Healthcare Business Trends

The hospital labor picture could be improving, but a full financial recovery isn’t imminent

Leading credit-rating agencies say 2023 seems likely to be another tough year, driven by expense pressures that will outlast broader inflation-related trends.

December 15, 2022 11:46 am

The financial and operational stress that has hampered hospitals may be easing in some ways, but probably not enough to qualify as a holiday gift for a beleaguered industry.

Recent reports from credit-rating agencies have presented a mixed outlook. For example, Fitch Ratings released an analysis in December showing “incremental signs of improvement” in the staffing situation at not-for-profit hospitals. Specifically, payrolls increased for both hospital and ambulatory services between October and November, while healthcare job openings decreased by 86,000 between September and October.

However, the industry quit rate remained “elevated.”

“The high quits rate indicates that healthcare and social assistance workers have a high willingness and ability to leave their current jobs and highlights the pressure on health systems to provide increased wages and improved working conditions to employees,” the report states.

Labor trends vary based on the time frame

In its latest monthly report on hospital financial benchmarks, Syntellis noted that October was the second consecutive month in which median hospital expenses declined year-over-year. Total expense per adjusted discharge fell by 1.4%, while labor expenses decreased by 1.7%.

But the month-over-month trends were less favorable, with total expense per adjusted discharge rising by 3% and labor expense by 4.5% over September. Syntellis reported that pediatric nurses have been in especially high demand as children’s hospitals cope with the combination of COVID-19, influenza and RSV. According to listings from the staffing firm Vivian Health, traveling pediatric intensive care nurses could make more than $8,000 per week in some locations as of Dec. 14.

With labor expenses still a drag on financial performance, the median hospital margin declined for the 10th consecutive month. Longer term, median margin was 2 percentage points lower YOY and nearly 6 points lower than in October 2019, Syntellis reported.

In its 2023 outlook for not-for-profit hospitals and health systems, Fitch cited the likelihood of persistently high labor expenses that likely will outlast broader inflationary trends.

“Volumes have generally rebounded from early pandemic lows, but expense inflation remains pronounced for hospitals, particularly for labor,” Kevin Holloran, senior director with Fitch Ratings, said in a news release. “It’s evident that labor expenses have been reset at a permanently higher level, the remedying of which will take all of 2023 and likely beyond.”

Improvement may take a while

Fitch is maintaining the outlook of “Deteriorating” that it applied to the NFP hospital sector in mid-2022. Among individual organizations, the share of negative rating outlooks increased from 3% in 2021 to 7% this year.

Given that labor generally constitutes 50% or more of a hospital’s expenses, followed by supplies and drugs at about 25%, three-quarters of a typical provider’s costs “are currently under intense expense pressure,” according to the 2023 outlook.

Operating metrics likewise are “down significantly” this year for most providers, “with 2023 not expected to show a rapid operational recovery for most,” the report states.

“For providers that suffered significant operational losses in 2022, Fitch believes that break-even on a month-to-month basis should return sometime in 2023, with gradual improvement from there. Others who suffered only modest losses may return to profitability on a month-to-month basis by late 2022 or early 2023.”

Moody’s Investors Service is maintaining a negative sector outlook for 2023, reflecting, in part, elevated expenses stemming from labor shortages, inflation, persistent COVID-19 surges, supply chain disruptions and cybersecurity investments.

Brad Spielman, vice president and senior credit officer with Moody’s, said operating cash flow will improve next year. However, “the high expense environment, coupled with modest revenue gains, will limit the profit margin” for the sector.

One cause for concern: “[The] level of operating cash-flow production will likely prove insufficient over the long term to enable adequate reinvestment in facilities, maintain investment in programs or support organizational growth — key considerations that drive our negative outlook,” Spielman added in a news release.

Inflation cooled in November, falling to a 7.1% increase in YOY prices. The Moody’s report, which was published before those numbers were released, finds that inflation likely will “drive up costs across the board” in 2023.

“Because of hospitals’ limited ability to respond quickly with price increases, higher inflation will have a particularly negative impact on operating margins,” the report states.

In addition to the increased expenses, “Higher interest rates will raise the cost of debt and make financing equipment or investing in capital more expensive,” Moody’s wrote.

Operational pressures show few signs of ebbing

According to a CNN analysis of federal data, early December marked only the second time that nationwide bed use exceeded 80% since hospitals began reporting capacity metrics in mid-2020 (the first time was in January during the peak of the omicron surge).

The American Hospital Association (AHA) released a report showing substantial delays in hospital discharges to other care settings. The report found a 19.2% increase in average length of stay (ALoS) between 2019 and 2022 even when controlling for the higher acuity levels that have been seen during the pandemic. For patients being discharged to post-acute settings, ALoS rose by nearly 24%, reflecting the absence of available capacity in those facilities.

The backlog of patients adds to hospitals’ financial burdens because of the lack of reimbursement for providing care to patients awaiting discharge. Congress should establish a temporary per diem Medicare payment to mitigate the strain, the AHA said.

“This per diem payment would be made for cases identified and assigned with a specific discharge code that fall under such type of long stays where the patient is documented to be ready for discharge but is unable to be discharged appropriately,” the AHA recommended.


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