'Dark clouds' may derail hospital financial recovery

Nonprofit hospitals have been hit hard over the last 18 months with rising costs, workforce shortages, inflation and more leading to tighter margins and tough decisions.

Financial performance is expected to improve through the first half of next year, according to an Aug. 9 Moody's Investor Service report, but "significant challenges could still derail recovery."

Nonprofit hospitals and health systems overall rely less on expensive contracted labor than they did during the pandemic and many have launched large-scale efforts to reduce labor costs in the last year, with some success. Nonprofit hospitals in general have reported "modest improvement" with commercial payer reimbursement, according to Moody's, and recent one-time Federal Emergency Management Agency grants are helping hospitals across the U.S.

But financial recovery isn't a sure thing. Moody's highlighted five "dark clouds" that may still hinder hospital finances:

1. Permanently higher labor costs.
2. Increasing aging population who rely on Medicare.
3. More uninsured people amid Medicaid eligibility redetermination.
4. Shifting care to the outpatient setting, as inpatient care leads to higher revenue and margins.
5. Elevated expenses for IT services, cybersecurity, pharmaceuticals and supplies.

CMS won't be much help, either. The agency is planning a 3 percent rate increase for 2024, which is below cost increases from previous years, as expenses climb. Moody's said hospitals with nimble management teams that can cut costs, sell non-core assets, reduce length of stay and add capacity for high-margin inpatient care will do better in the coming year. But even with these efforts, not all hospitals will succeed.

"Hospitals in rural areas or lacking a sufficient network to transition patients to outpatient care will likely continue to lag peers. A prolonged failure to restore operating performance to pre-pandemic levels and rebuild liquidity will exacerbate credit stress, particularly when covenant violations are a risk. Exposure to certain bank agreements and concentrated counterparty risk that tighten available credit will also pose a significant risk at least into next year," according to the report.

Copyright © 2023 Becker's Healthcare. All Rights Reserved. Privacy Policy. Cookie Policy. Linking and Reprinting Policy.


Featured Whitepapers

Featured Webinars