Fitch Ratings adjusted its outlook for nonprofit hospitals from “neutral” to “deteriorating” halfway through what has proven to be a rough year for the industry.
The macro headwinds of labor pressures and high inflation were known heading into 2022 but “have been more pronounced than expected,” the ratings agency wrote in a midyear outlook report released Tuesday.
“While severe volume disruption to operations appears to be waning, elevated expense pressure remains pronounced,” Kevin Holloran, senior director at Fitch Ratings, said in a release accompanying the outlook report. “Even if macro inflation cools, labor expenses may be reset at a permanently higher level for the rest of 2022 and likely well beyond.”
Fitch anticipates nonprofit hospitals’ operating margins will reflect those pressures through the back half of the year, although many organizations will be able to somewhat weather the storm with the record levels of cash they accumulated last year. Still, asset price corrections in the market are substantially trimming the investment portfolios built up during 2021’s strong markets, the agency noted.
“While Fitch does not expect en masse downgrades across the sector, a period in which downgrades and negative outlooks outpace upgrades and positive outlooks is anticipated,” the ratings agency wrote.
Fitch said it’s expecting “a more manageable endemic period” for hospitals balancing COVID inpatient and welcoming the return of surgical and specialty care volumes that “have returned to near pre-COVID-19 levels in many markets.” On the other hand, uncertainty abounds during a pandemic that has shown its ability to resurge time and again, the agency wrote.
Looking ahead, Fitch said it is expecting labor expenses to remain high regardless of broader inflation. “Many providers” are expected to violate their debt service coverage covenants during the remainder of the year, the agency wrote, and local factors such as strong population growth will become increasingly vital toward determining hospitals’ credit quality.
Fitch’s new outlook falls in line with a July report from the agency warning that the nonprofit sector will likely require “transformational” changes to offset short- and long-term pressures.
Midyear financial statements from some of the country’s largest nonprofit systems have painted labor pressures, muted volume recovery and major investment losses as the norm. For the most recent quarter, Kaiser Permanente logged a nearly $1.3 billion net loss, Sutter Health posted a $457 million net loss, Mass General Brigham reported a $949 million net loss and Providence fell $424 million from its operations alone.