The U.S. economy grew at an annualized 2.9% rate in the final months of 2022, the Commerce Department said on Thursday.
Why it matters:
Economists are bracing for a significant slowdown in economic activity as the Federal Reserve’s interest rates hikes take hold, but that certainly wasn’t the case in the final months of last year.
Economists expected the Gross Domestic Product figures to show the economy grew at a 2.6% annualized rate last quarter, after expanding at a 3.2% pace in the prior quarter.
Consumer spending and businesses built up private inventories gave GDP the biggest boost. Among the biggest drags: fixed investment, a category that includes housing.
By the numbers:
Over the calendar year, GDP grew by 2.1% in 2022 — a decent pace, especially considering the historically aggressive rate hikes by the Federal Reserve that sought to restrain economic activity to contain inflation.
Those rate hikes hit the housing sector particularly hard, which dragged down overall growth earlier last year.
Catch up quick:
The first half of 2022 was dogged by fears that the economy had entered a recession, after back-to-back quarters of contractions. But by the second half of the year, the economy had returned to growth mode.
The growth over 2022 was an expected slowdown from the 5.9% achieved in 2021, when the economy bounced back from the pandemic shock.
In our decades of working in healthcare, we’ve never seen a time when payer-provider negotiations have been more tense. Emboldened insurers, having seen strong growth during the pandemic, are entering contract negotiations with an aggressive posture.
“They weren’t even willing to discuss a rate increase,” one CFO shared as he described his health system’s recent negotiations with a large national insurer. “The plan’s opening salvo was a fifteen percent rate cut!”
Health systems are feeling lucky to get even a two or three percent rate bump, well short of the historical average of seven percent—and far short of what would be needed to account for skyrocketing labor, supply, and drug costs. According to executives we work with, efforts to describe the current labor crisis and resulting cost impacts with payers are largely falling on deaf ears.
This scenario is playing out in markets across the country, with more insurers and health systems announcing that they are “terming” their contract, publicly stating they will cut ties should the stalemate in negotiations persist.
Speaking off the record, a system executive shared how this played out for them. With negotiations at an impasse, a large insurer began the process of notifying beneficiaries that the system would soon be out-of-network, and patients would be reassigned to new primary care providers. The health plan assumed that the other systems in the market would see this as a growth opportunity—and was shocked when they discovered that other providers were already operating at capacity, unable to accommodate additional patients from the “terminated” system.
Mounting concerns about access brought the plan back to the table. Even in the best of times, a major insurer cutting ties with a health system is extremely disruptive for consumers, who must shift their care to new providers or pay out-of-network rates. But given current capacity challenges in hospitals nationwide, major network disruptions can be even more dire for patients—and may force payers and providers to walk back from the brink of contract termination.
It may be time to update your inflation narrative.
The ultra-hot readings that defined the first half of 2022 appear to be firmly in the rearview mirror, improving the odds that price pressures can dissipate further without excessive economic pain.
That’s the key takeaway from the December Consumer Price Index released this morning, which confirmed notably cooler inflation as the year came to a close.
Why it matters:
The nation’s inflation problem isn’t over, but so far inflation is slowing while the job market is still healthy, an enviable combination.
As Princeton economist Alan Blinder put it in an op-ed last week, inflation was “vastly lower” in the second half of 2022 than the first; yet, “hardly anyone seems to have noticed.”
By the numbers:
In the final three months of 2022, core inflation (which excludes food and fuel costs) came in at an annualized 3.1% — higher than the Fed aims for, but hardly crisis levels. In the second quarter of the year, that number was 7.9%.
It’s a stunning decline, occurring alongside a labor market that by nearly all measures is still flourishing. Just this morning, the Labor Department announced that jobless claims fell to an ultra-low 205,000 last week.
State of play:
Grocery prices rose 1.1% in the final three months of the year, an uncomfortably high rate, but not as extreme as the rates seen earlier in 2022.
Gasoline prices, pushed up by Russia’s invasion of Ukraine, were once the crucial reason why inflation was rising. In recent months, the opposite has been true: December pump prices slid 9.4%, helping drag the overall index into negative territory.
Disinflation was at work for many other goods, including used cars (-2.5%) and new vehicles (-0.1%) where prices have reversed, helped by easing supply chain bottlenecks.
Shelter costs pushed inflation upward, surging 0.8% in December. But private-sector data points to rents on new leases falling in recent months, which would only filter into the CPI data over time. That makes for a more benign inflation outlook in 2023.
What to watch:
That’s not to say there aren’t risks ahead. The war in Ukraine is ongoing, and another energy price shock could occur.
The Fed has also focused in on the services sector, where price increases have slowed from last summer but remain frothy. The risk is that business costs associated with the still-tight labor market (like higher wages) will pass through to prices for consumers.
