for hospitals. In addition, health systems can expect to see higher interest rates, which will make it more expensive to borrow for capital projects.
Still, Moody’s is expecting more hospitals to tackle improvement projects that have been put on the back-burner since the emergence of the COVID-19 pandemic.
Moody’s also forecasts the need for health systems to invest more in cybersecurity, and hospitals could see higher costs if they suffer attacks. More than 200 hospitals and health systems suffered cyberattacks in the first half of 2022, according to the American Hospital Association.
While hospital mergers have occurred with greater frequency in 2023 compared to the previous two years, Moody’s sees potential for the pace of consolidation to slow down.
“The rate of consolidation among health systems may slow due to increased scrutiny of mergers by federal and state governments, potentially depriving distressed systems of exit strategies and slowing the growth of larger systems active in the M&A space,” Moody’s stated.