Nonprofit hospitals are bracing for a challenging few months as healthcare and social assistance job vacancies remain high against a backdrop of low unemployment, Fitch Ratings said in an Oct. 25 update.
Healthcare and social assistance job openings fell for two consecutive months to 7.7 percent as of August, but the number of openings remains above the highest level recorded before the COVID-19 pandemic.
One encouraging sign is the slowly declining number of quits — 2.3 percent (486,000 quits) in August 2022 compared with a peak of 3.1 percent (626,000 quits) in November 2021. However, current quit rates remain high and are on track to exceed last year, according to Fitch.
“[not-for-profit] hospital quits will need to normalize to well below pre-pandemic levels in order to reduce staffing shortages and a reliance on contract/temporary labor,” Fitch Director Richard Park said in the news release.
The labor shortage saw hospital employees’ average weekly earnings increase 21.1 percent since February, significantly higher than the 13.6 percent earnings growth of overall private sector employees, according to Fitch. But ambulatory healthcare services employees’ earnings increased by only 12.6 percent over the same period.
“Wage increases and employee recruitment challenges may amplify the role of ambulatory care in the overall healthcare sector and continue the acceleration of inpatient care to outpatient settings,” Mr. Park said.
As everyone in our industry knows, sluggish volumes amid persistently rising costs, especially for labor, have sent health system margins into a downward spiral across 2022. Using the latest data from consultancy Kaufman Hall, the graphic above shows that by the end of this year, employed labor expenses will have increased more than all non-labor costs combined.
While contract labor usage, namely travel nursing, is declining, the constant battle for nursing talent means travel nurses are still a significant expense at many hospitals. Through the first six months of this year, over half of hospitals reported a negative operating margin, and the median hospital operating margin has dropped over 100 percent from 2019.
Larger health systems are not faring better: all five of the large, multi-regional, not-for-profit systems we’ve highlighted below saw their operating margins tumble this year, with drops ranging from three points (Kaiser Permanente) to nearly seven points (CommonSpirit Health and Providence).
While these unfavorable cost trends have been building throughout COVID, health systems now have neither federal relief nor returns from a thriving stock market to help stabilize their deteriorating financial outlooks.
Health system boards will tolerate negative margins in the short-term (especially given that many have months’ worth of days cash on hand), but if this situation persists into 2023, pressure for service cuts, layoffs, and restructuring will mount quickly.
St. Louis-based Ascension reported higher expenses in the 12 months ended June 30 and closed out the year with a loss, according to recently released financial documents.
The 144-hospital system reported operating revenue of $27.98 billion in the year ended June 30, up from $27.24 billion a year earlier.
Ascension’s operating expenses climbed to $28.77 billion in the 12 months ended June 30, up from $26.69 billion last year. The increase was attributed to several factors, including higher salaries, wages and benefits due to staffing challenges and increased use of contract and premium labor.
Ascension ended the most recent fiscal year with an operating loss of $879.2 million, compared to an operating income of $676.3 million a year earlier.
After factoring in nonoperating items, Ascension reported a net loss of $1.8 billion for the 12 months ended June 30. A year earlier, the health system posted net income of $5.7 billion.
Ascension is facing many of the same financial pressures as other health systems across the U.S. More than half of hospitals — 53 percent — are projected to have negative margins for the rest of the year.
Here are 14 health systems with strong operational metrics and solid financial positions, according to reports from Fitch Ratings and Moody’s Investors Service.
1. Advocate Aurora Health has an “AA” rating and stable outlook with Fitch. The health system, dually headquartered in Milwaukee and Downers Grove, Ill., has a strong financial profile and a leading market position over a broad service area in Illinois and Wisconsin, Fitch said. The health system’s fundamental operating platform is strong, the credit rating agency said.
2. AnMed Health has an “AA-” rating and stable outlook with Fitch. The Anderson, S.C.-based system has a leading market share in most service lines, strong operating performance and very solid EBITDA margins, Fitch said.
3. Banner Health has an “AA-” rating and stable outlook with Fitch. The Phoenix-based health system’s core hospital delivery system and growth of its insurance division combine to make it a successful highly integrated delivery system, Fitch said. The credit rating agency said it expects Banner to maintain operating EBITDA margins of about 8 percent on an annual basis, reflecting the growing revenues from the system’s insurance division and large employed physician base.
