Hospital cash flow, margins to surge in 2024: Moody's

The median operating cash flow and margins are expected to improve next year for most nonprofit hospitals, according to a Nov. 7 report from Moody's Investor Services.

Moody's revised the outlook for the nonprofit healthcare sector to stable from negative, citing slower expense growth. Nonprofit hospitals are reigning in labor costs and reporting a "modest rebound" in patient volumes. They are also seeing higher reimbursement rates, which could mean higher revenue next year.

"These factors signal that a financial recovery will increasingly take hold in 2024, marked by an uptick in cash flow margins. While some government initiatives pose risks, increased state financial backing and Federal Emergency Management Agency funds will aid some healthcare providers' financial turnaround," the report notes.

Operating cash flow hit nearly -40% last year, but is projected to have double-digit growth this year. The operating cash flow growth will mean hospitals can invest in facilities and programs for the future.

Five takeaways from the report:

1. Moody's anticipates median operating cash flow will jump 10% to 20% next year and median operating cash flow margins will hit 7%, a 1% increase from this year. The Moody's outlook for nonprofit hospitals could increase to "positive" next year if the median operating cash flow hits 8% or decrease to "negative" if supply or labor expenses derail hospital finances.

2. Labor costs will continue to sting expenses, even as hospitals pivot away from expensive labor contracts and grow their employed workforce. Moody's still predicts revenue growth will be higher than expense growth due to revenue and patient volume increases.

3. Most nonprofit hospitals will "maintain solid days cash on hand" next year, according to Moody's, even as some pursue capital investments paused during the pandemic.

4. States with Medicaid-directed payments and one-time FEMA grants will help some nonprofit hospitals next year. But Medicaid disenrollment and the possibility of minimum nurse-to-patient ratios are risks for the coming year.

5. Outpatient volumes will continue to increase and length of stay will decrease, which frees up capacity, according to the report. Many hospitals are grappling with the right outpatient strategy for their markets.

"Growth in outpatient volumes will lead the recovery, in line with the industry shift of more complex procedures to outpatient settings because of advancements in medicine. Insurers provide hospitals with lower reimbursement for outpatient treatment than inpatient and encourage patients to seek care in outpatient centers. To compensate for lesser revenue, health systems will continue to shift their focus to growing high-margin outpatient service lines in fields such as oncology and orthopedics," the report states.

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