Hospitals' operating margin reset

Nonprofit Hospitals' operating margins are far below the pre-pandemic "magic number" of 3% and are in danger of a permanent reset in the 1%-2% range, according to a Jan. 29 report published by Fitch Ratings.

This operating margin reset is worrying some investors, but "hospital downgrades en masse would be unlikely because many systems have built up robust balance sheets and learned to economize on capital spending to a certain degree," Kevin Holloran, senior director and sector head at Fitch, said.

Fitch sees this scenario as a "pain point" that providers must balance against their liquidity cushions rather than a "sector-ending incident." However, hospital-specific declines are a possibility if they cannot afford to defer capital longer and operations do not improve. 

The hospital sector is particularly concerned about 2030, when the final baby boomer generation will reach age 65, "which will potentially pose the scenario of a smaller workforce serving a larger population in need of heightened care," Mr. Holloran said.

Investors are also concerned about hospital and health system days' cash on hand, and whether 200-250 days may be too high given the sector's challenging headwinds. 

With days' cash on hand reported above 200 days nine of the last 10 years and the overall median being 216 days based on 2022 financials, the answer appears to be "no," according to Fitch. However, days' cash on hand will improve very little despite better profitability and inherent gains on investments.

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