Labor costs and other concerns dampen the outlook for not-for-profit hospitals this year

Insights from a leading credit-rating agency illustrate the scope of the financial challenges facing not-for-profit hospitals and health systems in 2023.

S&P Global Ratings revised its outlook (login required) for the NFP acute healthcare sector from stable for most of 2022 to negative for 2023, echoing recent assessments by Fitch Ratings and Moody’s Investors Service.

S&P issued 28 rating downgrades and 18 upgrades in 2022 through November — and the ratio was worse than it appears at first glance, given that five of the upgrades resulted from mergers. The ratio of upgrades to downgrades deteriorated during the second half of the year, and the trend is likely to continue.

“We do not expect full margin recovery in 2023 and will likely see continued operating losses, albeit at lower levels than 2022, for many institutions,” the S&P report states. “Meaningful improvement will likely take multiple years.”

“We’ve seen weaker cash flow from operations, weaker cash flow from nonoperating sources such as investments, and of course diminished balance sheet strength, which itself is strongly correlated with investment market performance as well as cash flow generation,” Patrick Zagar, a director and lead analyst with S&P, said during a webinar last week.

He noted that in 2022, based on a partial sample of audits, median days cash on hand was 202. That’s a drop-off from 233 in 2020 and 250 in 2021, and it represents the low-water mark for the past decade.

“With the broad credit deterioration that’s already occurred, it’s fair to say that any incremental pressure to providers — whether a cyberattack, a hurricane, a payment cut — they all carry a greater chance of driving a negative rating action,” Zagar said.

A few positive indicators

Recent data has hinted at small signs of relief for the sector, even if the numbers don’t signal a dramatic turnaround.

For example, Kaufman Hall’s latest Flash Report, analyzing data provided by Syntellis Performance Solutions, found improved hospital margins for November (at a median -0.2%, compared with -3.4% in early 2022).

Labor expenses decreased due at least in part to a reduced reliance on contract labor. Hiring of FTEs accelerated in December, with hospitals adding 15,700 jobs, according to seasonally adjusted data. The job numbers represent an increase of nearly 32,000 over October 2022 and 153,000 compared with December 2021.

Regardless, labor costs are “still well above pre-pandemic levels, which seems more and more like a bygone era at this point,” Zagar said.

He pointed to data from Vivian Health showing an average weekly salary for travel nurses of $3,080 in October, nearly $1,200 more than in January 2020.

“We’ve heard [organizations] taking a stand and saying, ‘We’re going to use our own folks, try to pay them more,’ and use their own pooling,” Suzie Desai, a senior director and leader of the not-for-profit healthcare group at S&P Global, said during the webinar. “And some of the systems may have an advantage there [over stand-alone hospitals], but it really is all hands on deck, and we’re going to have to see some movement there to get to break-even.”

The labor picture likely will take a few years to stabilize.

“There isn’t a quick fix to something structural,” Zagar said. “There isn’t a quick fix to earnings pressure of this magnitude.”

Revenue issues also linger

The Kaufman Hall report also highlighted a 10% year-over-year increase in outpatient revenue, noting that “hospitals could lean on their outpatient services to buoy margins.”

But from a rating standpoint, there’s cause for concern on the revenue side as well.

“Words that come to mind are uncertainty and volatility applying to care patterns, inpatient to outpatient transition, telehealth utilization, patient acuity, payer mix,” Zagar said.

Anecdotally, many of the problems can be seen in the revenue cycle.

“We’re certainly seeing more combative negotiations with insurers, but we’re also hearing about increased denials, increased [numbers of] observation patients, generally increased revenue tied up in [accounts receivable],” Zagar said.

Negotiated payment rate increases don’t appear to be keeping pace with inflation, said Stephen Infranco, a senior director and analytical manager with S&P. Providers are reporting increases of 3% to 5%, or perhaps closer to 7% in some cases — a decent increase in many years, but less so in the current environment.

“Most providers are telling us that they’re going into negotiations with inflationary data and requesting much higher increases, but in many cases coming out with less than what they targeted,” Infranco said.

The expected termination of the public health emergency sometime in 2023 also will affect revenue because it will mark the end of the 20% Medicare payment bump for treating patients diagnosed with COVID-19. In addition, payer mix challenges could intensify because the FY23 federal omnibus spending bill allows states to phase out Medicaid continuous enrollment provisions starting in April.

FEMA funding has helped some providers make up for the wind-down early last year of the Provider Relief Fund, but Zagar noted that “payments and timing remain quite uncertain with FEMA. We generally negatively view unresolved FEMA funds being included in operating budgets, which we are starting to see.”

Striving for solutions

Hospitals and health systems are undertaking various initiatives to mitigate the challenges, Desai said. Among the efforts are steps to reduce length of stay and improve access via more efficient discharge processes.

“That’s been a bottleneck for a lot of places,” she said, adding that some organizations are “using top-of-your-license folks to help in that. I think getting the agency and contract labor out will help, because sometimes that can slow down the length of stay. Obviously, there’s a lot of work going on in the long-term care side to get folks into some of those centers.”

Hospitals also are examining ways to rationalize care, including by temporarily or permanently closing less profitable services and units. On the flip side, some are seeking to diversify services by branching into more profitable areas of operation, such as pharmacy.

“Even those [organizations] that are having losses, the stronger ones continue to talk about outpatient strategies that they’re trying to deploy, trying to deal with more value-based reimbursement,” Desai said. “We think that’s important to talk about because if those investments aren’t being made, there are a lot of other players out there in the market that are trying to make inroads into healthcare.”