The bottom line:
Inflation will still be a worry in 2023, but much less so than it seemed a few months ago.
U.S. consumers got a reprieve from soaring costs in December: the Consumer Price Index declined on a monthly basis, the first drop since last summer as falling prices for items including gasoline and used carsdragged the overall index down.
By the numbers:
The index, which captures price changes across a basket of consumer goods and services, fell 0.1%, following an increase by the same amount in November. Over the past 12 months ending in December, the index is up 6.5%, falling from 7.1% through November.
Core CPI, which excludes food and fuel costs, rose by0.3% last month. Over the last 12 months through December, the index rose 5.7%. In November, those figures were 0.2% and 6%, respectively.
Why it matters:
The hot inflation that persisted through much of last year continues to show signs of receding — offering at least some relief for shoppers, the White House and the Federal Reserve, though some underlying inflation pressure remains.
Where it stands:
The data caps a year in which consumer prices rose rapidly, though the pace of cost increases began to slow in the final months of the year.
As consumers shifted spending and supply chains began to heal, price increases for a range of goods have cooled or, in some cases, costs have fallen outright.
Between the lines:
The Federal Reserve, which has been raising interest rates aggressively to tame inflation, is watching the services sector closely, where inflation can be more challenging to stamp out.
A sub-index measuring price moves within the services category (excluding housing) accelerated by 0.4%, after two straight months of cooler readings
Still, in the 12 months through December, this sub-index is up 7.4%(compared to 7.3% in November).
The Goldilocks nature of these jobs numbers is particularly apparent in the wage data.
By the numbers: Average hourly earnings rose by 0.3% in December, and are up 4.6% over the last year. Over the last three months, worker pay rose at a 4.1% annual rate.
Wages are rising, but unlike a year ago, the pace is consistent with the economy settling into the 2% inflation that the Fed seeks.
For example, there were stretches in 2018 and 2019 that featured wage growth similar to that in Q4 paired with low inflation levels — which meant rising real wages for workers.
In other words, current pay growth, if sustained, would help diminish the Fed’s fears of an upward spiral of wages and prices. Also, it sets workers up to see gains in their real compensation, if and when inflation comes down.
The intrigue: It appears that a surge in earnings initially reported in November was a head fake. The Labor Department revised those numbers to show a 0.4% rise in hourly earnings, not the 0.6% first reported.
The original figures had been a source of alarm among Fed watchers, suggesting the central bank might need to step up its monetary tightening campaign.
It is a good reminder — for both policymakers and those of us in the media — to not overreact to single-month shifts in any volatile data series.
We really liked what we saw in the December jobs report, which made us more optimistic about the possibility the 2023 economy will hold up reasonably well. More details below.
Situational awareness: In less optimistic news, the Institute for Supply Management’s survey of service industry activity plunged in December, to 49.6% — down from 56.5% in November. This is the first time the index has been in negative territory since May 2020.
The U.S. labor market is extraordinarily strong, despite gloom-and-doom economic forecasts and high-profile layoffs.
That is the takeaway from December numbers, out this morning, that were outstanding in subtle and not-so-subtle ways.
Why it matters: If America’s economy is going to come in for a soft-landing — inflation dissipating without mass unemployment — you would expect to see numbers that look a lot like last month’s.
The economy continues to add a healthy number of new jobs, though the pace is moderating. Wages are rising, but not so quickly as to alarm economic policymakers. And more workers are entering the labor force, which — if sustained — could heal labor shortages.
The data has positive developments both for American workers — who continue to have abundant job opportunities — and for Fed officials seeking evidence that their inflation-fighting efforts are starting to cool job creation and wage growth to more sustainable rates.
The headline unemployment rate, at 3.5%, matched its lowest levels in decades. If you extend the calculation out a couple more decimal places, University of Michigan economist Justin Wolfers points out, it was 3.468%, the lowest since 1969!
It fell even as the labor force expanded by 439,000 workers, a welcome development on the supply front after months of little progress. More Americans working means fewer of the labor shortages that have contributed to inflation.
An additional 717,000 Americans reported being employed, helping resolve what had been a puzzling disconnect between different sources of labor market data — and in a positive direction.
A stunningly low jobless rate might raise some alarm bells at the Fed over the possibility the job market is too tight, and that this could fuel inflation. But the labor force growth and benign wage data (more on that below) may take the edge off those fears.
By the numbers: Employers are still hiring at a rapid pace — 223,000 in December — but slowing from early last year’s unsustainable numbers.
The economy has added roughly 247,000 jobs per month on average in the last three months, slower than the 366,000 in the prior three-month stretch, and less than half of the 539,000 jobs added each month in Q1 2022.
Evidence of tech layoffs did show up somewhat in the report, with the information sector shedding 5,000 jobs. Temporary help services employment fell by 35,000, the clearest sign employers are paring back demand for workers.
