High labor costs, inflation make healthcare outlook negative, Moody's says

Sustained high labor expenses and inflationary pressures will continue to affect the healthcare industry in 2023, keeping the outlook for nonprofit hospital systems negative, Moody's said in a Dec. 7 report.

In addition to such pressures, persistent COVID-19 surges, supply chain disruptions and the need for continued cybersecurity investments will also increase expenses, the report said. And while operating revenue is expected to modestly improve next year, the ending of federal Coronavirus Aid, Relief and Economic Security Act funding, net Medicare cuts and the end of the public health emergency will negatively affect hospital revenues, Moody's said.

"This level of operating cash flow production will likely prove insufficient over the long term to enable adequate reinvestment in facilities, maintain investment in programs, or support organizational growth — key considerations that drive our negative outlook," said Brad Spielman, vice president, senior credit officer for Moody's.

Some of the less well-funded healthcare systems could even face breaches of covenant amid such a challenging backdrop, Moody's warned. Such covenants typically refer to issues like days of cash on hand or minimum coverage of debt.

Management in such challenged systems have taken measures to mitigate the danger of such breaches, the report said. These include liquidating investments and drawing on lines of credit as well as refinancing debt, an unfavorable option in the current economic situation.

"The present interest-rate environment, however, currently makes such a move relatively costly," the report noted.

The Moody's report follows quickly on the heels of a similar one from Fitch Ratings Dec. 1 that highlighted the "formidable challenge" of high labor expenses and inflationary pressures facing the industry.

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