4. Bon Secours Mercy Health has an “AA-” rating and stable outlook with Fitch. The Cincinnati-based health system has a broad geographic footprint as one of the five largest Catholic health systems in the U.S., a good payer mix and a leading or near leading market share in eight of its eleven markets in the U.S., Fitch said.
5. Lincoln, Neb.-based Bryan Health has an “AA-” rating and stable outlook with Fitch. The health system has a leading and growing market position, very strong cash flow and a strong financial position, Fitch said. The credit rating agency said Bryan Health has been resilient through the COVID-19 pandemic and is well-positioned to accommodate additional strategic investments.
6. Franciscan Alliance has an “AA” rating and stable outlook with Fitch. The Mishawaka, Ind.-based health system has a very strong cash position and maintains leading market shares in seven of its nine defined primary service areas, Fitch said. The health system benefits from a good payer mix, the credit rating agency said.
7. Gundersen Health System has an “AA-” rating and stable outlook with Fitch. The La Crosse, Wis.-based health system has strong balance sheet metrics and a leading market position and expanding operating platform in its service area, Fitch said. The credit rating agency expects the health system to return to strong operating performance as it emerges from disruption related to the COVID-19 pandemic.
8. Hackensack Meridian Health has an “AA-” rating and stable outlook with Fitch. The Edison, N.J.-based health system has shown consistent year-over-year increases in market share and has a solid liquidity position, Fitch said.
9. Falls Church, Va.-based Inova Health System has an “Aa2” rating and stable outlook with Moody’s. The health system has a consistently strong operating cash flow margin and ample balance sheet resources, Moody’s said. Inova’s financial excellence will remain undergirded by its favorable regulatory and economic environment, the credit rating agency said.
10. Salt Lake City-based Intermountain Healthcare has an “Aa1” rating and stable outlook with Moody’s. The health system has exceptional credit quality, which will continue to benefit from its leading market position in Utah, Moody’s said. The credit rating agency said the health system’s merger with Broomfield, Colo.-based SCL Health will give Intermountain greater geographic reach.
11. Omaha-based Nebraska Medicine has an “AA-” rating and stable outlook with Fitch. The health system has a strong market position and is the only public academic provider in Nebraska with high acuity services, Fitch said. The health system continues to generate positive operating cash flow levels, and it has modest flexibility to absorb additional debt, according to the credit rating agency.
12. Fort Wayne, Ind.-based Parkview Health has an “Aa3” rating and stable outlook with Moody’s. The health system has a leading market position with expansive tertiary and quaternary clinical services in northeastern Indiana and northwestern Ohio, Moody’s said. The credit rating agency said the stable outlook reflects management’s ability to generate strong operating performance during the pandement and with less favorable reimbursement rates.
13. UnityPoint Health has an “AA-” rating and stable outlook with Fitch. The Des Moines, Iowa-based health system has strong leverage metrics and cash position, Fitch said. The credit rating agency expects the health system’s balance sheet and debt service coverage metrics to remain robust.
14. Yale New Haven (Conn.) Health has an “AA-” rating and stable outlook with Fitch. The health system’s turnaround efforts, brand recognition and market presence will help it return to strong operating results, Fitch said.
Moody’s Investors Service has downgraded MultiCare Health System’s revenue bonds to “A1” from “Aa3,” and revised the health system’s rating outlook to negative from stable.
Moody’s said the downgrade and the revision of the outlook to negative reflect several pressures that weaken the health system’s credit profile, including an unexpected 24 percent increase in debt, a decline in liquidity and significant operating losses through the first six months of fiscal 2022.
“Operations are expected to improve through the second half of fiscal 2022, but nevertheless full year results will remain weak, providing at best thin headroom to MultiCare’s debt service coverage covenant,” Moody’s said.
Moody’s noted that MultiCare, an 11-hospital system based in Tacoma, Wash., will continue to benefit from several strengths, including a large and growing revenue base and strong clinical offerings.
Despite a a seventh straight month of industrywide negative margins, “hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience,” Kaufman Hall’s Erik Swanson said.
Months of inching performance gains were upended in July as the nation’s hospitals logged “some of the worst margins since the beginning of the COVID-19 pandemic,” Kaufman Hall wrote in its latest industry report.
Decreasing outpatient revenues paired with pricier inpatient stays were chief among the culprits and outpaced minor improvements in expenses, the group wrote in its monthly sector update for July.
