Hospitals' fortunes improving

Nonprofit hospital financial performance is improving, and operating margins are expected to increase 1.6% on average in 2024, according to a report from Fitch, a ratings firm.

The early 2023 results show operating margins improved slightly, 0.5% to 0.7%, in 2023, with operating results declining but not as severely as the year before. Hospitals began to exceed breakeven results in the first quarter of 2023 on a month-to-month basis as revenue grew and expense pressures declined, according to Fitch.

Fitch expects an increase in 2024 median operating margins to approximately 1.6%.

"While this is still below pre-pandemic levels, margin improvements fueled by positive labor indicators, volume diversification and efficiency initiatives lead us to believe that margins could return to near historic trends around 2025-2026," according to the report.

Slower expense growth closed the gap, with revenue growth to 130 basis points last year, as compared to 430 basis points in 2022. Revenue growth from higher patient volumes has continued at around 6%, according to the report, although revenue growth is still limited by "staffing-related capacity constraints" and limited skilled nursing beds, forcing hospitals to delay discharge.

The report also notes:

1. Personnel costs dropped from 55.7% of total operating revenues to 55.4% from mid-year 2022 to 2023.
2. Providers have strong liquidity related to debt.
3. Hospitals report a median of 220 days cash on hand, similar to pre-pandemic metrics.
4. Cash-to-debt medians ended around 170% with a rebound in investment returns and should improve compared to 2022.
5. Medical patient volumes are also growing, while surgical volumes are declining.

"Though many hospitals are still struggling to grow revenues due to lack of adequate staffing and skilled nursing bed unavailability, personnel costs are easing," said Kevin Holloran, senior director of Fitch Ratings. "Hospitals that report their results later in the year will reflect the comparatively more profitable months in the latter half of fiscal 2023, which will pull up Fitch's full year medians."

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