https://mailchi.mp/09f9563acfcf/gist-weekly-february-2-2024?e=d1e747d2d8

On Monday, Fitch Ratings, the New York City-based credit rating agency, released a report predicting that the US not-for-profit hospital sector will see average operating margins reset in the one-to-two percent range, rather than returning to historical levels of above three percent. 

Following disruptions from the pandemic that saw utilization drop and operating costs rise, hospitals have seen a slower-than-expected recovery.

But, according to Fitch, these rebased margins are unlikely to lead to widespread credit downgrades as most hospitals still carry robust balance sheets and have curtailed capital spending in response. 

The Gist: As labor costs stabilize and volumes return, the median hospital has been able to maintain a positive operating margin for the past ten months. 

But nonprofit hospitals are in a transitory period, one with both continued challenges—including labor costs that rebased at a higher rate and ongoing capital restraints—and opportunities—including the increase in outpatient demand, which has driven hospital outpatient revenue up over 40 percent from 2020 levels.

While the future margin outlook for individual hospitals will depend on factors that vary greatly across markets, organizations that thrive in this new era will be the ones willing to pivot, take risks, and invest heavily in outpatient services.