The financial health of nonprofit hospitals and health systems has stabilized. FitchRatings upgraded the evaluation to “neutral” from “deteriorating.” However, the outlook could revert to deteriorating if macroeconomic disruption resulted in a combination of a weaker payor mix, softening volume, or equity market losses resulting in a material decline in liquidity ratios.
The rate of labor expense escalation continues to have impact, as well as a moderation of general inflation. Balance sheets remain robust, benefiting from improving cash flows and equity market returns, according to the FitchRatings analysts. Forecasted median operating margin is between 1% and 2%, barring unforeseen shocks.
Labor costs are by far the largest expense for health systems, and spikes in salaries can have a pronounced effect on hospital operating margins, particularly as the sector historically operates with very thin margins even in ideal circumstances, according to the FitchRating analysts. Healthcare management teams have worked to enhance productivity and drive down expected credit loss use and are deploying new workforce care models.
The labor recovery is not uniform, and Fitch analysts expect a number of providers to continue to lag significantly, while many will face new operational challenges, such as pronounced drug expense growth, shifting payor mixes, and stronger competition.
Liquidity continues to provide a significant rating cushion and should allow many providers, particularly higher-rated health systems, to weather ongoing headwinds and macro uncertainties, the analysts wrote.
Fitch’s sector outlook revision to neutral includes our expectation that the sector is entering a period in which the pace of rating downgrades and Negative Rating Outlook changes will roughly approximate upgrades and Positive Rating Outlook changes.
“It is wonderful to see hospital and health systems’ ratings improving, and their margins stabilizing,” said Alice Ayres, president and CEO of the Association for Healthcare Philanthropy. “The sector continues to need more investment than operating margins can support, and with an average return of $5 for every $1 invested in philanthropy, charitable giving remains critically important to the financial health of our hospitals and to the physical and mental health of our communities.”
Arthur J. Ochoa, JD., senior vice president, advancement & chief advancement officer at Cedars-Sinai in Los Angeles agrees with Ayres. “Philanthropy is pivotal to funding strategic growth priorities in nonprofit hospital systems like Cedars-Sinai. Initiatives that, for example, advance technology, pioneer research for new cures, and improve patient-centric care are always the goals,” said Ochoa. “While this upgrade in outlook by ratings agencies is encouraging, a sobering fact is that across the country, many hospitals especially those with the fewest resources are increasingly tasked to raise philanthropic dollars for operational (rather than strategic growth) needs in order to close funding gaps.”
