Moody’s Maintains Negative Outlook on Not-For-Profit Healthcare in 2023

The investment analysis firm sees non-profit healthcare organizations continuing to struggle next year as inflation and labor costs drive expenses higher.

Moody's Investors Service has a negative outlook on the not-for-profit healthcare sector going into 2023 as difficult operating conditions, labor costs, supply chain disruptions, Medicare cuts, and the end of the CARES Act funding all negatively impact hospitals’ financial well-being.

"While operating cash flow will grow in 2023, the high-expense environment, coupled with modest revenue gains, will limit the profit margin for the not-for-profit healthcare sector," Brad Spielman, Vice President and Senior Credit Officer for Moody's Investors Service said in a press release. "This level of operating cash flow production will likely prove insufficient over the long term to enable adequate reinvestment in facilities, maintain investment in programs, or support organizational growth—key considerations that drive our negative outlook."

Moody’s expects inflation to be in the "high single-digit range" as 2023 gets underway, which will drive up costs for hospitals and health systems in every department.

"Because of hospitals' limited ability to respond quickly with price increases, higher inflation will have a particularly negative impact on operating margins," Moody’s said in the release. "Other drivers of expense growth include higher drug costs because of reimbursement changes and increased supply costs because of supply chain disruptions. Continuing exposure to cyber risks will cause organizations to spend significantly on preventive measures, and to shoulder the consequences of security failures. Additionally, higher interest rates will raise the cost of debt and make financing equipment or investing in capital more expensive."

Moody’s could revise its outlook to "Stable" if reimbursements improve, if there is an increase in high-margin service volumes, and if there is a decline in labor costs. These factors could potentially result in sufficient operating cash flow growth, which could support the needs of organizations as the year continues.