Supply And Demand Disparities Will Persist

We believe the increasing supply and demand gap for nurses is a long-term issue, showcasing a structural shift in the health care labor market.  While we expect the supply-demand imbalance to ease from its pandemic peak, we believe it could continue to worsen in the long term. The industry has been experiencing staffing shortages (most notably for nurses) for well over a decade, a situation that has become more acute in the past few years. The aging of the nurse pool is another dilemma, with about 45% of nurses over 45 years of age, with a greater number of registered nurses set to retire over the next 15 years (see chart 1). Further compounding the supply problem is the dramatic increase in the number of nurses leaving the profession due to inadequate compensation, staff-burnout, difficult working conditions, growing work stress, and increased personal risk from the pandemic. The number of nurses considering leaving the profession has increased to about 30% from 11% just two years ago. Another phenomenon hurting the pool of permanent nurses is the wide pay difference between permanent and temporary staffing nurses. Also, fewer nurses are graduating each successive year, due in part to a shortage of nursing faculty. In 2019, over 80,000 qualified applicants to U.S. nursing schools were rejected due to a shortage of faculty, and inadequate funding in the respective programs. Given the multiple factors contributing to the crisis, we expect a nursing shortage to persist post-pandemic.

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Meanwhile, the demand for nurses is increasing. According to U.S. Bureau of Labor Statistics, the number of adults aged 65 or older is expected to grow 80% between 2020 and 2030. Typically, people over age 65 utilize roughly three times more health care services than younger people. The relative success of the Affordable Care Act (ACA) also leads to more people seeking healthcare services. According to the Department of Health and Human Services, 20 million people have become insured from the ACA, increasing demand. Advancements in technology contribute to rising demand as the capabilities of medicine continue to expand. Also, health care providers face challenges operating at full capacity, and meet growing demand due to labor constraints.

All these factors contribute to job openings in the health care and social assistance sector increasing more than two-fold while the gap between openings and hires has increased to more than 2.5 times in May 2022 compared to February 2020.

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The pandemic has exacerbated labor shortages   While nursing shortages have been around for some time, in recent years the relative scarcity of nurses has hurt health care providers' profitability and jeopardized their ability to sustain care levels. While staffing shortages have eased from a peak in first-quarter 2022 following another spike in COVID-19 hospitalizations, job openings remain high. COVID-19-related hospitalizations are again elevated , however non-Covid-19 related volume remains somewhat soft, and overall demand for services remains relatively soft compared to historical levels. While it's likely the number of COVID-19 patients will decline and remain at a lower baseline level should no further significant COVID-19 variants emerge, we expect non-COVID-19 hospital admissions to increase closer to historical levels. Overall, we expect the demand for temporary staffing to moderate, but at a level that will remain quite elevated compared to pre-pandemic levels because of the ongoing mismatch between labor supply and demand.

Bill rates were high over the past 18 to 24 months and peaked in first-quarter 2022. Though where they will settle is uncertain, we expect they will moderate as demand normalizes. As per latest data from travel nursing agencies Aya Healthcare and Fastaff, demand for temporary nursing staff is showing a more normalized trend and is expected to moderate further absent any new COVID-19 variants, while the median rates gradually decline. Staffing companies like AMN Healthcare Services, Inc. and Cross Country Healthcare, Inc. (not rated) expect modest sequential declines in the high single-to-low double-digit range in second half of 2022, ending the year approximately 30% lower compared with a peak during first-quarter 2022. Even with these expected declines, we expect bill rates will remain significantly higher than pre-pandemic levels due to the fundamental supply/demand gap.

Providers are finding ways to manage rising staff-related expenses  Providers must be very aggressive in managing rising staff costs, which comprise 30%-50% of their overall costs. They are struggling with solutions to retain their permanent staff as they seek to minimize the use of very high-cost temporary nursing staff. This is a particular challenge given the ongoing pandemic, rising inflation, and increasing recession risk. Several companies have recently lowered earnings guidance, citing the nurse staffing problem as one of the main reasons.

Near term, providers are taking several steps to address compensation, recruitment, and retention issues, such as offering sign on, referral, and retention bonuses. They are having nonclinical staff assume some of the administrative tasks nurses typically complete. Providers are also expanding their presence in nursing education. HCA Healthcare Inc. (BBB-/Stable/--), which was already active in this field, purchased a majority ownership of Galen College of Nursing to boost recruitment efforts. It has used the partnership with Galen to open new campuses in several markets. Community Health Systems Inc. (B-/Stable/--) has established relationships between all its hospitals and nursing colleges. The company is also using a partnership with Jersey College to integrate nursing students into their facilities.

Increasingly, providers are making tough decisions about the level of services provided, with some facilities closing services due staffing shortages. Moreover, some hospitals are shuttering entire clinical services such as obstetrics, pediatrics, or behavioral health due to staffing shortages or because the premium cost of the temporary staff would make the service too unprofitable.

In addition, on the federal level, potential regulatory actions to curb high bill rates as the cost becomes a burden for many providers have been proposed. Also the staffing companies are increasing the utilization of international nurses (which reduced during pandemic due to travel restrictions) to fill the demand.

Rating Spotlight On Staffing Companies

We have a stable rating outlook on this sector. Most of the staffing companies we rate have historically been highly leveraged above 5x, notwithstanding their current lower levels, which we do not believe is sustainable. We believe as demand and bill rates ease from very elevated levels, and as many of these companies have already, or are likely to pursue aggressive shareholder-friendly activity, leverage will increase closer to historical levels.

