NFP Hospitals Struggle Financially at Midyear

S&P reports that inflation, rising labor and borrowing costs, and sputtering investments are stressing margins. 

The first quarter of 2022 proved to be one of the toughest performance quarter on record for the nation's not-for-profit hospitals, according to a midyear analysis by S&P Global Ratings.

The bond rating agency reports that hospitals in early 2022 struggled with inflation and high but possibly plateauing labor costs, while simultaneously confronting rising interest rates and demands on cash flow, and underperforming investments in a weakened market, all of which are likely to hobble operations for the rest of the year, and into 2023.

"Midway through 2022, not-for-profit hospitals and health systems face a difficult operating environment that, while easing from the extreme pressures of late December 2021 and early January and February related to the omicron surge, is still causing operating cash flow compression for many of them across the U.S.," S&P says.

"Although many entities, particularly those with healthy business positions and unrestricted reserves, should be able to handle the stress as they implement near- and medium-term solutions, S&P Global Ratings believes those with weaker financial profiles and business positions or those that have had underlying operational problems in recent years or have less balance sheet cushion, could be at increased risk for a downgrade or negative outlook revision. Much will depend on the extent and duration of the operating pressures as well as the broader macroeconomic conditions," S&P says.

Unless Congress acts, providers will also have to contend with further reductions in federal funding with the re-introduction of sequestration and the anticipated end of the public health emergency later this year.

"That said, for many hospitals and health systems, underlying demand, including pent-up needs for care that was deferred during the omicron surge earlier in the year, remains sound," S&P says. "However, if a structural imbalance of labor supply and demand persists, it could be hard to meet those patient needs, thereby further elevating the human capital social risks that we capture under our environmental, social, and governance (ESG) factors."

"We had noted these operating pressures, but some of them are more pronounced than anticipated, with the financial flexibility provided by unrestricted reserves starting to lessen for certain organizations, as investment markets have been volatile since the beginning of 2022," S&P says.

Inflation and Labor Costs

Earnings were down in the first quarter of 2022 for almost every hospital rated by S&P, primarily because of inflation and rising labor costs.

"The questions are: How much of the heightened expenses are temporary due to the omicron surge at the beginning of the year versus how much is built into base salaries and will be ongoing? And when does the imbalance of labor supply and demand begin to ease?" S&P says.

In the short term, providers have had to spend more to recruit and retain staff as burned-out clinicians either retire or quit. All this is happening, S&P says, amid "significant uncertainty on how long it might take to fill vacancies, reduce agency usage, address staff burnout, and return to a more balanced labor market."

While the reliance on travel nurses and other temporary clinicians has eased somewhat since the height of the pandemic in 2021 and early 2022, S&P projects that labor costs "will likely remain higher for at least the next year and possibly for several years to come as staff shortages could continue and more workers may seek to become travelers than before the pandemic," S&P says.

"Anecdotally, we've observed nurse agency rates of more than $200/hour from providers at the height of the omicron surge; for many, those rates have fallen and still vary widely, but may be closer to $130-$150--and are still higher than agency rates before the pandemic," S&P says.

Pay Raises

Salary and wage hikes, and signing and retention bonuses -- key components of employee retention -- are also much higher rate than previous annual increases of around 3% and often higher than what was budgeted.

"Some hospitals and health systems are making further wage and benefit adjustments midyear to retain and attract staff," S&P says. "All of this is in addition to absorbing the agency and one-time impacts previously mentioned."

M&A Options Limited

Whereas in the past, hospitals facing financial duress often looked to mergers, S&P notes that the regulatory crackdowns on healthcare consolidation may close that outlet.

"Given recent denials by the Federal Trade Commission and other regulatory agencies, this option may be increasingly difficult to deploy," S&P says. "If these denials affect organizations that are already struggling operationally, options could become increasingly limited for certain providers."