Healthcare cost caps weaken hospital finances: Fitch

Nonprofit hospitals in states with healthcare cost caps face a tougher road to financial strength, according to a May 30 report from Fitch.

Healthcare cost caps, which are meant to limit healthcare charge increases for patients and insurers, are in many cases weakening hospital finances even as these essential institutions struggle to recover from the COVID-19 pandemic and inflation over the last few years.

The states with oversight of healthcare cost growth are Connecticut, Maryland, Massachusetts, Nevada, New Jersey, Oregon, Rhode Island and Washington. Delaware is considering measures to monitor and cap healthcare price increases at 2% for the next two years and the Office of Health Care Affordability in California approved capping price target growth at 3%, which would be phased in over the next half-decade, according to the report.

Fitch noted the caps "are a potential credit negative" because they could further strain hospital revenue and reduce operating margins.

"Caps on what hospitals can charge based on economic indicators rather than cost and value of care would result in margin pressures or service cuts. Healthcare provider input cost growth is trending higher than pre-pandemic levels for both inpatient and outpatient care," states the report.

For the last several years, nonprofit hospital expenses have increased year over year in the high single digits, according to Fitch data. Last year median expense growth outpaced revenue and without the ability to raise prices concurrently, hospitals find themselves with few options to close the gap. C-suites are pushing innovation and creative partnerships to operate more efficiently and transform care delivery outside of the hospital. They're also leveraging artificial intelligence for administrative functions and to boost lean workforces.

The rising labor costs across the board are eating into hospital profits, according to a Kaufman Hall report released in early May. Matthew Bates, managing director with Kaufman Hall, said the cost of labor will not decline significantly and recommended hospitals optimize downstream margins and focus on strategies to allow physicians to become more productive and prioritize outcomes for length of stay and readmissions.

Increased labor costs in the last few years continues to pressure hospitals financially. Three quick findings from the Fitch report paint a stark picture:

1. The 9.6% job openings rate is double the average from 2010 to 2019.
2. Year-over-year wage growth has stayed above the 10-year average before 2020.
3. Some hospitals have seen as high as 60% labor expense growth.

Fitch noted in April hospitals using alternative staff retention methods can better manage the expense growth. Organizations in the best position have leaned into recruiting international nurses, partnered with nursing schools and pivoting to care team models with registered nurses, nursing assistants and virtual nurses.


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