The portfolio of staffing companies we rate is concentrated in the 'BB' and 'B' categories, reflecting both heavy private equity involvement and an industry that is fragmented with many small regional and local players. The market benefits from favorable demographics and changes in health care delivery models that underlie the structural nursing shortage. The industry is competitive and cyclical with sensitivity to economic cycles. There is no reimbursement risk because these companies do not have direct exposure to government or insurance payors.

The Road Ahead

While both providers and the entire health care industry are actively pursuing strategies to deal with the shortage, we believe the growing supply/demand imbalance will remain significant for quite some time. In our view, the use of travel nurses will remain an important source of staffing solutions, and at a price that will set a new bar higher than pre-pandemic levels. Demand will continue to exert pressure on supply as the U.S. population continues to age.

To some extent, economic cycles will influence the imbalance. Historically during recessionary periods with high unemployment, demand for permanent full-time and part-time health care facility staff tends to rise, easing the need to hire temporary nursing. Conversely when unemployment is low, health care facilities experience higher employee attrition and find it increasingly difficult to obtain and retain permanent staff.

Given the health care industry's history of adapting through cycles, we expect companies to continue to do so and enhance processes for recruiting, hiring, and onboarding new employees. Despite some early successes from their recent efforts, we believe it will take time for providers to fully address the nursing shortage. It's not an easy task to reshape the role of the nurse and turn the tide on nurses leaving the profession. Given increasing demand and estimates of even larger shortages, we believe the outlook for the travel nurse staffing industry remains favorable. While demand for these companies' services will remain quite healthy with bill rates typically at a higher premium compared to pre-pandemic levels, staffing companies will continue to experience some margin pressure given the need to pass through compensation to nurses.

Recent Ratings Actions On Health Care Staffing Companies

AMN Healthcare Services Inc. (BB/Positive/--)

We recently revised our outlook on AMN to positive, reflecting our expectation that despite uncertainty around bill rates, AMN will benefit from further growth and maturation of its business, supported by stronger demand due to severe labor challenges and its market position and leadership in the industry. AMN's technological ability to fulfill increased demand helped it provide an entire suite of workflow solutions to its clients, compared to smaller players in the industry, and solidified its market position. We believe the company's disciplined growth strategy through acquisitions will keep leverage under its publicly stated target of 2x-2.5x.

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• AMN Healthcare Services Outlook Revised To Positive On Improved Performance And Credit Metrics, 'BB' Rating Affirmed, April 12, 2022

Medical Solutions Parent Holdings Inc. (B/Stable/--)

Medical Solutions is the second-largest provider of travel nurses and allied professionals in the U.S. Its operating performance improved significantly over the past couple of years. Leverage for year-to-date March 2022 is below 3.0x—an all-time low for the company. In September 2021, TPG Growth sold its stake in Medical Solutions to Centerbridge Partners and Caisse de dépôt et placement due Québec (CDPQ) at a multiple of 11.1x for a purchase price of $2.25 billion. We believe the level of debt this is temporary because we believe the private equity owners (Centerpointe and CDPQ) will focus on shareholder-friendly activities and/or acquisitions than permanent deleveraging below 5x. Also, as the bill rates and demand for travel nurse staffing will normalize, leverage will increase.

• Medical Solutions Parent Holdings Inc. 'B' Rating Affirmed On Proposed Acquisition, Outlook Stable; New Debt Rated, Sept. 23, 2021

CHG Healthcare Services Inc. (B/Stable/--)

CHG Healthcare provides temporary physician staffing services, allied health care services, and nurse staffing to various health care service providers in U.S. With the return of elective procedures, demand for locum tenens have increased significantly compared to during the pandemic. It experienced a shift in specialty mix with increase in demand for primary care physicians. CHG's nursing segment revenue increased significantly in 2021 and 2022 due to the ongoing nurse shortage. In September 2021, CHG took a debt-financed dividend. It refinanced its capital structure and collectively used its $300 million cash on balance sheet to repay its existing debt and pay $570 million dividend to its shareholders.

• CHG Healthcare Services Inc. 'B' Rating Affirmed On Dividend Recapitalization, Outlook Stable; New Debt Rated, Sept. 13, 2021

TTF Holdings LLC (d/b/a Soliant) (B+/Negative/--)

Soliant is a diversified staffing services providers providing travel nursing (30% of EBITDA), health care staff for schools and educational institutions (more than 50% of EBITDA), life sciences services. TTF's operating performance for 2021 and year-to-date had been stronger than our expectations with significant improvement in all three segments, specifically nursing. However, we revised our outlook on the company to negative from stable in November 2021 after company debt-financed a dividend. We believe the scale of the aggressive debt-financed dividend outweighed the significance of TTF's strong operating performance. The transaction will leave the company with limited capacity at the current rating to expand its size and scale or further diversify its offerings, such as in the growing life sciences market.

• TTF Holdings LLC Outlook Revised To Negative On Debt-Financed Dividend, 'B+' Issuer Credit Rating Affirmed, Nov. 9, 2021

Ingenovis Health Inc. (B/Stable/--)

Ingenovis is a diversified health care staffing company providing travel nurse, rapid response, labor dispute staffing, and physician outsourcing services to health care providers. Similar to other staffing companies, Ingenovis' operating performance has been strong providing enough liquidity and flexibility to pursue acquisitions. The company recently completed acquisitions of HealthcareSupport (HCS) and VISTA.

• Ingenovis Health Inc., Aug. 5, 2022