Fitch ratings. Health care special report.

Fitch Ratings continues to believe that the current and projected personnel shortages, especially among registered nurses (RNs). present one of the greatest operating challenges for health care providers nationwide. As noted in Fitch Research on "Health Care Staffing Shortage," dated June 21, 2001 (available on Fitch's web site at www.fitchratings. com), staffing is an area that is creating enormous expense inflation for health care providers and presenting one of the biggest areas of uncertainty in assessing an organization's credit quality. Shortages are becoming increasingly widespread, affecting health care providers in urban and rural areas regardless of size. Since health care is a labor intensive business, salary and benefit costs are key determinants of profitability. Fitch believes the attention given to the nursing shortage and potential looming crisis has created a sense of urgency, with many hospitals developing innovative strategies for work force development. In addition, federal, state, and local governments are creating programs and/or providing financial support to help alleviate shortages. Yet, the benefits of many of these initiatives may not be realized for many years, and Fitch expects health care providers to continue experiencing inflating salary and benefit expenses with growing temporary staffing usage and competitive pressure to increase overall compensation. Fitch believes managing labor costs is critical to achieving profitability, especially as the ability to increase revenue diminishes. Fitch believes the nursing shortage will continue to represent an area of extreme expense pressure for health care providers for years to come. Imbalanced supply and demand, which is expected to worsen as retiring nurses outstrip replacements, should create financial strain for many providers in an industry that is gearing up to meet the aging population's anticipated demand for more services. Fitch plans to closely monitor management strategies for dealing with vacancy and turnover rates, as well as trends in agency spending, to determine financial implications among its rated portfolio.