But most other sectors, including leisure and hospitality, construction and health care, continued to add jobs.
The bottom line: If we keep getting numbers like these, 2023 may not be such a rough year for workers after all.
Financial analysts have said that 2022 may have been the worst year for hospital finances in decades. This year looks like it will be yet another year of financial underperformance, with rural providers in especially dire circumstances.
What’s driving this bleak financial reality? It’s “primarily an expense story,” said Erik Swanson, a senior vice president at Kaufman Hall‘s data analytics practice.
“Growth in expenses has vastly outpaced growth in revenues — since pre-pandemic levels since last year, and even the year prior — such that margins are ultimately being pushed downward. And hospitals’ median operating margin is still below zero on a cumulative basis,” he declared, referring to 2021 and 2020.
Here’s some context about how dismal this situation is: Even in 2020, a year in which hospitals saw extraordinary losses during the first few months of the pandemic, they still reported operating margins of 2%.
What’s even more disconcerting is that hospitals are underperforming financially pretty much across the board, Swanson said.
Rural hospitals are in even worse shape, but more on that below.
Other hospitals have been forced to shutter service lines to offset these financial losses. Some are also turning to integration and consolidation.
For example, Hermann Area District Hospital in Missouri said last month that it is seeking a “deeper affiliation” with Mercy Health or another provider. This announcement came after the hospital eliminated its home health agency as a cost-cutting measure. In December, the hospital projected a loss of $2 million for 2022.
The merger was finalized one day after North Carolina Attorney General Josh Stein expressed concern about how the deal could impact rural communities. He said that while he didn’t have a legal basis within his office’s limited statutory authority to block the deal, he was worried that it could further restrict access to healthcare in rural and underserved communities.
Stein brings up an extremely valid concern. Rural hospitals’ dismal financial circumstances are becoming more and more worrisome — in fact, about 30% of all rural hospitals are at risk of closing in the near future, according to a recent report from the Center for Healthcare Quality and Payment Reform (CHQPR).
A crucial reason for this is that it is more expensive to deliver healthcare in rural areas — usually because of smaller patient volumes and higher costs for attracting staff. Another factor is that payments rural hospitals receive from commercial health plans isn’t enough to cover the cost of delivering care to patients in rural areas, said Harold Miller, CEO of CHQPR.
“Many people assume that private commercial insurance plans pay more than Medicare and Medicaid. But for small rural hospitals, the exact opposite is true,” he said. “In many cases, Medicare is their best payer. And private health plans actually pay them well below their costs — well below what they pay their larger hospitals. One of the biggest drivers of rural hospital losses is the payments they receive from private health plans.”
In Miller’s view, rural hospitals perform two main functions: taking care of sick people in the hospital and being there for people in case they need to go to the hospital.
To fulfill the latter job, rural hospitals must operate 24/7 emergency rooms. These hospitals get paid when there’s an emergency, but not when there isn’t — even though the hospital is incurring costs by operating and staffing these units.
“Rural hospitals have a physician on duty 24/7 to be available for emergencies. But they don’t get paid for that by most payers. Medicare does pay them for that, but other payers don’t. If the hospital is doing two different things, we should be paying them for both of those things. Hospitals should be paid for what I refer to as ‘standby capacity,’” Miller said.
He bolstered his argument by pointing to these analogies: Do we only pay firefighters when there’s a fire? Do we only pay police officers when there’s a crime?
It’s also important to remember that rural hospitals are in the midst of transitioning to a post-pandemic environment, now without the pandemic-era financial assistance they received from the government, said Brock Slabach, chief operations officer at the National Rural Health Association.
“Rural providers are looking to move into the future without the benefit of those extra payments. And they’re in an environment of really high inflation. It’s over 8%, and for some goods and services in the healthcare sector, that’s going to be over 20% in terms of increased prices. Wages and salaries have also gone up significantly. But patient volumes have maintained below average or average. That all presents a huge challenge,” Slabach said.
Many rural hospitals can’t escape their fate. From 2010 to 2021, there were 136 rural hospital closures. There were only two closures in 2021, and Slabach said 2022 produced a similarly low number. But these low totals are due to government relief, he explained. Slabach said he’s expecting an increase in rural hospital closures in 2023.
When a rural hospital closes, it means community members have to travel far distances for emergency or inpatient care. Miller pointed out another problem: in many rural communities, the hospital is the only place people can go to get laboratory or imaging work done. The hospital might also be the only source of primary care for the community. Shuttering these hospitals would be a massive blow to rural Americans’ healthcare access.
In the face of these potentially devastating blows to patient access, financial analysts’ outlook is bleak.
