Hospital finances are on the upswing, but the toll of the Change Healthcare outage is yet to be seen

Note: The second section of this article was updated where noted with a new comment from Fitch Ratings.

There is reason to be optimistic about the state of hospital finances, but the impact of the Change Healthcare cyberattack has added uncertainty to the forecasts.

Financial metrics for the first two months of 2024 continued to show a steady recovery from pandemic-era doldrums, especially those that were seen in 2022 and part of 2023. As recently reported by Syntellis (part of Strata Decision Technology), the year-to-date (YTD) median hospital margin through February was 6.4%.

Year-over-year (YOY), the jump in operating margin was 4.8 percentage points, while median operating EBITDA margin rose by 4.1 points.

“We’re seeing a more normal labor-inflation area, which gives people a little bit of breathing room in terms of how they operate because they can kind of predict what’s going to come around the corner,” Steve Wasson, chief data and intelligence officer with Strata Decision Technology, said in an interview before the February data was published.

Providers also have reaped the benefits of higher volumes and negotiated increases in payer reimbursement.

Contracted increases “probably had been in the works since ’22 and ’23,” Wasson said. “Those renegotiations aren’t overnight — it’s not like you can just go in and ask for increases that quickly — but those are starting to come online.”

Major challenges remain. One is volatility: the median margin dropped by 0.6 percentage points month-over-month in February, while median EBITDA margin fell by 0.4.

In addition, median days cash on hand increased by only 0.6% YOY. The metric also was 25% lower than at the same point in 2022, “reflecting a need for hospitals to rebuild these critical cash reserves to ensure greater stability for the long term,” Syntellis wrote in a report summary.

“The steep decrease versus two years ago highlights continued financial uncertainties for the sector,” the report states.

A big X-factor

The cash issue is likely to be exacerbated for many hospitals by the Change Healthcare outage, which started Feb. 21 and still was progressing toward a full resolution as March ended.

“I’m not sure if [the outage] would change your operating margin because you could probably still take revenue for the volume, but if you’re not getting paid, then your cash is going to be depressed,” Wasson said. “And people’s cash cushion had been depleted in many cases leading into this 12-month period [when] we’re starting to see some positive momentum.”

He added, “There’s going to be some folks that are going to feel some pain, but these positive margins are going to help offset that a little bit. If that had happened a year ago, it would have been disastrous for some folks. There’s been a little recovery over these last 12 months that gives people just that much breathing room.”

Credit-rating agencies see the risk for some categories of providers. In an analysis of for-profit healthcare entities, Fitch Ratings recently posted that the incident “could negatively affect the credit profiles of smaller healthcare providers, pharmacies and other companies that rely on Change for working capital-related services.”

Factors in the ratings impact include the extent of disruption to cash flows, the adequacy of existing liquidity sources, the likelihood and sufficiency of sources such as shareholder and lender support, and the ability to switch to other clearinghouses.

Providers generally are at greater risk of a significant impact if they’re rated in the mid-B categories or lower, “indicating very low margins of safety,” Fitch wrote.

Examining the overall provider sector, Moody’s similarly wrote (login required) that “providers with small scale, a weak financial profile, who only use Change and have little headroom in meeting debt covenants stand to suffer most from the disruption.”

April 1 update: In a new comment looking specifically at not-for-profit (NFP) providers, Fitch said hospitals likely can avoid any rating downgrades stemming from the cyberattack.

After assessing its portfolio of rated NFP hospitals, particularly focusing on those with less than 75 days cash on hand, Fitch said hospitals appear to have the balance-sheet cushion to ride out the situation. They also are implementing workarounds or switching clearinghouses and are obtaining advance payments.

The assessment could change if a return to normal operations is delayed beyond expectations, Fitch stated.

Cost increases still a hindrance

Cash-flow issues could make it more difficult to shoulder the added expenses many providers have incurred in responding to the attack, including the labor costs of managing workarounds, Moody’s noted.

Those costs are tacked on to expenses that are rising amid persistent inflation. The costs of drugs and supplies continued to increase by double digits YOY in February, Syntellis reported: 12.5% for supplies and 11.9% for drugs, contributing to an overall 8.8% jump in nonlabor expenses (compared with 7.8% for labor).

“We are seeing costs continue to escalate in some of the non-labor areas at a higher rate than I think anyone would want,” Wasson said.

Good news on the expense front in February included decreases month-over-month, as well as YOY declines when accounting for increased patient volumes. Decreases in expense per adjusted discharge were 4.1% for labor, 1.7% for nonlabor categories and 2.5% overall. Yet expenses for supplies (2.6%) and drugs (1.2%) rose YOY per adjusted discharge.

Wasson said the margin trend is likely to stay positive, although whether the YTD median margin remains in the 5%-6% range is another question.

“I do think organizations just have a little more stable awareness of their financials — the volatility and wild-card issues that have been coming at them over the last several years just aren’t there as much,” Wasson said. “So, they’re able to get to a more normal financial picture.”