Labor costs are expected to continue to decline next year, boosting the financial outlook of nonprofit hospitals.
Credit ratings agency Moody’s Investors Service has upgraded the 2024 nonprofit hospital sector financial outlook to stable, from negative. Moody’s researchers expect patient admissions to rise, especially in outpatient facilities, and reimbursement rates from insurers to improve for some providers.
Here are five takeaways from the Moody's report released Wednesday.
1. Labor costs soften
Labor costs rose throughout the COVID-19 pandemic as health systems filled workforce gaps through staffing agencies. But toward the end of last year, those expenses began to decline. That has continued through 2023.
While nonprofit hospital labor costs are expected to decelerate substantially from a median 9.7% increase in salaries and benefits in 2022, baseline salary and benefit costs will remain higher than pre-pandemic levels, Moody’s researchers said. How much those costs decline will depend on hospitals’ recruitment and retention efforts, contract negotiations with unions and the availability of post-acute beds.
2. Inpatient and outpatient admissions will grow
Outpatient admissions are expected to lead the rebound in patient volumes, which have already surpassed pre-pandemic levels, researchers said.
Since outpatient care is less profitable than inpatient treatment, nonprofit hospitals are expected to focus on growing high-margin outpatient service lines such as oncology and orthopedics.
3. Revenue growth is limited by payment delays
Rebounding volumes and, in some cases, higher reimbursement rates negotiated with insurers, are expected to boost nonprofit hospital median operating revenue 4%-6% next year.
However, denied reimbursement claims and payment delays, especially among the growing number of Medicare Advantage beneficiaries, are expected to constrain revenue growth. In addition, revenue will likely be limited by Medicaid redeterminations as Medicaid enrollees continue to lose coverage.
4. Default risk remains high
The risk of nonprofit hospitals defaulting on their loans remains high as cash flows are constrained by higher expenses and interest rates, among other financial pressures. But median operating cash flows are poised to increase 10%-20% next year, helping hospitals avoid any bond covenant violations, Moody’s said.
Nonprofit health systems have been amending their covenant agreements as they ask bondholders for more time to improve their finances.
5. Operating cash margin should improve
Median operating cash flow margin is expected to increase to 7% in 2024, up from 6% this year, trailing the pre-pandemic 8%-9% levels, Moody's said.
Operating cash flow margins will vary widely, falling below 3% for about a third of providers that Moody’s rates.