What’s more, seven straight months of negative margins “reversed any gains hospitals saw this year” and has the advisory group forecasting a brutal year for the industry.
“July was a disappointing month for hospitals and put 2022 on pace to be the worst financial year hospitals have experienced in a long time,” Erik Swanson, senior vice president of data and analytics with Kaufman Hall, said in a statement. “Over the past few years, hospitals and health systems have been able to offset some financial hardship with federal support, but those funding sources have dried up, and hospitals’ bottom lines remain in the red.”
Kaufman Hall placed its median year-to-date operating margin index at -0.98% through July, compared to the -0.09% from January to June the group had reported during last month’s report. Hospitals’ median percent change in operating margin from June to July was -63.9%, according to the report, and -73.6% from July 2021.
The month’s volume trends hinted at the larger shift toward scheduling procedures for ambulatory settings, Kaufman Hall wrote. For instance, operating room minutes declined 10.3% from June to July and 7.7% year over year, according to the report.
Patients who did come into the hospital tended to be sicker, the firm continued. Average length of stay increased 2% from last month and 3.4% year over year. Patient days increased 2.8% from the previous month but were down 2.6% from the prior year, while adjusted discharges dipped 2.8% from June and 4.2% from July 2021.
These trends came together as a brake check on 2022’s to-date revenue gains. Gross operating revenue fell 3.6% from June but remains up 5.5% year to date. Outpatient revenue was down 4.8% from June and maintains a 7.1% year-to-date increase. Inpatient revenue declined 0.7% from June but is still up 3.6% year to date.
The silver lining in Kaufman Hall’s report were total expenses that, although up 7.6% from July 2021, saw a modest 0.4% decline since June. Those savings came squarely among supply and drug expenses as total labor costs and labor expense per adjusted discharge still grew 0.8% and 3.5%, respectively, since June. Increases in full-time employees per adjusted occupied bed “possibly” suggest increased hiring, the group wrote in the report.
Kaufman Hall acknowledged the “urgency of day-to-day pressures” driving the month’s sudden performance dips but urged hospital leaders to prioritize long-term operational improvements as they work to keep the organization afloat.
“2022 has been, and will likely continue to be, a challenging year for hospitals and health systems, but it would not be prudent to focus on short-term solutions at the expense of long-term planning,” Swanson said. “Hospitals and health systems must think strategically and make investments to strengthen performance toward long-term institutional goals despite the day-to-day financial challenges they experience.”
Kaufman Hall’s monthly reports are based on a sample of more than 900 nationally representative hospitals.
The group isn’t alone in its doom-and-gloom warnings for providers. Fitch Ratings recently wrote that high expenses, jilted volume gains and other challenges are unlikely to resolve before the end of the year. As such, the agency downgraded its outlook for the nonprofit hospital industry from “neutral” to “deteriorating.”
Cleveland Clinic’s revenue was down year over year in the second quarter of this year, and the health system ended the period with a loss, according to financial documents released Aug. 29.
The health system’s revenue totaled $3.1 billion in the three-month period ended June 30, down from $3.2 billion in the same quarter last year.
Cleveland Clinic reported expenses of $3.1 billion in the second quarter of this year, up from $2.7 billion in the same period last year. The system saw expenses rise across all categories, including supplies and salaries, wages and benefits.
“Nationwide labor shortages have created staffing challenges that have resulted in increased overtime costs and premium pay for employed caregivers as well as an increase in the utilization of agency nurses and other temporary personnel to meet the demand of patient activity,” Cleveland Clinic said in an earnings release. “Supplies, pharmaceuticals and other nonlabor expenses have also increased due to recent inflationary trends and supply chain challenges.”
The health system ended the second quarter with an operating loss of $183.5 million, compared to operating income of $339.5 million in the second quarter of 2021.
After factoring in nonoperating losses, Cleveland Clinic posted a net loss of $786.9 million in the second quarter of this year, compared to net income of $904.4 million in the same quarter a year earlier.
Looking at the first six months of this year, Cleveland Clinic reported a net loss of $1.1 billion on revenue of $6.2 billion. In the same period a year earlier, the health system reported net income of $1.3 billion on revenue of $6 billion, according to the financial documents.
Nonoperating losses for Cleveland Clinic were $781.4 million in the first six months of this year, compared to nonoperating gains of $853.5 million in the same period last year. The decrease was primarily due to lower investment returns in the first half of 2022.
HENRY KOTULA 