In 2023, healthcare providers will be forced to navigate a challenging year, trying to control cost increases driven by pandemic-induced labor shortages.

Moody's Investor Service said the outlook for most of the healthcare sector remains negative this year as inflation and rising labor costs create difficult operating conditions for nonprofit providers.

As a result, health systems and hospitals are likely to clash with insurers over desired rate increases to offset higher expenses; providers will negotiate as hard as possible for higher rates to boost revenue.

Although insurers are in a better position than providers, companies are still expected to face some headwinds this year. However, Fitch Ratings said the insurance industry outlook for 2023 is neutral.

A recession could also erode enrollment, while the government prepares to roll back consumer protections that kept millions of people enrolled in government-funded programs during the pandemic.

Analysts say member attrition could put downward pressure on insurers' revenue and profits.

Providers may push for rate increases

How much will healthcare prices rise in 2023?

"That's absolutely the number one question we all want to know," said Kevin Holloran, senior director of U.S. public finance at Fitch Ratings.

Holloran noted that pressured providers will push for rate increases in contracts expiring this year, adding that based on his discussions with providers, the two sides are currently "far apart."

He said the year will be contentious, and providers may take a hard line in negotiations to secure better prices and may walk away during talks, leaving patients to experience periods out of network.

"This year will be very bumpy and contentious," Holloran said, describing 2022 as a poor year for most providers.

Unlike other industries, many healthcare providers were unable to raise rates when inflation surged to record highs. Providers have multi-year payment agreements with insurers, which strengthens their desire to push for higher rates in the coming years.

Labor woes persist

Labor shortages and expensive contract rates continue to pressure providers, largely exacerbating financial strain.

Erik Swanson of hospital consulting firm Kaufman Hall recently said in the firm's latest flash report that high labor costs make it harder for hospitals to achieve positive operating margins.

"The biggest driver is eliminating contract labor costs," said Suzie Desai, senior director at S&P Global Ratings.

Last year, some of the most well-known health systems in the U.S. fell into losses due to rising labor costs, includingMass General Brigham、Cleveland ClinicandIntermountain Healthcare。

The labor shortage is partly due to nurses leaving clinical positions due to burnout or leaving the industry entirely. Providers have had to turn to staffing agencies to fill gaps, and agencies charge high fees amid the demand to fill positions.

Hospitals are not the only institutions facing staffing shortages.The impact of nursing home staffing shortages is rippling across the industry. Because nursing homes struggle to admit more patients without additional staff, patients' hospital stays are unnecessarily prolonged, adding extra financial burden to hospitals.

Focus on utilization and commercial enrollment, recession may loom

Some economists expecta recessionto squeeze the U.S. economy this year and could trigger job losses.

As a result, insurers may see enrollment decline, leading patients to think twice about seeking medical care.

Health insurance coverage in the U.S. is closely tied to employment, so job losses could pose a financial headwind for insurers if they lead to coverage losses.

With the threat of a recession looming, patients may be reluctant to pay copays and deductibles for medical services, especially as record-high inflation consumes more of Americans' income.

"Healthcare spending is being squeezed out of people's budgets," said Jefferies analyst Brian Tanquilut.

He added that consumer confidence will also affect healthcare utilization.

Tanquilut said that at HCA Healthcare, one of the largest hospital chains, visit volumes this year are expected to be below historical averages.

However, the so-called "tridemic"—RSV, flu, and COVID—could drive up visit volumes, especially if outbreaks are more severe.

Medicaid enrollment expected to decline after pandemic protections end

Pandemic protections shielded millions of people from losing health insurance early in the COVID-19 pandemic.

As a result, Medicaid enrollment surged, growing by 27% to cover more than 90 million people, as states were barred from removing people from the program due to the public health emergency.

These pandemic protections will end in 2023, potentially cutting off healthcare access for millions. According to estimates from the Kaiser Family Foundation,5 million to 14 million people are expected to lose coverageas states resume eligibility checks.

For insurers like Centene and Molina, prior revenue growth from the pause in eligibility checks is expected to shrink.

Analysts are closely watching how many members insurers can convert from Medicaid plans to Affordable Care Act exchange plans.

Home health momentum continues

Health insurers continue to bet on the home health sector, which will remain a key focus in 2023.

"The core of health insurance is controlling costs," said Dean Ungar, analyst at Moody's Investors Service.

Home health aides are uniquely positioned to control costs because they can work in members' homes, ensure people take medications on time, and check other factors affecting an individual's health.

"They can identify issues that can prevent emergency room visits through proactive intervention," Ungar said.

Some of the largest payers made big bets on the home health sector in 2022.

UnitedHealth Groupsigned a $5.4 billion dealto acquire home health provider LHC Group. The deal is expected to close early this year.

CVS signed an $8 billion dealto acquire home health provider Signify, beating out other potential buyers including Amazon.

These moves follow Humana's bid for home health giant Kindred. Humana acquired the remaining stake in Kindred in 2021 for$5.7 billion。

Medicare Advantage expected to surpass enrollment milestone

Medicare Advantage enrollment is expected to hit a milestone this year, surpassing 50% of the total Medicare population in 2023.

This change also affects providers, as reimbursement rates may differ.

According to the Kaiser Family Foundation, MA plan enrollment has more than doubled since 2007. Nevertheless, the program continues to face criticism over financial incentives that make members appear sicker to boost monthly capitation rates.

"I think this matters because it's really a restructuring of the Medicare program," said Jeannie Fuglesten Biniek of the Kaiser Family Foundation. "As Medicare Advantage plans play a larger role, we see more variation introduced in what Medicare coverage means."