Labor spending contributes to negative credit outlook for healthcare, says Moody’s
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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 health sectors are faring less well. , collecting a negative outlook from Moody’s Investors Service in its latest report.
Key factors contributing to this outlook include nursing shortages and rising labor costs, which are expected to reduce operating cash flow to between 2% and 9%, against a backdrop of gains. relatively modest income.
Shortages, while primarily reducing the availability of nurses and other skilled personnel such as laboratory technicians, will also affect less skilled and entry-level positions. Other factors driving spending up are supply chain disruptions, rising drug costs, rising inflation, and increased investment in cybersecurity.
The recovery in volumes will be jerky and a worsening of the payers mix will slow down income gains. As patient volumes recover from the peak of the pandemic, revenues will increase – but at a moderate pace. In addition to the composition of payers, limits to income growth include persistent pandemic tensions, inability to meet demand due to workforce constraints, and the continued shift of care to low-cost facilities.
Liquidity will likely decline as Medicare advances are repaid and deferred taxes are paid. The reimbursement of advances received by hospitals under the CARES Act for future health insurance services will reduce this liquidity, as will the payment of payroll taxes deferred until the end of the 2020 calendar year. Another threat is a slowdown in the investment market in 2022, as nonprofit hospitals rely heavily on large cash reserves.
Legislative, regulatory and judicial activities will continue to add risks, Moody’s noted. Medicare sequestration – the process by which the federal government cuts spending by 2% per year – was scheduled to resume in 2022 after a suspension due to the pandemic.
However, the House and Senate recently passed legislation to avoid the cuts, extending a moratorium on 2% sequestration of Medicare until April 2022, then reducing the cut to 1% from April to June.
Vaccine mandates, tougher antitrust laws and price transparency rules will also create challenges for the industry.
WHAT IS THE IMPACT
There are a number of global credit themes affecting the financial outlook for nonprofit and public health entities, Moody’s found. One is the emergence of new technologies. The sensitive patient data held by providers make them a prime target for cyber attacks, particularly in the form of ransomware. Cyber security spending is expected to increase in 2022 and the years to come as a result.
The widening adoption of telehealth and remote care during the COVID-19 pandemic will lead to new vulnerabilities, according to the report.
In terms of policy, increased federal merger supervision can reduce consolidation, slowing the growth of larger systems. And immunization mandates will exacerbate workforce challenges, with contractors losing employees unwilling to comply.
These workforce difficulties will only worsen with the glut of nurses who have quit due to fatigue, stress or overwork, and as they seek more attractive wages in other industries. Amid growing demand, this shortage of nurses and other skilled workers will cause labor costs to rise sharply.
Pay rates, on the other hand, will remain high until the labor market returns to equilibrium, which will probably take several years.
Moody’s has identified a few factors that could change the outlook for the nonprofit and public health sector to stable. One would be operating cash flow growth of between 0 and 4%.
Other factors include moderating spending growth and continuing volume recovery, leading to strong revenue growth; and the continued improvement in vaccination rates, the absence of a slowdown in investment markets and an increase in net reimbursements.
THE BIGGEST TREND
Labor spending challenges have been a common refrain in recent months, with Kaufman Hall’s November Flash report, which looked at data for October, finding that hospital margins have become even thinner. since labor expenditure started to increase.
Excluding CARES Act financing, the median change in operating margin fell 12.1% from September to October, marking a second consecutive month of declining margins. Looking at year-over-year results, the median change in operating margin fell 31.5% from pre-pandemic levels in October 2019.
Multiple factors are contributing to workforce pressures, including staff burnout caused by the pandemic and an overall shortage of skilled help, which has resulted in higher costs to hire temporary staff, as well as a wage inflation.
Supply chain issues are also adding pressure on profit margins, primarily due to the higher transportation costs incurred by distributors. The medical device sub-sector is also affected by the global shortage of semiconductors required for their manufacturing processes.
Washington state healthcare workers have called on hospitals to ease the workforce crisis, with the union arguing that there are a number of policies hospital administrators could immediately adopt that would help alleviate some of the problems.
Meanwhile, immunization mandates for healthcare workers are also having an effect on the staff shortage. For example, Washington state has lost 2% of its healthcare workforce since it demanded that all staff in hospitals and nursing homes receive COVID-19 vaccines.