Weak hospital margins to persist in 2024: Fitch

Hospital margins peaked in 2021 amid the pandemic then dipped considerably last year. While the margin freefall has stabilized somewhat in 2023, labor expenses will continue to burden hospitals in the foreseeable future, according to a July 25 report from Fitch.

"The sector will continue to experience weak margins in 2023 and into 2024, due to an inelastic revenue model, pronounced labor challenges and lingering inflationary pressures, unless payors, governmental or otherwise, begin to hike annual rate increases more in line with the new normal," the report states.

Fitch reported operating margins for nonprofit hospitals and health systems it rates at 2.5 percent on average last year for AA rated hospitals but falling to -3 on average for BBB rated hospitals. Overall, operating margins for Fitch-rated hospitals were 0.2 percent last year, down from 2.7 percent on average in 2021 and 3.8 percent in 2015.

Health systems also reported a dip in cash on hand, from 270.4 days in 2021 to 219 days last year. Days cash on hand were slightly higher in 2015 at 230.5 days, and had hit 255 in 2020. Standalone hospitals had 209.7 days cash on hand last year on average, down from 237.5 days in 2021.

Operating EBITDA margins also declined last year on average to 5.8 percent from nearly 9 percent in 2021.

"The deterioration seen in operating income is attributable to multiple factors but is primarily due to the cost of labor shortages, generally elevated inflation and the depletion of prior pandemic-era relief funding," according to Fitch.

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