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Moody’s Investors Service has kept its 2024 outlook stable for the not-for-profit and public healthcare sector from negative.
While hospitals continue to struggle with high costs due to a shortage of skilled labor, particularly nurses, Moody’s predicts that cost growth will moderate as hospitals make greater efforts to recruit and retain full-time staff. This reduces dependence on expensive contract labor.
Still, with union activity on the rise nationwide, contract negotiations could become more contentious, resulting in layoffs and significant wage increases, Moody’s said.
Why is this important?
Hospitals, physicians and other providers have been struggling with labor shortages and high costs by hiring travel nurses to fill the gap.
It is expected to help revenue in addition to expensive contract labor options
Moderate rebound in patient volumes and higher reimbursement rates.
These factors point to an incremental financial recovery in 2024, a sign of higher cash flow margins, Moody’s said.
Although premiums from insurers will increase on average in the single-digit percentage range through 2024, they won’t fully offset recent cost increases due to inflation, Moody’s said.
In some cases, higher payment rates with insurers and modest increases in patient volume will lead to average operating income growth of 4-6 percent in 2024, Moody’s predicts.
Improvements in cash flow margins allow many hospitals to make necessary investments in facilities and programs and maintain liquidity.
State financial assistance and Federal Emergency Management Agency (FEMA) funds can help with the financial transition for some health care providers.
Concerns include government policies such as Medicare reimbursement levels that do not keep pace with inflation and the end of the pandemic provision that prohibits divestment from Medicaid, resulting in higher unfunded coverage.
Moody’s said the 340B program, which allows some hospitals to buy drugs at a discount, could hurt eligible hospitals because of restrictions on the use of contract pharmacies, which could harm eligible hospitals due to the loss of operating income. However, some health systems may benefit from a one-time payment in 2024 from the actual payment of past 340B reimbursements.
The pace of mergers among health systems is likely to slow due to increased merger scrutiny by federal and state governments, which could undermine exit strategies for distressed systems and slow the growth of large systems operating in the M&A space, the report said.
In addition, meetable nurse-to-patient staffing ratio requirements can increase labor costs and exacerbate staffing shortages, particularly in post-hospital facilities.
The bottom line is that hospitals’ cash flow and profitability will improve, and revenue growth will increase costs somewhat, but this will require tight cost management to maintain a path to recovery.
The biggest trend
Moody’s said the outlook could shift to positive if the median operating cash flow margin is above 8%, possibly leading to much slower cost growth and better return prospects.
A sharp increase in labor or supply costs or a disruption in volume recovery could again lead to a negative outlook.
Rejection of claims by insurers will have an impact on providers. Revenue-cycle management will be critical because the costs of collecting patient fees will be high, in part because insurers are more aggressive in denying coverage and requiring extensive preauthorization, Moody’s said.
Reimbursement claims and payment delays will limit revenue growth, and private payers’ need for extensive documentation is expected to increase hospitals’ costs and the time needed to collect revenue.
Growth in managed care plans, such as Medicare Advantage, where insurers decline more than plans in which they simply manage payments without insurance coverage, can lead to more denials.
In turn, Moody’s anticipates lawsuits against hospitals for underpayment and breach of contract, leading to more contentious contract negotiations with insurers and breakdowns in relationships. High-profile lawsuits and terminations can prompt legislative intervention that changes the bargaining landscape.
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