Inflation eating away hospital margins
Hospitals and health systems have been facing tight margins over the past few years during the COVID-19 pandemic, and with historic inflation, things aren’t likely to get better anytime soon.
Not-for-profit hospital margins will see greater erosion due to ongoing inflationary pressures of elevated labor, supply and capital costs, according to Fitch Ratings. To improve margins, hospitals will need to make both short- and long-term changes, and it could take years for hospitals to recover their margins.
Many hospitals are still reporting below average margins compared to the pre-pandemic years, according to Fitch Ratings, which noted that hospitals need to make transformational changes to the business model if they are to see improvement in margins from reduced levels. They will also need to engage in “relentless, ongoing cost-cutting and productivity improvements” in order to turn things around.
Fortunately, many NFP hospitals do have strong balance sheets coming out of the pandemic, but inflation is rearing its ugly head and will erase those gains.
“Without more substantial changes to the current business model, or with additional coronavirus surges this fall or winter, this balance sheet cushion could eventually erode, which would lead to negative rating actions,” Fitch Ratings wrote.
The report comes as inflation levels have reached a 40-year high, with the last time the rate of inflation was as high in the 1970s and 1980s. Back then, hospital reimbursements were based on cost, with cost pressures passed on to the government and private insurance payors under a more elastic revenue model. Since 1983, when the Medicare Prospective Payment System (MPPS) was implemented, Medicare reimbursement has been based on a pre-determined, fixed amount according to diagnosis grouping.
As a result of inflationary pressures, providers will look for higher rate increases from commercial payors, which are also facing the same pressures. However, some providers may be successful getting higher rates from payors, Fitch noted.
“We do not expect to see Medicare or Medicaid rate adjustments to offset inflation given federal budget deficits, and commercial rate increases are also likely to be well below inflation in the short term,” Fitch Ratings predicted.
On the M&A front, Fitch Ratings predicts the economic pressures will lead more providers to think about consolidation, “as hospitals seek to generate economies of scale and gain skills to enable them to take on additional risk contracts.” At the same time, regulators are taking a harder look at the impact of consolidation and could step in to prevent some of these transactions.
Amy joined TriMed Media as a Senior Writer for HealthExec after covering home care for three years. When not writing about all things healthcare, she fulfills her lifelong dream of becoming a pirate by sailing in regattas and enjoying rum. Fun fact: she sailed 333 miles across Lake Michigan in the Chicago Yacht Club "Race to Mackinac."