Moody’s Investor Service is forecasting stronger financials across the nonprofit hospital sector in 2024 thanks to upticks in reimbursement rates and volumes that will outpace continued labor expense challenges.
The ratings agency issued a report Tuesday sharing an anticipated 10% to 20% increase in the sector’s median operating cash flow across 2024. These trends led Moody’s to revise its outlook for the nonprofit healthcare sector from “negative” to “stable.”
“A financial recovery will increasingly take hold in 2024, marked by an uptick in cash flow margins,” the agency wrote in its outlook report. “While some government initiatives pose risks, increased state financial backing and Federal Emergency Management Agency (FEMA) funds will aid some healthcare providers' financial turnaround.”
Moody’s wrote that it expects the sector’s median operating revenue to grow between 4% and 6% across 2024 thanks to higher negotiated reimbursement rates, though these will “vary widely among providers” and be joined by reimbursement claims denials and payment delays.
The sector will also see “modest” volume increases primarily hitting outpatient settings, meaning that “health systems will continue to shift their focus to growing high-margin outpatient service lines in fields such as oncology and orthopedics,” according to the report.
Median operating expense growth is expected to increase within a slightly slower 3% to 5% range. Labor cost growth will slow compared to prior years, though hospitals’ baseline expenses “will remain structurally higher,” Moody’s wrote. Still, the sector could see expense growth nose out revenues should hospitals slack on cost controls and other performance improvement efforts.
“In response to these challenges, management teams will likely expedite initiatives that redesign workflow, better leverage IT and increase use of telemedicine and other technologies to streamline operations,” Moody’s wrote. “… Hospitals will also seek to reduce costs through partnerships with physician management groups and organizations specializing in revenue-cycle management, IT, care management, the patient experience and other areas.”
Moody’s anticipated that hospitals will up their capital investments after pandemic deferrals but still maintain healthy liquidity thanks in part to the repayment of accelerated Medicare payments. They’ll also gain a bit more breathing space on their debt covenant levels from the increased operating cash flow, though some organizations will remain at risk of default.
Moody’s didn’t rule out large increases in labor or supply costs, inflation, a disruption in volume recovery and even COVID-19 surges as possible spoilers to nonprofits’ anticipated recovery.
The agency also touched on federal and state policies that could harm recovery, including 340B program limitations, potential nurse-to-patient staff ratio requirements, below inflation Medicare reimbursement and Medicaid disenrollment.
On the other hand, “some states' Medicaid directed payment programs will increase Medicaid managed care reimbursement and sometimes provide funding for indigent care, helping offset a revenue loss,” Moody’s wrote. “Also, FEMA continues to provide one-time grants for previously incurred COVID-19-related costs, though the timing of the payments is uncertain and subject to delays as FEMA also needs funds to provide assistance in the wake of natural disasters.”