Nonprofit hospitals will continue to operate under a cloud of labor supply shortages and “pressured” margins into 2024, setting the coming 12 months up as another “make or break year” for the sector, Fitch Ratings wrote in a new outlook report for 2024.
Labor spending, the group wrote, “has emerged as the single most meaningful differentiator between operational success and failure” and will remain pressured “for the foreseeable future yet slowly resolve, with the expectation for added incremental operational recovery in 2024.” A subset of providers, however, are still expected “to lag significantly behind any recovery.”
As a result, Fitch held the nonprofit hospital sector to a “deteriorating” outlook status.
“While staffing issues have started to attenuate, salary and wage expenses appear to have been reset at a new, higher level for many — directly impacting operating margins over the near term,” Kevin Holloran, senior director and sector head at Fitch Ratings, said in the outlook report. “This year was a turning point for many to the positive, particularly on a month-to-month basis; however, 2024 will remain challenging and will be yet another make or break year for a sizable portion of the sector.”
Fitch’s prediction of persistent high labor cost extends beyond the hard-hit nursing pool but into “all levels of labor, including what most would describe as unskilled workers." While "rampant” competition for a small supply of workers drives the higher spending, a “pronounced increase” in organized labor activity—for instance, the largest-ever healthcare strike experienced by Kaiser Permanente this year—will compound the hurdle for providers with unionized staff, per the report.
The impact of these pressures and other major industry events (Medicaid expansion, merger and acquisition waves, etc.) has also led to a stratification of nonprofit hospitals’ credit quality, Fitch wrote.
Specifically, the sector is “trifurcating” into three groups of improving, neutral and deteriorating credit quality with substantial gaps between each. Hospitals’ placements in these groups will hinge on their ability to navigate labor hurdles, with those in the latter group most vulnerable to rating downgrades in 2024.
Year to date, 2023 saw Fitch issue three times the number of ratings downgrades as upgrades, though the nonprofit hospital sector as a whole “continues to demonstrate considerable resiliency due to previously accumulated financial cushion.”
The past year also showed a slight downward shift in Fitch’s aggregate rating outlooks, the agency said. Whether that trend will continue for another year will, again, largely hinge on whether hospitals can pull off operational improvements.
Greater stability and material positive returns from the equity market “could restore and increase rating headroom” and a greater likelihood of a sector outlook revision. On the other hand, the agency said that a second year of debt service covenant violations “are of particular concern this year” as late fiscal 2023 and early 2024 audits are finalized.
Fitch’s guarded focus on labor challenges comes about a month after the 2024 forecast from Moody’s Investor Service predicted stronger financials across the nonprofit hospital sector. Moody’s wrote that higher reimbursement rates and volumes are expected to outpace the ongoing labor challenges, leading the agency to revise its outlook from “negative” to “stable.”