July 2023 / INVESTMENT INSIGHTS
Post-Pandemic Trends Support Credit Quality in Health Care
Collaboration across health care industries reveals credit trends
Key Insights
- While the pandemic introduced unprecedented volatility into the health care space, we are cautiously optimistic that pressures driven by COVID have peaked.
- We expect the fundamental credit quality of health care providers and medical technology companies to gradually improve.
- Health insurers increased rates after the onset of the pandemic prior to renegotiating reimbursement rates, so we think their credit profiles will be stable.
While COVID introduced unprecedented volatility into the health care space, we are cautiously optimistic that pressures driven by COVID have peaked, and we expect the fundamental credit quality of most health care providers and medical technology companies to gradually improve. Conversely, health insurers benefited from the ability to increase rates after the onset of the pandemic prior to renegotiating reimbursement rates with providers, so we anticipate that the credit profiles of health insurers will remain stable.
Pandemic Headwinds for Hospitals
COVID presented many headwinds for hospitals; some of those, such as the temporary suspension of elective procedures, were short-lived. Others, such as elevated labor costs, continue to linger to varying degrees. Various federal and state COVID relief funding initiatives offset much of the lost revenue from the suspension of elective procedures, but most of those funds have now been exhausted.
Nurse burnout, early retirements, and higher-paying agencies that specialize in providing health care labor support turbocharged a nursing shortage that existed prior to the pandemic, pushing hospital labor costs even higher. Figure 1 illustrates how U.S. health care and social assistance job vacancies increased even more than vacancies in the broad job market during the pandemic.1
Health Care Vacancies Surged in Pandemic
(Fig. 1) Job openings as a percentage of total employment
As of May 31, 2023.
Source: Department of Labor.
Health care systems responded by boosting pay to attract and retain talent, increasing overtime pay to fill staffing gaps, and relying on expensive agency labor. Figure 2 shows the material escalation of hourly agency rates relative to pre-pandemic levels. Although rates vary by regional market, broadly speaking, the hourly agency rate was roughly USD 75 before the pandemic, peaked at approximately USD 150 during the omicron surge, and moderated to around USD 110 in the first quarter of 2023.2
Hourly Agency Labor Rates Still High
(Fig. 2) But agency costs are well below post-pandemic peak
As of March 31, 2023.
Sources: AMN Healthcare Services, Inc., T. Rowe Price estimates
Suspension of Elective Procedures Weighed on Medical Technology Firms
In addition to challenging health care providers, the suspension of elective procedures and the intensified nursing shortage negatively impacted medical technology companies. Staffing shortages prevented providers from operating at full capacity, let alone recapturing the procedures that had been deferred during the acute phase of the pandemic. Procedure volumes—and therefore demand for medical products—remained stubbornly below pre-pandemic levels through 2021 and most of 2022, creating a headwind for medical technology companies.
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Domingo Villarruel is a municipal credit analyst in the Fixed Income Division. He is a vice president of T. Rowe Price Group, Inc., and T. Rowe Price Associates, Inc. Domingo's investment experience began in 2010, and he has been with T. Rowe Price since 2021, beginning in the Fixed Income Division. Prior to this, Domingo was employed by Victory Capital Management, Inc. (formerly USAA), as a fixed income analyst. Domingo earned a B.S. in economics from the University of New Mexico and an M.B.A. in finance from The University of Texas at San Antonio. He also has earned the Chartered Financial Analyst® designation. He is fluent in Spanish. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.
