Hospitals with revenues under $500M likely to struggle this year

Despite a modest turning point for some hospital and health system margins in 2023, this year is expected to be another "make or break" year for much of the sector, particularly among smaller hospitals with annual revenues under $500 million, according to outlooks from Fitch Ratings and S&P Global Ratings.

Four things to know: 

1. Core credit drivers for the sector will remain challenged as staffing shortages and salary/wage/benefit pressure continues to hinder margins for a sizable portion of the sector, even as other core credit drivers — specifically volumes and overall liquidity — begin to improve, according to Fitch. 

2. High labor and operating costs — which have not been entirely offset by generally improving revenue trends — low reimbursement and slow recovery of cash flow are key factors contributing to negative outlooks for the hospital sector, according to S&P.  While contract labor expenses have decreased in recent months, many hospitals and health systems are still battling an imbalance between the rate of growth across expenses and revenue.

3. As long-term capital plans and strategic investments get back on track, additional spending or debt issuances could also be a factor influencing credit quality — depending on balance-sheet strength and the rate of cash flow improvement, S&P said. The pace of margin recovery, supported by labor management, throughput and efficiency gains, and performance improvement plans, coupled with balance-sheet and enterprise strengths, will be key for hospitals to maintain credit quality.

4. Staffing shortages, cited as the number one challenge facing hospitals and health systems, will remain a pain point for the foreseeable future yet slowly resolve, with the expectation for added incremental operational recovery in 2024, according to Fitch. The ratings agency also anticipates a notable portion of the sector to lag significantly behind any recovery.

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