Last year is shaping up to be the worst year ever for the finances of US nonprofit hospitals — and 2023 isn’t looking much better, according to Fitch Ratings.
(Bloomberg) — Last year is shaping up to be the worst year ever for the finances of US nonprofit hospitals — and 2023 isn’t looking much better, according to Fitch Ratings.
“2023 is going to be the make-or-break year” for stemming financial declines, senior director Kevin Holloran said during a presentation Wednesday on the challenges facing nonprofit hospitals.
Those trials include labor costs and shortages, inflation, a higher cost of capital, investment losses and the end of billions in federal pandemic funds. While the need for expensive traveling nurses has declined, basic wages have jumped.
“It’s the worst operating year we’ve ever seen in the sector,” Holloran said of the 2022 results reported so far. When the results from the latter half of last year come in, he expects a deeper slump.
Holloran looked at 80 rated not-for-profit hospitals for their creditworthiness — or about a third of the portfolio he tracks — to compare the first half of 2021 to the same period in 2022. The latter period showed marked declines, leading the firm to apply a “deteriorating,” or negative, outlook for the sector that still holds.
Consider some key measures for the six months through June: Personnel costs as a percentage of total operating revenue jumped to about 56% last year from about 53% in the same period in 2021. The gauge under-represents costs since it excludes outlays for travel nurses, Holloran said. Hospitals that can keep that measure at 50% or below are likely to be profitable, he said, while there is “no way” to do so at more than 60%.
Revenue growth in the six months through June was 6.2% — but costs grew 10.5%, a situation Holloran called “simply unsustainable over a long period of time.” Cash on hand shrank to about 221 days from 266 in the previous period.
Holloran estimates that half weren’t profitable for the full year.
And these numbers are for hospitals with more resources like investments and endowments. The situation is more alarming for the thousands of smaller, unrated facilities, many of them rural.
“What does their future look like? It looks very grim,” Holloran said. Most have a month or less of cash on hand.
There are some signs of improvement for the rated sector. The median operating income of not-for-profit hospitals may hit break-even on a monthly basis sometime this year, he said, while new hires are also starting to outpace departures. And hospital bonds are some of the top performers in the $4 trillion municipal sector so far this year.
Still, hospital margins are stabilizing as “razor-thin margins become the new normal,” consulting firm Kaufman Hall said in a March 28 report.
It showed year-to-date profitability was 32% lower than the same period in 2020. Said senior vice president Lisa Goldstein, “the sector is under pressure.”
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