Hospitals faced 'worst operating year' ever in 2022: Fitch

Last year is shaping up to be "the worst operating year we’ve ever seen" in the hospital sector, with 2023 set to be a "make-or-break year" for many, Fitch Ratings Senior Director Kevin Holloran said during an April 5 presentation, according to Bloomberg

Several financial challenges contributed to hospital margins suffering steep declines last year, including labor costs and staff shortages, inflation, higher cost of capital, investment losses and the end of federal pandemic-related funds. While the need for high-cost travel nurses has declined, basic wages have increased and inflation remains at elevated levels.

Fitch doesn't expect much respite for hospitals this year either. 

In an analysis of 80 nonprofit hospitals' creditworthiness — the first half of 2021 versus the first half of 2022 — Mr. Holloran found significant declines in the 2022 period, resulting in Fitch applying a "deteriorating," or negative, outlook for the hospital sector.

For the six months ended June 30, labor costs as a percentage of total revenue increased to about 56 percent in 2022 from about 53 percent in the first six months of 2021. However, this metric under-represents costs because it excludes outlays for travel nurses, according to Mr. Holloran. 

Hospitals that can keep this metric at 50 percent or below are likely to be profitable, but there is "no way" they can be profitable if this is above 60 percent, Mr. Holloran said.

On the other hand, revenue growth for the six months ended June 30 was 6.2 percent, but costs increased by 10.5 percent, which is unsustainable over a long period of time, he said.

Mr. Holloran estimates that half of hospitals were not profitable for the full year and that the future for many — especially rural hospitals — looks bleak. Most have a month or less of cash on hand, he said.

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