Moody’s lifts healthcare sector outlook to stable as revenues grow

Moody’s Investors Service has revised its outlook for not-for-profit healthcare to stable from negative citing an expectation that an uptick in revenues will outpace expenses as the industry gets a handle on labor costs.

The uptick in revenues comes from a modest rebound in patient volumes and higher reimbursement rates, Moody’s analysts wrote in a report released Tuesday.

“These factors signal that a financial recovery will increasingly take hold in 2024, marked by an uptick in cash flow margins,” Moody’s analysts wrote. “While some government initiatives pose risks, increased state financial backing and Federal Emergency Management Agency funds will aid some healthcare providers’ financial turnaround.”

Kaufman Hall also noted in a state-of-the-industry report released in October that its calendar year-to-date operating margin index hit 1.4% in September, though hospitals’ overall performance declined slightly in September compared to the previous month.

Though the sector overall demonstrates strength heading into 2024, challenges remain, including that bad debt and charity care remained elevated on a year-over-year basis, which is partly attributed to the ongoing Medicaid re-determination process, which has resulted in at least 9.5 million people being dropped from the rolls after pandemic-period rules designed to ease access to care were removed.

While labor expenses increased as workforce issues continue to challenge hospitals and health systems, Kaufman Hall wrote that hospitals have been using contract employees less, lowering costs, and expenses overall have fallen.

Though Moody’s predicts that revenue growth will only slightly top expense growth, it cited other positives including an expected improvement in operating cash flow and margins and that liquidity will remain healthy despite healthcare’s move to use cash for capital projects.

It expects that median operating cash flow growth will be about 10% to 20% in 2024, while the median operating cash flow margin, which is Moody’s measure of profitability, will edge up about 7% from 6%. The increase will allow some providers to make investments in facilities and programs that can improve their competitive positions while maintaining liquidity.

Still, analysts said, the median operating cash flow margin will trail a pre-pandemic 8% to 9% and fall below 3% for about a third of the providers they rate.

Though labor cost growth has slowed, Moody’s said it will remain a challenge.

It also expects that most issuers will experience headroom above debt covenant levels, though a significant portion will continue to face difficulties avoiding covenant violations. Those at risk are healthcare providers that face fundamental challenges such as weak cash positions.

The median operating cash flow margin would have to rise above 8% as expense growth continues to decline and reimbursements improve for the sector to shift to a positive outlook. But if labor or supply costs spike or the sector experiences a disruption in volume recovery, the outlook could swerve back to negative.