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Hospital outlooks? ‘Deteriorating.’ Payor predictions? ‘Attractive returns.’

Fitch Ratings agrees: Hospitals are short-staffed and financially shaky. Meanwhile, health insurers are heaping in cash!

Bad news for nonprofit hospitals (and just after things were maybe looking up!).

Ratings agency Fitch Ratings published a new outlook for the nonprofit hospital sector, and it’s anything but encouraging.

In fact, the agency has so little hope in the financial stability of nonprofit hospitals that it adjusted its former “neutral” outlook to “deteriorating,” citing higher labor costs and continued volume disruption (i.e., patients still aren’t back at the doctor like they were before COVID-19). To aggravate these conditions, inflation is the highest it’s been in forty years.

But according to Kevin Holloran, Senior Director and the Sector Leader of the Not-for-Profit Healthcare Group at Fitch Ratings: “Even if macro inflation cools, labor expenses may be reset at a permanently higher level for the rest of 2022 and likely well beyond.”

This means that, inflation or not, under-staffed and under-funded hospitals are trying to keep up with the astronomically rising costs of attaining and retaining their employees. This spring, Healthcare Dive reported that by March 2022, hospitals’ labor costs rose by more than a third from pre-pandemic levels. This is primarily due to “heightened temporary and traveling labor costs.”

To put it more into perspective:

  • In 2022, contract labor accounted for 11% of hospitals’ total labor
  • In 2019, that figure was only 2%

It’s gotten so bad that many providers are “expected to violate their debt service coverage covenants during the remainder of the year,” Fitch Ratings reports.

Meaning, because revenues have been so low and expenses so high, hospitals literally may not have enough cash on hand to meet their obligations.

Kaiser Permanente, for instance, just barely skated by on its razor-thin operating margin of 0.4%. In its second quarter, the health system experienced a $1.3 billion net loss. Sutter Health, another nonprofit, faced a $457 million net loss. Meanwhile, Mass General Brigham posted a $949 million net loss, nearly reversing its earnings from the same time last year.

As for health insurance companies, after a profitable first quarter, United Healthcare raised its outlook — meaning the insurer expects even more money to come in! — and is now on track to surpass its record-breaking profits from last year.

And the rest?

Elevance Health raised its full year outlook after a promising second quarter 2022. Cigna raised its outlook for full year 2022, which is now projected to be at least $178 billion.

When are we going to acknowledge that these two phenomena — insurer profits and hospital losses — aren’t just occurring in vacuums, but are fundamentally related?

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