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Operating margins at not-for-profit hospitals are expected to “gradually improve” in 2024 but will still lag far behind pre-pandemic levels, according to a January report from credit rating agency Fitch Ratings.
Median operating margins for not-for-profit hospitals dipped to record lows during the pandemic, falling to 0.2% in 2022, according to the agency, which has yet to report numbers for 2023. In 2019, the median not-for-profit hospital operating margin was 2.4%, according to Moody’s.
Despite signs that margins are improving, they’re still “nowhere near” where they were pre-2020, and a “larger expense base will keep huge gains unlikely,” according to Fitch.
“2024 will not be markedly better and certainly not the V-shaped recovery we’re hoping for,” Kevin Holloran, senior director and sector head at Fitch, said in a statement.
Not only are margins still below pre-pandemic levels, “more importantly, they will tread below the ‘magic number’ operating margin of 3%,” Holloran added.
Thanks to the slow recovery, not-for-profit hospitals will face a heightened risk of credit downgrades, according to the Fitch report.
Labor shortages and wage pressure are the main challenges not-for-profit hospitals face, according to a separate Fitch report released last December 5. Both factors continue “compressing” operating margins despite improving volumes and overall liquidity.
“As the largest single expense for healthcare providers, managing salary, wages, and benefits has emerged as the single most meaningful differentiator between operational success and failure,” the Fitch report stated.
Fitch projected that labor expenses will stay high in 2024 for all types of healthcare workers.
“The last several years have proven very challenging for most of the sector, which is now facing the ongoing ‘labor-demic’ with significant staff shortages, intense wage pressure, and heightened inflation,” Holloran said in the report. “While staffing issues have started to attenuate, salary and wage expenses appear to have been reset at a new, higher level for many—directly impacting operating margins over the near term.”
An uptick in union activity seen across healthcare will compound the labor shortages, Fitch projected, saying not-for-profit hospitals that rely on unionized workers will experience “elevated pressures.”
Holloran said 2024 will be a “make-or-break year” for many not-for-profit hospitals.
“Much of a hospital’s ability to be successful will depend on their ability to recruit and retain staff in the currently hypercompetitive landscape for personnel,” he said.