A Negative Outlook: 9 Financial Trends CFOs Should Know

CFOs should expect to see another constrained operating environment this year, and persistently high labor and operating costs are to blame.

All signs are pointing to another year of belt tightening for hospital and health system CFOs.

In line with what Fitch Ratings reported, S&P Global Ratings has also predicted a negative outlook for this year.

While this news shouldn’t shock CFOs, longer-range capital plans and strategic investments will still need to be of focus. In fact, S&P says that additional spending or debt issuances could be a factor influencing credit quality, depending on balance-sheet strength and the level of cash flow improvement.

Here are nine takeaways from the report that hospital and health system CFOs should take into consideration this year.

1. Labor expenses remain a major challenge:
   • Ongoing cash flow margin pressures are primarily due to labor expenses.
   • The slow easing of labor expense pressures is complicated by factors such as union activity, regional market difficulties, higher base labor rates, and challenges in international recruitment.
   • CFOs should focus on accelerating revenue growth, improving staffing efficiencies, and making non-labor expense reductions to enhance earnings and cash flow.
2. Potential impact on credit ratings:
   • The negative sector view is influenced by the strain on cash flow, with labor and other inflationary expenses contributing to ongoing challenges.
   • Credit rating performance will depend on revenue trends and management's ability to achieve offsetting efficiencies.
   • CFOs need to closely monitor credit quality trends, with a particular emphasis on the pace of margin recovery and the ability to improve operating performance.
3. Balance sheet considerations:
   • While balance sheets remain sound, they have not strengthened materially for most organizations.
   • CFOs may face reduced balance-sheet flexibility as they consider capital needs and spending strategies, especially if they restart deferred capital projects or utilize debt.
   • Strategic spending should be carefully managed to avoid additional pressure on the balance sheet and increased carrying costs.
4. Varying credit quality trends:
   • There is a higher percentage of negative outlooks across credit ratings, with ongoing uncertainties in credit stability.
   • Organizations in demographically favorable regions, with healthy demand, market positions, and favorable payer rates, are more likely to perform in line with rating expectations.
   • Cash flow recovery in 2024 will be a crucial factor influencing credit quality assessments.
5. Challenges for lower-rated entities:
   • Lower-rated entities may face a difficult 2024 without meaningful partnerships or improved labor conditions.
   • Sustained higher interest rates, tighter lending, and limited debt capacity could impact capital spending for lower-rated organizations.
   • CFOs of lower-rated entities should seek strategies to address ongoing covenant issues and strengthen their financial positions.
6. Industry-specific challenges:
   • Revenue is strained by payer and service mix dynamics, with challenges in governmental payments, Medicaid, and commercial payer rates.
   • CFOs should navigate the shift from inpatient to outpatient services, manage commercial payer relationships, and address difficulties in claims processing and denial rates.
7. Efficiency focus and operating model improvement:
   • Management teams are accelerating expense management initiatives to lower the cost base.
   • Outsourcing to third parties, increased use of AI, asset sales, service line consolidation, and reduction in operating leases are strategies to improve efficiency.
   • CFOs should assess these initiatives based on cash flow, growth potential, and diversification of the revenue base.
8. Capital spending and debt issuance challenges:
   • Debt issuances have slowed, but CFOs must balance the need for capital spending with rising interest rates and weaker operating performance.
   • Access to capital may be difficult for lower-rated entities, potentially putting them at a long-term strategic disadvantage.
   • CFOs should consider less cash-intensive strategies and carefully manage debt-like structures, such as operating leases.
9. Event risks and ongoing pressures:
   • Cybersecurity events, weather, and other physical risks pose ongoing pressures on organizations.
   • CFOs should allocate resources for planning and investment to minimize financial and operating disruption from unexpected events.
   • Event risks could impact financial and management resources, affecting performance improvement needed to maintain credit ratings.