Health

Moody’s: Hospitals, staffing agencies shouldering the labor shortage while insurers are largely immune

Labor shortages are poised to raise costs and whittle down the financial performances of both nonprofit and for-profit hospitals well into 2022, whereas health insurers are generally better positioned to shrug off the inflating costs of medical care, according to a new quarterly report from Moody’s Investors Services.

The workforce crunch is hitting hospitals from a number of different directions, the credit agency wrote.

Many provider organizations are increasing their minimum wages for nonclinical staff to compete with other agencies, for instance, while at the same time rolling out retention and sign-on bonuses to maintain their nursing workforce. Shortages also increase the leverage of unions negotiating new contracts and boost the hourly wages of contract nurses, the group wrote.

These trends and mitigation efforts will eat at hospitals’ bottom lines over the long term as salaries and benefits typically make up about half of a hospital’s expenses, Moody’s wrote. These provider organizations will also have limited opportunities to offset the cost increases, thanks to staffing-related restraints on elective procedure capacity and few opportunities to charge payers more for their services.

“Given their substantial reliance on government reimbursement sources, such as Medicare and Medicaid, most healthcare providers maintain limited pricing flexibility to offset the costs of higher wages,” Moody’s wrote in the report. “While there are opportunities for more lucrative commercial insurance contracts, rates are the subject of intense negotiations, limiting providers’ pricing power. Providers with strong liquidity and diversified cash flow will remain better positioned to manage stress from cost constraints.”

RELATED: Pandemic-era overtime, agency staffing costs U.S. hospitals an extra $24B per year

The report specifically drew attention to the plight of academic medical centers, which face increased cost-cutting difficulties due to the “highly specialized services they offer and their teaching and research missions,” Moody’s noted. Here, the agency pointed to the centers’ size and academic affiliations as a lifeline, as enhanced employee benefits such as tuition discounts could make these facilities a more attractive employer.

The pandemic-driven increase of clinician burnout is also taking a toll on physician and nurse staffing companies, with the former taking the brunt of the damage, the credit agency wrote.

Large physician staffing agencies have limited ability to pass along increasing wage costs because the bulk of their revenue comes from billing insurers. These companies are also facing concurrent threats to their revenue—commercial players like UnitedHealth Group removing some staffing companies from provider networks and a proposed 3.75% conversion factor cut included in the Centers for Medicare  & Medicaid Services’ 2022 Physician Fee Schedule.

Travel nurse staffing companies are facing similar supply constraints but typically charge in-need hospitals and other providers directly and, as such, can more consistently pass along higher costs than their physician staffing counterparts, the group wrote.

RELATED: Will bonuses and benefits be enough to tackle healthcare’s workforce shortages?

The outliers of the bunch are health insurers, which Moody’s wrote are less affected by labor shortages and wage pressure.

“Aided by the short-term nature of the product it sells, the [health insurance] industry has the flexibility to offset inflationary pressures,” the agency wrote. “The health insurers reset premiums each year based on anticipated medical costs, which does factor in expected medical inflation but also includes such things as utilization levels, the impact of new technology and new procedures.”

Still, Moody’s noted that insurers aren’t entirely immune from broader economic trends. Sustained inflation could pose “potential serious risks” to the industry as providers would seek higher reimbursement rates from commercial payers should government reimbursement not keep pace.

“If that happens, small businesses, with less than 50 employees, which are not required by law to provide insurance, could drop coverage,” Moody’s wrote. “Therefore, there could be downward pressure on commercial enrollment, a key driver of earnings for the industry. Inflation could also raise insurers’ overall costs.”

Whereas health insurers’ earnings before interest, taxes, depreciation and amortization landed at 15% growth in 2020, Moody’s said it is currently forecasting a “mid-single-digit” increase for 2021. This is due to increasing utilization—partially driven by the delta variant surge—and the individual market special enrollment period.

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