S&P reports that inflation, rising labor and borrowing costs and falling investment are weighing on margins.
The first quarter of 2022 turned out to be one of the toughest performance quarters on record for nonprofit hospitals nationwide, according to a mid-year analysis by S&P Global Ratings.
The bond rating agency reports that at the start of 2022, hospitals struggled with inflation and high but possibly capped labor costs, while simultaneously facing rising labor rates. interest and cash requirements, and underperforming investments in a weakened market, all of which are likely to hamper operations for the remainder of the year, and into 2023.
“Midway through 2022, hospitals and nonprofit health systems face a challenging operating environment that, while easing from the extreme pressures of late December 2021 and early January and February related to the rise omicron surge, continues to cause operating cash flow compression for many across the United States,” S&P said.
“While many entities, especially those with healthy trading positions and unlimited reserves, should be able to manage stress when implementing short- to medium-term solutions, S&P Global Ratings believes that those whose financial profiles and trading positions are the weakest or those that have had underlying operational issues in recent years or have less balance sheet cushion, could be at increased risk of downgrade or downgrade much will depend on the extent and duration of operational pressures as well as broader macroeconomic conditions,” S&P says.
Unless Congress acts, providers will also face further federal funding cuts with the reintroduction of sequestration and the expected end of the public health emergency later this year.
“That said, for many hospitals and healthcare systems, underlying demand, including pent-up care needs that were deferred during the omicron push earlier in the year, remains strong,” says S&P. . “However, if a structural imbalance in labor supply and demand persists, it could be difficult to meet these patient needs, further increasing the human capital-related social risks we capture in the framework of our environmental, social and governance (ESG) factors.”
“We had noted these operational pressures, but some of them are more pronounced than expected, with the financial flexibility offered by unrestricted reserves beginning to ease for some organizations as investment markets have been volatile since the start of 2022,” says S&P.
Inflation and labor costs
Earnings fell in the first quarter of 2022 for almost all hospitals rated by S&P, mainly due to inflation and rising labor costs.
“The questions are: how much of the increase in spending is temporary due to the omicron ramp-up at the start of the year versus how much is built into base salaries and And when will the imbalance between labor supply and demand start to ease? says S&P.
In the short term, providers had to spend more to recruit and retain staff, as burnt-out clinicians retired or quit. All of this is happening, according to S&P, amid “significant uncertainty about how long it will take to fill vacancies, reduce reliance on agencies, address burnout, and return to a more balanced labor market.” “.
While reliance on traveling nurses and other temporary clinicians has eased somewhat since the peak of the pandemic in 2021 and early 2022, S&P expects labor costs to “remain likely higher for at least next year and possibly for several years to come as staff shortages may continue and more workers may seek to become travelers than before the pandemic,” S&P says.
“Anecdotally, we observed nurse agency rates of over $200/hour from providers at the height of the omicron surge; for many, these rates have dropped and still vary widely. , but can be closer to $130 to $150 – and are still higher than pre-pandemic agency rates,” S&P says.
Salary and salary increases, as well as signing and retention bonuses – key elements of employee retention – are also much higher than previous annual increases of around 3% and often higher than expected.
“Some hospitals and health systems are making additional mid-year salary and benefits adjustments to retain and attract staff,” S&P said. “All of this is on top of the agency absorption and one-time impacts mentioned earlier.”
Limited merger and acquisition options
While in the past, hospitals facing financial difficulties often turned to mergers, S&P notes that regulatory crackdowns on health care consolidation could close this outlet.
“Given recent denials from the Federal Trade Commission and other regulators, 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 some vendors.”
John Commins is content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.