High labor expenses are poised to continue hampering the ability of not-for-profit hospitals to generate revenue in 2023.

Despite demand returning to pre-pandemic levels, workforce shortages remain high, and expenses associated with both in-house and contract workers have become the number one contributor to operational losses among hospitals, with 75% or more of providers' expenses under intense pressure, according to a 2023 outlook report by Fitch Ratings.

As a result, the rate of negative rating outlooks has doubled from 3% in 2021 to 7% in 2022, with some ratings dropping. The company previously revised its sector outlook to deteriorating in August 2022.

Kevin Holloran, senior director of U.S. public finance at Fitch Ratings, told HCB News that some hospitals will recover faster than others, breaking even or better on a monthly basis at some point in 2023.

"Quality of care will not be sacrificed, as providers will maintain adequate staffing levels, but many providers will have to reduce inpatient volumes to the level of staffing available. We have seen in 2022 and expect to see in 2023, periodic curtailment of services, either in whole, or for some specific units," he said.

The biggest loss has been among nurses, with the profession already having a high number of vacancies prior to the pandemic, partially due to those who left their careers. COVID has only increased the number leaving to a range estimated anywhere between one and two million.

Holloran says that the pandemic has reset labor expenses at a permanently higher level, and that solving the issue will take all of 2023 and likely beyond that. Additionally, labor problems are likely to worsen, with revenue dropping and expenses spiking, should a highly transmissible and deadly variant appear in the wintertime and into the next year.

Efforts by healthcare management teams to reduce operation losses should decrease the rate of downgrades, but bringing down labor will require reducing the number of contract workers and the per-hour expense of employing them.

"This is achieved through better recruitment and retention efforts, such as retention benefits, increasing local school class sizes for nursing students, and through innovative use of technology and different care design methods," said Holloran. "This will not be solved completely in 2023, but it is Fitch's opinion that the issuers we work with will see progress in 2023 and beyond in this regard."

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