Nonprofit healthcare continues to deal with challenges

While times have been difficult for nonprofit and public sector healthcare organizations, finances should improve in the coming quarters, according to reports.

“Hospital leaders are facing a ‘new normal’ of persistently flat operating margins and reduced operational performance compared to pre-pandemic levels through the first seven months of 2023,” said Kaufman Hall Senior Vice President Erik Swanson. “In the near term, hospitals’ financial performance declined in July 2023 compared to June, with hospital volumes decreasing and bad debt and charity care on the rise.”

While expenses fell in July from June, the drop wasn’t “enough to offset revenue losses,” Swanson added.

Labor costs remain the largest issue for hospital costs and inflation will make costs volatile, he said.

“Hospitals and patients also continue to feel the effects of Medicaid eligibility redeterminations, as more than 30 states disqualified previous enrollees in June and July,” Swanson said.

But finances will see gradual improvement “in the next several quarters after a period of severe financial stress,” according to a Moody’s Investor’s Service report. All is not rosy though, as the agency sees “suppressed” financial results at least through the middle of next year, and warns “significant challenges could still derail a recovery.”

Fiscal 2022 was “likely … the worst operational year on record for many providers,” Fitch Ratings said.

The point was echoed by Moody’s, which noted, “Operating margins fell to unsustainable levels” last year.

“The median operating cash-flow margin for 2022 was 4.9% while the median operating margin was negative-0.3%, illustrating the immense operating pressures the industry is contending with in the face of labor shortages and uneven recovery across patient volumes,” Associate Lead Analyst Vanessa Chebli and three others wrote in the report.

Moody’s Analyst Rita Strauss noted in an August report she believed there was, “gradual improvement in median operating cash-flow margin in fiscal 2023.”

While median operating cash-flow margin through March 3 grew to 5.4% from 4.9% in fiscal 2022, margins generally need to be between 6% and 7% to “allow for capital spending modestly above depreciation as well as adequate debt service coverage and maintenance of cash reserve,” Strauss said.

S&P Global Ratings in July raised the outlook on one healthcare organization, downgraded ratings on five, and lowered the outlooks on six, according to an Aug. 15 report. The agency said in an earlier report hospital balance sheets were improving slowly and pressures persist.

Fitch has downgraded about three times more issuers in the sector than it has upgraded so far this year, Fitch Senior Director Kevin Halloran said in an email.

Expenses grew faster than revenues in fiscal 2022, Moody’s analysts said, while days of cash on hand fell to 206 from 264. Median debt to cash flow reached a five-year high of 3.6 times and median cash to debt fell below 200% for the first time since 2019.

Still, the Moody’s analysts believe some positive factors will emerge, including reduced use of expensive contract labor and improved reimbursements from some private insurers. Also, the Federal Emergency Management Agency will provide many hospitals with a one-time infusion of cash. Some states are creating special funding streams for hospitals or increasing Medicaid base rates.

Still, nonprofit hospitals will be challenged by continued high labor costs, increasing numbers of Medicare patients, changing determinations of Medicaid eligibility, and a continued shift to outpatient rather than inpatient services.

Cash-flow declines from fiscal 2021 to fiscal 2022 hit speculative grade organizations the hardest, with those rated below Baa3 at a median 0.3% operating cash flow, Moody’s said.

Fitch and S&P painted a similar picture. Fitch Director Michael Burger said in July the sector had a “deteriorating” outlook but overwhelmingly most ratings were stable. He said Fitch expected some improvement in operating performance in the next six to nine months.

In a report, S&P Director Patrick Zagar and Associate Director Chloe Pickett said, “After falling steadily the previous two years, the percentage of systems that have a negative outlook more than doubled in 2023, now encompassing one-in-five rated systems. This compares to the previous high of 17% in 2020, and a pre-pandemic level of 5% in 2019.

“We believe it is possible this is a high point for negative outlooks given financial profiles are generally improving,” Zagar and Pickett said.

The troubles in the nonprofit healthcare sector come as there are signs of financial weakness in the related nonprofit senior care sector.