Anemic post-pandemic operating margins probably won’t cause nonprofit hospitals to suffer credit downgrades “en masse.”
That’s because many not-for-profit health systems have “built up robust balance sheets and learned to economize on capital spending to a certain degree.”
Further, volumes and liquidity have trended upward in the wake of the COVID-19 crisis, as has investment, adding cause to the cautious optimism.
The forecast is from the credit agency Fitch Ratings, which released a special report this week.
Fitch says operating margins may be “resetting” in the range of only 1% to 2%, but the drop likely represents less of a “sector-ending” scenario than a “pain point” inflection addressable by individual organizations based on their particular financial circumstances.
While expressing relative optimism in the face of the tumble, however, Fitch says hospital-specific declines are a real possibility for institutions that can’t afford to wait for capital to return longer than it takes for margins to improve.
The agency notes that 3% is the minimum operating margin for comfortably paying the bills, and collective margins have yet to return to that level in the wake of the COVID-19 setbacks.
According to Fitch sector head Kevin Holloran, the year 2030 will be of special concern for these stressed hospitals.
The final Baby Boomer wave will turn 65 that year, “which will potentially pose the scenario of a smaller workforce serving a larger population in need of heightened care,” Holloran says in a news release promoting the new report.
Also of concern is how many days’ cash on hand, or DCOH, nonprofit hospitals have.
Specifically, the germane question is whether 200 days to 250 days “may be too high given the sector’s lofty struggles.”
With DCOH coming in at above 200 days nine of the last 10 years and the overall median being 216 days based on 2022 financials, “the answer appears to be no,” Fitch Ratings says. “However, DCOH will improve very little despite better profitability and inherent gains on investments.”
Fitch summarizes:
“Fitch Ratings expects core credit drivers to remain challenged for the sector again in 2024, coming off a difficult operating environment since the pandemic. The industry continues to struggle with labor shortages and salary/wage/benefit pressure compressing margins for a sizable portion of the sector, even as other core credit drivers, specifically volumes and overall liquidity, begin to improve.”
Dave P. has worked in journalism, marketing and public relations for more than 30 years, frequently concentrating on hospitals, healthcare technology and Catholic communications. He has also specialized in fundraising communications, ghostwriting for CEOs of local, national and global charities, nonprofits and foundations.