As exorbitant labor expenses began to gradually ease for hospitals, some for-profit health systems saw improved EBITDA in the first quarter of 2023, according to a new report from financial services company Moody’s. 

Notably, the nation’s two largest for-profit hospital chains — HCA Healthcare and Tenet Healthcare — increased their EBITDA as salary and benefit obligations became less burdensome. In Q1, salaries and benefits as a percent of revenue decreased for both HCA and Tenet, dropping by approximately one percentage point each to 45.4% and 45%, respectively.

HCA saw its EBITDA grow by nearly 8% to $3.2 billion, and Moody’s said it expects the health system’s profitability to improve even further over the rest of the year. As for Tenet, its EBITDA rose to $832 million. 

Additionally, some hospital operators that focus on behavioral health services also boosted their earnings in Q1, including Universal Health Services and Acadia Healthcare. This is likely because behavioral care has been less affected by recent surges in labor expenses than other areas of healthcare, such as acute hospital care or nursing home care, according to the report. 

The report also pointed out that the companies seeing increased earnings have medical centers predominantly located in urban areas. In such locales, the payer mix is more favorable and the nursing shortage is less severe.

On the other hand, a significant number of hospitals operated by the country’s third-largest for-profit hospital chain — Community Health Systems — are located in rural communities, where it is more costly to attract and retain employees. In Q1, Community Health Systems’ salaries and benefits as a portion of revenue rose by 1.3 percentage points, and its EBITDA dropped by 18.1% to $335 million. This is partly because of high labor costs and a less favorable payer mix, the report said.

Unsurprisingly, the story for nonprofit hospitals is a bit different. For this class of health systems, the stress associated with labor costs is subsiding, but operating margins are having a difficult time bouncing back, according to Moody’s.

The report predicted that labor trends will continue to get better for nonprofit hospitals across the next year or so, driven by rising net hires and reduced dependence on costly contract labor, especially involving nurses. However, the ongoing labor shortage during the pandemic forced hospitals to offer raises to retain current staff, as well as invest in actively seeking new employees. Although these efforts were necessary, it will take time for these costs to be absorbed into regular expenses, and until then, operating margins are unlikely to reach their pre-pandemic levels, the report explained.

In Q1, the growth rate for salaries and wages at nonprofit hospitals decelerated to a median of 7%, down from 11% in fiscal year 2022. However, this rate is still relatively high compared to historical levels, and it poses a significant constraint on financial performance given that compensation constitutes over 50% of the average hospital’s expenses.

Consequently, numerous hospitals are experiencing notably weak margins, with approximately 33% of those assessed in Moody’s analysis reporting operating cash flow margins below 3%. This is a considerable increase from the 6% reported prior to the pandemic.

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