2024 looks like another challenging year for hospitals and health systems trying to rebuild.
Rising costs for labor, supplies and infrastructure continue to plague providers as they adjust to a new operating environment with higher wages and inflated prices after the COVID-19 pandemic. At the same time, patient volumes are increasing and putting pressure on existing care facilities, forcing providers to draw from their cash to keep up with demands.
Related: 5 factors impacting hospital financials in 2024
Still unknown is when operating margins will return to pre-pandemic levels, according to a report released Monday by credit ratings agency Fitch Ratings. In the meantime, healthcare leaders must strike a balance between short-term challenges and long-term strategic goals.
Here are key points to watch, according to Fitch:
Capital spending is necessary
Fitch expects a robust capital cycle in 2024. Capital spending deferrals, although often necessary in a challenging operating environment, can lead to problems with aging infrastructure and missed growth opportunities if allowed to go on too long. Striving for an operating margin of 3% or higher is a sweet spot for health systems to cover their expenses but still make important investments into the organizations.
Many health systems have already ramped up capital spending to meet patient demand. Sacramento, California-based Sutter Health, for example, is investing roughly $800 million to open 25 ambulatory care centers in the next three years. Tampa General Hospital doubled its footprint after spending nearly $300 million to purchase three Florida hospitals in December.
Some M&A deals are easier than others
Additional scrutiny from state and federal regulators is limiting traditional mergers and acquisitions and will likely continue to do so. However, pent-up demand must be addressed. Large providers acquiring smaller ones and out-of-market mergers have been allowed by regulators. Acquisitions in which providers already control a large share of the market, such as Winston-Salem, North Carolina-based Novant Health's proposed purchase of two North Carolina hospitals, have been more difficult to achieve.
Traditional providers must pass or play
Technology companies, private equity firms, payers and other non-traditional healthcare businesses are rapidly moving into care delivery and creating challenges for more traditional providers.
Traditional providers have three options: ignore the new market entrants, partner with them or outcompete with them. Many are opting for the second choice, as ignoring new entrants could be a strategic misstep and outdoing them requires a lot of financial and technological investment.
For example, big systems such as Charlotte, North Carolina-based Advocate Health and New York-based Mount Sinai Health System are teaming up with technology giant Best Buy to deliver at-home care.
Modest improvements expected for cash on hand
Cash on hand significantly improved for many providers in 2023, following a financially devastating 2022.
Better profitability and investment gains typically bolster cash on hand, but any increases can be offset by a growing expense base, particularly for labor. As a result, Fitch expects to see only modest improvements in cash on hand in 2024.
