Expenses remain key to any improvement in healthcare performance, not investments

The environment for nonprofit hospitals and health systems remains highly challenging into 2023, and any eventual reversal of fortune will depend on expenses and not the value of investment portfolios, Fitch Ratings said.

In an April 5 webinar building on recent research by the agency examining nonprofit hospital medians, it wasn't that recent investment losses for players in the sector weren't a factor in poor overall results, it's more that operating challenges play a far more fundamental role in whether any system is going to recover, said Kevin Holloran, senior director at Fitch.

"2021 was a run-up year (in terms of investments) and we didn't upgrade many systems because of that," he said. "From an analytic standpoint, that is a level line for us but what dominates the airwaves, and will continue to dominate the airwaves, is that the major culprit in (weakening) operations has been the expense base; fix that and everything else begins to resolve thereafter."

Current revenue growth at nonprofit systems cannot meet the rise in expense growth over the long-term, Fitch research showed. Personnel costs on average have risen from 52.8 percent of operating revenue in 2021 to 55.71 percent in 2022, Fitch showed, describing the phenomenon as "the canary in the coalmine."

In terms of anything positive, early data is showing there are more new hires than people leaving the profession and the cost of contract labor is coming down, Fitch said. This should help with any expectation of possible month-to-month recovery overall.

"There is light at the end of the tunnel," Mr. Holloran said. "I would say this is not a universal problem as about 50 percent of our portfolio is profitable, the other 50 percent not. We will continue to downgrade, we will continue to upgrade; month to month progress is the most important."

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