Children’s hospitals seeing financial recovery, but challenges are looming

Nonprofit children’s hospitals are seeing solid financial performance, but financial analysts say they can expect challenges coming.

Pediatric hospitals are going to face more financial pressures due to pending Medicaid cuts, according to Fitch Ratings and Moody’s Ratings.

“Children’s hospitals are adapting with operational innovations and technology adoption, but staffing costs remain high and pending changes to Medicaid funding will test the sector’s resilience,” Richard Park, a director for Fitch Ratings, said in a statement accompanying Fitch’s recent analysis on pediatric hospitals.

Many patients in pediatric hospitals are covered by Medicaid, and that could pose more financial difficulties for children’s hospitals. Medicaid accounted for a median of 51.4% of the gross revenue of children’s hospitals, compared to the median of 15% for hospitals serving adults, according to Moody’s Ratings.

The heavy reliance on Medicaid funding poses a risk for pediatric hospitals, particularly as states face new restrictions on how they can finance their Medicaid programs.

Matt Cook, president and CEO of the Children’s Hospital Association, told Chief Healthcare Executive® in an interview last month that the Medicaid cuts coming from the tax bill “are really going to be detrimental to all hospitals, but children's hospitals in particular, because we serve such a high Medicaid population."

Some children’s hospitals get up to 70% and 80% of their revenue from Medicaid, according to Fitch Ratings.

Many of the Medicaid changes in the federal tax package aren’t set to take effect until late 2026 and 2027. But if funding is cut, some children’s hospitals “may ultimately face difficult decisions regarding specialized service lines and uncompensated care,” Fitch Ratings said earlier this month.

Nonprofit pediatric hospitals are generally performing better than adult hospitals, but Moody’s Ratings said fiscal year 2024 operating medians showed “the lowest profitability in at least five years.” The median operating cash flow margin for children’s hospitals was 8.1% in the 2024 fiscal year.

Pediatric hospitals saw a 10.1% increase in revenues in the 2024 fiscal year, which did surpass the increase in costs (9%) in 2024.

Even with some solid performance, pediatric hospitals have yet to see their operating margins return to pre-pandemic levels, analysts say.

Children’s hospitals continue to see higher labor costs and rising costs for drugs and other key supplies.

On the upside, pediatric hospitals typically enjoy strong philanthropic support, since donors tend to be generous to support facilities caring for children. Because of strong fundraising efforts, nonprofit children’s hospitals have been able to continue to invest in their facilities and academic research programs.

Pediatric hospital leaders have said that fundraising is going to be more critical in the coming years, especially with the prospect of reduced support from Medicaid and the federal government.

“Fundraising is going to be even more important,” Lucio Fragoso, president and CEO of Manning Family Children’s, said in a recent interview. “We can never put our mission at risk, where we say yes to every child every time.”

• Read more: With Medicaid cuts, emergency rooms could get even busier