Higher inflation and costly labor expenses will continue to have negative effects on hospitals — both rural and urban — in 2023, according to an analysis from Moody’s. Expenses will also continue to increase due to supply chain bottlenecks, the need for more robust cybersecurity investments and longer hospital stays due to higher levels of patient acuity.
All of this doom and gloom begs the question — are any hospitals doing well financially?
These three systems all had positive operating margins for the majority of the pandemic, including most recently in the third quarter of 2022.
Large public health systems have shareholders to report to and stock prices to worry about. Does this mean they’re more likely to deny care to patients who can’t afford it while other hospitals pick up the slack?
Slabach said it’s tough to say.
“Obviously, hospitals try to mitigate their exposure to risk when it comes to taking care of patients. Most hospitals do a really good job of providing services and care to people who don’t have insurance or don’t have the means to pay. But that gets stressed in this current financial environment. So indeed, there may be instances where what you suggested might happen, but it’s not because they want to deny services or deny care. It’s because they have a bigger picture they have to maintain,” Slabach said.
And the big picture involving dollar signs for hospitals looks pretty bleak in 2023.
Sustained high labor expenses and inflationary pressures will continue to affect the healthcare industry in 2023, keeping the outlook for nonprofit hospital systems negative, Moody’s said in a Dec. 7 report.
In addition to such pressures, persistent COVID-19 surges, supply chain disruptions and the need for continued cybersecurity investments will also increase expenses, the report said. And while operating revenue is expected to modestly improve next year, the ending of federal Coronavirus Aid, Relief and Economic Security Act funding, net Medicare cuts and the end of the public health emergency will negatively affect hospital revenues, Moody’s said.
“This level of operating cash flow production will likely prove insufficient over the long term to enable adequate reinvestment in facilities, maintain investment in programs, or support organizational growth — key considerations that drive our negative outlook,” said Brad Spielman, vice president, senior credit officer for Moody’s.
Some of the less well-funded healthcare systems could even face breaches of covenant amid such a challenging backdrop, Moody’s warned. Such covenants typically refer to issues like days of cash on hand or minimum coverage of debt.
Management in such challenged systems have taken measures to mitigate the danger of such breaches, the report said. These include liquidating investments and drawing on lines of credit as well as refinancing debt, an unfavorable option in the current economic situation.
“The present interest-rate environment, however, currently makes such a move relatively costly,” the report noted.
The Moody’s report follows quickly on the heels of a similar one from Fitch Ratings Dec. 1 that highlighted the “formidable challenge” of high labor expenses and inflationary pressures facing the industry.
UnitedHealth Group expects Optum to see a long-term double-digit revenue growth rate and bring in a range between $212 billion to $214 billion in 2023 revenues.
The Minnetonka, Minn.-based healthcare giant shared Nov. 29 it projects growth margins of over 20 percent for technology products and low- to mid-single-digit growth for pharmacy care services.
Optum Health Revenues: $91 billion to $92 billion Earnings: $7.4 billion to $7.6 billion
Optum Insight Revenues: $18.6 billion to $19.3 billion Earnings: $4.4 billion to $4.5 billion
OptumRx Revenues: $105.5 billion to $106.5 billion Earnings: $4.8 billion to $4.9 billion
UnitedHealth Group expects 2023 revenues of $357 billion to $360 billion, net earnings of $23.15 to $23.65 per share, and adjusted net earnings of $24.40 to $24.90 per share. Cash flows from operations are expected to be $27 billion to $28 billion.
UnitedHealthcareexpects 2023 revenues to range from $274 billion to $276 billion. By the end of this year, the payer’s revenues are expected to hit $249.2 billion, up from $222.9 billion in 2021.
Wall Street’s roil has stabilized somewhat in recent days, with the S&P 500 brushing up against its 200-day moving average and rising more than 10 percent since its October lows, as of publication time.
The index’s 50-day moving average is trending up, according to financial data firm Refinitiv. But it still must climb another 7.4 percent to form a “golden cross,” which is when a stock or index’s short-term moving average rises above one of its longer-term moving averages. The S&P 500’s 20-day and 100-day moving averages are closer to the milestone, only needing increases of 5 percent and 1.2 percent, respectively.
The Dow Jones Industrial Average has already formed a small golden cross: its 20-day moving average is 1.2 percent higher than its 200-day moving average.
Investors Optimistic about Healthcare Sector
– Investors are most optimistic about the Healthcare sector, which is trading close to its 3-year average “price to earnings-per-share” ratio of 48.1x, according to Simply Wall Street.
– Analysts are expecting an annual earnings growth of 13.4 percent, higher than the sector’s past year earnings growth of 5 percent.
– Merck and Johnson & Johnson were among last week’s top gainers driving the market.
Inflation Appears to be Slowing
– The recent lower-than-expected inflation figures could indicate it is slowing.
– The Fed may continue raising rates, considering the strength in recent labor market and retail sales data.