Labor expenses contribute to negative credit outlook for healthcare, Moody’s finds

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While the credit landscape in 2022 looks stable or positive for sectors of the economy including local government and higher education, the nonprofit and public healthcare sector stands to fare worse, garnering a negative outlook from Moody’s Investors Service in its latest report.

Among the main factors contributing to this outlook are nursing shortages and increased labor costs, which are projected to decrease operating cash flow between 2% and 9%, amid comparatively modest revenue gains.

The shortages, while mostly reducing the availability of nurses and other skilled staff such as lab technicians, will also affect less skilled and entry-level positions. Other factors pushing expenses higher are supply chain disruptions, increased drug costs, higher inflation and increased investment in cybersecurity. 

Volume recovery will be choppy, and a worsening payer mix will curb revenue gains. As patient volumes recover from the height of the pandemic, revenues will grow – but at a moderate rate. Aside from payer mix, limits on revenue growth include lingering pandemic strains, the inability to meet demand because of labor constraints, and the continued shift of care to low-cost settings.

Liquidity will likely decline as Medicare advances are reimbursed and deferred taxes are paid. Repayment of advances received by hospitals under the CARES Act for future Medicare services will cut into this liquidity, as will payment of payroll taxes deferred through the end of calendar 2020. The potential for an investment market downturn in 2022 represents another threat, since nonprofit hospitals rely heavily on large cash reserves.

Legislative, regulatory and judicial activity will continue to add risk, Moody’s found. Medicare sequestration – the process by which the federal government reduces spending by 2% annually – was set to resume in 2022 after a suspension because of the pandemic. 

However, both the House and the Senate recently passed legislation to avert the cuts, extending a moratorium on the 2% Medicare sequestration until April 2022, then reducing the cut to 1% from April to June.

Vaccine mandates, the tightening of antitrust laws and price transparency rules will also create challenges for the sector.

WHAT’S THE IMPACT

There are a number of global credit themes affecting the financial outlook for nonprofit and public healthcare entities, Moody’s found. One is the emergence of new technologies. Sensitive patient data held by providers makes them a rich target for cyberattacks, particularly in the form of ransomware. Spending on cybersecurity is likely to increase in 2022 and the years ahead as a result.

Expanding adoption of telehealth and remote care during the COVID-19 pandemic will result in further vulnerabilities, the report found.

In terms of policy, the increased federal scrutiny of mergers may reduce consolidation, slowing the growth of larger systems. And vaccine mandates will exacerbate labor difficulties, with providers losing employees who don’t wish to comply.

Those labor difficulties will only get worse with the glut of nurses who have resigned due to fatigue, stress or overwork, and as they seek out more attractive wages in other industries. In the middle of rising demand, this shortage of nurses and other skilled labor will send labor costs sharply higher.

Pay rates, meanwhile, will remain elevated until the labor market returns to equilibrium, which will likely take several years.

Moody’s did identify a couple of factors that could change the nonprofit and public healthcare sector’s outlook to stable. One would be operating cash flow growth between 0 and 4%.

Other factors include the moderation of expense growth and continued recovery in volumes, leading to solid revenue growth; and continued improvement in vaccination rates, the absence of a downturn in investment markets and an increase in net reimbursement.

THE LARGER TREND

Labor expense challenges have been a common refrain in recent months, with Kaufman Hall’s November Flash Report, which looked at data from October, finding hospital margins have become even thinner since labor expenses have begun to rise.

Not including CARES Act funding, the median change in operating margin was down 12.1% from September to October, marking a second consecutive month of margin declines. Looking at year-over-year results, the median change in operating margin dropped 31.5% compared to pre-pandemic levels in October 2019.

Multiple factors are contributing to labor pressures, including staff burnout caused by the pandemic and an overall shortage of qualified help, which has resulted in higher costs to hire temporary staff, as well as wage inflation.

Supply chain issues are also adding pressure to profit margins, mainly due to higher transportation costs incurred by distributors. The medical device subsector is also being impacted by the global shortage of semiconductors needed for their manufacturing processes.

Washington State healthcare workers have called on hospitals to mitigate the staffing crisis, with the union arguing there are a number of policies hospital administrators could immedi­ately enact that would help alleviate some of the issues.

Meanwhile, vaccine mandates for healthcare workers are also having an effect on the staffing shortage. For example, the state of Washington lost 2% of its healthcare workforce since mandating that all hospital and nursing home staff members receive COVID-19 vaccines.

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