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Nonprofit hospitals still have negative outlook, but Fitch projects ‘better times’

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Operating margins remain modest, but Fitch projects some growth in the year ahead.

Hospitals and health systems still see modest operating margins, but Fitch Ratings is seeing more signs for optimism.

Image credit: @ekapolsira - stock.adobe.com

Hospitals still have modest margins, but Fitch Ratings is expecting improved performance in the year ahead. (Image credit: @ekapolsira - stock.adobe.com)

Kevin Holloran, senior director for Fitch Ratings, talked about the performance of nonprofit hospitals during a webinar Thursday.

“Things are getting better, but … as we sometimes say in Texas, we’ve got a little bit of wood to chop before I think we get all the way back to a full recovery,” said Holloran. “And maybe that's up for debate, that we ever fully get back to what folks are looking for.”

Holloran, the sector leader for Fitch’s nonprofit healthcare group, offered a preview of the 2023 medians, which won’t be released until the summer, when health systems and hospitals release their full 2023 results.

While acknowledging some challenges, Holloran also offered more upbeat projections than he has in previous months, as many hospital systems struggled financially. And in an interview with Chief Healthcare Executive® in December, Holloran said nonprofit hospitals were expected to have “another tough year” in 2024.

So far, the early 2023 numbers Fitch has reviewed show operating margins in negative territory, about -0.5%. But Holloran said he projects the final median operating margins for 2023 will end in positive territory, ranging between 0.5% and 0.7%.

Fitch is still maintaining a deteriorating, or negative, outlook for nonprofit hospitals. However, he notes the outlook covers the entire nonprofit hospital sector and extends beyond the hospitals rated by Fitch.

Still, Fitch Ratings expects the medians for nonprofit hospitals to rise by another percentage point in 2024, perhaps reaching 1.6% or 1.7%.

Part of the reason for the more optimistic outlook is driven by the fact that most providers say they are seeing improved patient volume, Holloran said.

“The volumes are coming back,” he says. That’s a sentiment echoed by many hospitals, except for some in low-volume areas, Holloran said.

Some hospitals say they’re approaching or reaching pre-pandemic levels in volume, with some even saying they’re having capacity issues, he added. Still, he said it’s unclear if nonprofit hospitals across the sector will match pre-pandemic levels in volum.

Hospitals are starting to see some dividends from efforts to cut costs and other improvement initiatives.

“We're predicting better times,” Holloran said, later adding, “I'm so happy I get to be optimistic for a change, because that's my normal state. It's hard being grumpy for this long.”

Labor costs are also “settling down,” Holloran said, and that’s critical because they represent a substantial share of hospital expenses. Personnel costs actually dipped from 55.7% in 2022 to 55.4% in 2023.

While it sounds like a miniscule drop, Holloran said, “That's important because it didn't keep going up and it did come down.”

“Labor is your number one expense that's out there,” he said. “So it goes, so does your profitability.”

More health systems are hiring, Holloran said. He also stressed the importance of organizations holding onto their workers.

“Someone used the phrase I really liked the other day,” Holloran said. “Retention is the new recruitment, right? So keep your people.”

With patient volume rising and labor costs becoming more manageable, setting the stage for more improvement in the sector.

“I think there'll be another uptick in 2024. When you put those things together, and I say we're on the cusp, I think, of maybe calling a turn back to a neutral or a stable sector outlook,” Holloran said. “So this is good news. Fingers crossed, it's going to hold.”

Holloran also answered a question about the impact of the Change Healthcare cyberattack, which has caused havoc for health providers nationwide. Hospitals, clinics, and physicians have seen cash flow problems due to interruptions in claim processing, along with delays in insurance approvals and filling prescriptions.

While acknowledging the impact the attack is having on hospitals and other providers, Holloran said he didn’t expect the cyberattack would affect credit ratings.

“I don't think you're gonna see any rating changes from us on this impact,” Holloran said.

Holloran said the Change Healthcare attack does underscore the risk of breaches to hospitals, including their vendors and partners.

“This is a risk we've called about many, many times,” Holloran said. “You can harden your own house, but sometimes things are outside of your control with vendors.”

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