Labor expenses will be biggest challenge well into 2023, Fitch says

Labor expenses remain the biggest challenge facing the U.S. nonprofit hospital and health systems sector and will not fade anytime soon, Fitch Ratings said in its outlook for 2023.

Such expenses typically make up 50 percent or more of a system's budget and, when coupled with supplies, edge toward 75 percent. With inflationary pressures, that makes for "intense expense pressure," the report said.

"Even as inflation is expected to attenuate eventually, labor expenses appear to have been reset at a permanently higher level," Kevin Holloran, senior director at Fitch, said in the report. "Remedying this will take all of 2023, and likely beyond."

The sector outlook for 2023 remains at "deteriorating," building on reports Fitch wrote in 2022. The shortage of nursing staff was at 500,000 before the COVID-19 pandemic and is now closer to 2 million, similar to numbers Fitch reported in December.

There is also likely to be increased M&A activity in the sector in part because of economic pressures, though regulators may have a say on resisting that, the report said. 

Cross-market M&A may become the new norm to counter such regulatory restrictions, Fitch added, describing the recent merger between Advocate Aurora Health and Atrium Health as "by far the most intriguing."

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