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Smith's Research & Gradings
August 23, 2022

Smith's Research & Gradings

Fitch Lowers Hospital Sector Outlook: ‘Deteriorating’

Fitch Lowers Hospital Sector Outlook: ‘Deteriorating’

Kevin Holloran, Senior Director of Public Sector Healthcare/Hospitals at Fitch Ratings, said, "More severe-than-expected macro headwinds have prompted Fitch Ratings to revise its sector outlook for U.S. not-for-profit hospitals and health systems to ‘deteriorating." He hosted a webinar last Thursday with Arlene Bohner, head of public finance at Fitch Ratings.

"The biggest sector impediment has been labor, and broader macro inflationary pressures are rendering the sector even more vulnerable to future stress," according to Mr. Holloran. Investment losses have contributed to a rockier 2022 to date than anticipated for hospitals, and operating metrics are down significantly compared to last year.

"While severe volume disruption to operations appears to be waning, elevated expense pressure remains pronounced," said Mr. Holloran. "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 will be seen most with nurses, already in high demand pre-pandemic with Covid only exacerbating a glaring shortage of nursing staff. Fitch says, as a result, many NFP health providers will violate debt service coverage covenants in 2022. That scenario for hospitals means, "We may be in a period of elevated downgrades and Negative Outlook pressure for the rest of 2022 and into 2023," said Mr. Holloran.

Peak Credit 2022

"Despite the release of multiple vaccines in 2021, which many believed heralded a return to normalcy, coronavirus again impacted our lives," Mr. Holloran explained, " and certainly the healthcare sector, for the duration of 2021. Fitch views the numerical improvements over prior years' medians less as a sign of sector resiliency, and more as a cautionary "calm before the storm."

Longer-term sector dynamics portend the expectation of protracted margin compression as additional expenses, primarily labor, have become part of the permanent fabric of operations. Mr. Holloran added, "We have an expectation that our 2022 medians represent a new high point for credit strength, with ongoing incremental challenges expected to exert tremendous pressure on many in the sector through calendar 2022 and beyond."

While the current medians still show considerable sector strength, Fitch expects to see its NFP Health medians to reverse course this time next year due to a conflagration of events, including the very challenged operational start to calendar 2022; additional Omicron sub-variants (e.g., BA.4, BA.5, BA.2.75) that could impact the delivery of care; inflationary pressures currently at 40-year high levels; equity market dislocation (the DJIA down 10.4% Jan. 1st 2022 to Aug. 1, 2022); and a growing concern that a recession and housing correction may be upon us.

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