- Pressure on U.S. hospital margins is intensifying as a scarcity of workers drives up labor costs and supply chain problems ripple across the healthcare sector, according to a report out Friday from Fitch Ratings.
- Healthcare and pharmaceutical companies have survived the coronavirus pandemic thus far with their credit profiles largely intact. Now, wage inflation and supply chain disruptions signal the potential for lost revenue and greater margin pressure in the near term as costs rise, the ratings agency said.
- Staffing challenges are especially acute in skilled nursing, senior housing and in-patient behavioral health, posing a greater risk to recovery for the hardest hit operators as the pandemic stretches on, according to the report.
The gloomy assessment from Fitch suggests the worst is not over yet for healthcare providers weathering a public health crisis now in its 20th month. The worker shortage is driving up wages and leading to greater use of more expensive temporary help.
Although third-quarter results met or slightly topped expectations across most healthcare sub-sectors, Fitch said, hospitals report staff burnout and high rates of employee turnover. Non-hospital providers face a more dire scenario where "staffing is insufficient to meet demand," resulting in lower patient admissions, the report said.
A number of hospital systems took a hit to margins from rising costs in the quarter. Among the chains seeing labor expenses dent margins were Providence Health, Baylor Scott & White, Tenet, HCA and UHS.
California-based Kaiser Permanente saw its operating margin erode in the third quarter due to higher expenses for contract labor as the delta variant of COVID-19 increased patient demand. The nonprofit narrowly avoided a strike by more than 28,000 of its unionized workers last week after reaching a contract agreement that included wage hikes.
Across the sector, healthcare workers report being stressed, with one recent survey finding almost a third of the country's nurses are considering leaving the profession. With staffing resources stretched, nurses have been able to command salary increases, signing bonuses and improved benefits packages, according to a report last month from Moody's Investors Service that echoed the Fitch findings.
Healthcare providers will look to recapture some of the lost margin through rate increases, according to Fitch. But until new rates can be negotiated during contract renewals, the efforts will likely lag labor inflation. Cost mitigation efforts, therefore, will focus initially on finding other ways to save money, such as using existing staff more efficiently, the report said. Some providers anticipate staffing challenges to ease as unemployment benefits expire and indicated recruitment efforts were more successful late in the third quarter and into the fourth quarter, Fitch said.
Supply chain woes including higher transportation costs and challenges in sourcing materials are becoming a bigger threat to revenue across the healthcare sector, Fitch said. The medical device sub-sector has lobbied for government support in acquiring semiconductors and other materials needed in production processes. The report also noted many companies expect these issues to start to subside in mid-2022.
Diagnostics makers, laboratories and pharmaceutical manufacturers with vaccines or therapeutics have continued to benefit from higher caseloads due to the delta variant, according to Fitch. The latest COVID-19 wave boosted patient volumes at for-profit hospitals in the third quarter. But deferral of non-COVID-19 care weighed on some providers and surgery-related medical device manufacturers.