Hospital 'labordemic,' weak margins to extend past 2024: Fitch

Clinical and nonclinical staffing shortages are likely to persist for nonprofit hospitals through 2024, and longer for some markets, according to an Oct. 2 report from Fitch.

High growth markets will be better able to address the labor shortages, and most are trying to decrease reliance on expensive travel nurse contracts while building up permanent staffing teams. The hospitals are still offering higher salaries and bonuses to new staff members, although wage growth overall has slowed.

Hospital employees' average hourly earnings growth hit 3.75 percent, which is down from a high of 8.4 percent since the pandemic began. From 2010 to 2019, the average employee earnings growth was 2.3 percent, meaning wage growth hasn't returned to pre-pandemic levels. And it may not return at all.

"Given current and projected staffing shortages and the associated upward reset of labor rates, Fitch believes that providers' success in attracting and retaining permanent staff is key to mitigating stress on margins. The sector will trifurcate, with highly successful labor recruiters generally gravitating to higher investment grade ratings," according to the Fitch report.

Fitch reported a 3:1 downgrade to upgrade ratio year-to-date, which reflects the margin pressures, especially among providers that continue to rely on expensive contract labor. Most of the hospitals will not experience a rating change as they balance some reliance on contracted labor while also building permanent staffing teams.

The efforts to control labor costs will affect hospital margins. Median operating and operating EBITDA margins declined to 0.2 percent and 5.8 percent, respectively, in the 2022 fiscal year as compared to the year prior.

"We expect weak margins to persist through 2023 and into 2024 due to an inelastic revenue model and higher labor costs due to still very tight labor conditions, even as operations broadly continue to gradually rebound," the report notes.

Hospital management teams are also focused on controlling payer contract negotiations, supply chains, consolidating less profitable service lines and reducing length of stay.

"Controlling expenses, especially labor costs, will be critical for not-for-profit hospitals to return to stronger margins and alleviate credit pressure," states the report.

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