Hospital operating improvement slower than expected

Hospital finances are still under considerable pressure as workforce shortages, inflation and equity market volatility persist, according to a July 20 report from Fitch.

"After the most operationally challenging year on record for many in 2022, operations are still expected to improve slowly, although margins are expected to remain below pre-pandemic levels for 2023. Early insight from 2023 suggests that the pace of operating improvement over 2022 is more sluggish than expected," states the report.

Staffing costs is a big contributing factor to hospitals' margin woes. Salary and benefits costs were up 11 percent in 2022 and grew 7 percent year over year in the first quarter of 2023, according to a recent Moody's Investor Services report. While it was promising to see growth in salary and benefits expenses drop, it's still above pre-pandemic levels.

Hospital CEOs are focused on several tactics to cut labor costs, including relying less on contracted travel nurses, expanding flexibility and deploying automation where possible to boost the current workforce. They're also focused on retention as a core strategy to avoid steep costs associated with hiring and onboarding new nursing staff. Finally, systems are seeking international nurses to fill gaps.

Labor costs have been problematic for years and greatly exacerbated by the pandemic," Melisa Adkins, CEO of UofLHealth - Mary & Elizabeth Hospital in Louisville, Ky., told Becker's. "Finding new ways to reduce costs has been imperative to improving the financial stability of our organization. Thinking outside of the box has been an important part of this strategy."

She first connected with an international nursing agency in 2020 to mitigate staffing shortages before there was an excess demand.

"It is a long-term strategy, but one that has been worthwhile," she said. "Forming internal agencies/float pools is also key. This will provide healthcare facilities with the tools needed to offer competitive pay for staffing at half the cost by eliminating agency fees."

Fitch estimated staffing costs will contribute to a "lengthy period of tighter operating margins" and result in more credit downgrades as well as negative outlook actions. There were 16 hospital and health system downgrades in the first quarter and 13 in the second quarter of the year. The agency reported 87 negative ratings outlooks and watches this year so far.

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