Hospital margins projected to remain below normal in 2025, Moody’s says

Even as many hospitals and health systems have seen a rebound in their financial performance over the past couple of years, analysts and executives have wrestled over a big question.

Hospital margins could remain below historic levels, due to higher labor costs, according to Moody's Ratings.

Will hospitals see their performance return to pre-pandemic levels?

Looking ahead, hospitals are expected to see continued challenges with high labor expenses, according to a report released this week by Moody’s Ratings.

While the pace of payroll growth is slowing a bit, higher labor costs will slow hospitals’ recovery in the year ahead, Moody’s projects.

“We expect operating margins to remain below historical levels in 2025,” Moody’s said in the Oct. 15 report.

In 2019, the median operating cash flow for nonprofit hospitals stood at 8.5%, Moody’s notes. But the median fell to 4.9% in 2022, rising a bit to 5.3% in 2023. Moody’s notes that “soaring expenses” have eaten into the cash flow of health systems.

Hospitals and health system leaders said they have seen some relief in the growth of labor costs, or at least some more predictability as providers have secured new contracts with unions representing nurses and other healthcare workers. Moody’s is projecting that nonprofit hospitals will see some easing in labor costs, though they will remain high.

• Read more: Hospital labor problems are easing, but they aren’t yet a memory

Labor costs represent more than half of all expenses for hospitals. For nonprofit hospitals, labor accounts for a median of 53% of operating expenses, according to Moody’s. Labor represents 51% of all expenses for four large for-profit systems: HCA Healthcare; Tenet Healthcare Corp.; Community Health Systems, Inc., and Universal Health Services, Inc.

“The steep rise in healthcare wages over the last three years remains a structural problem and credit risk for the hospital industry. While the wage growth rate will remain lower in 2025, average hourly earnings will continue to top prior years,” Moody’s said.

While nursing shortages in particular have been a problem for some time, they continue to be a challenge, Moody’s notes. Health systems are competing for a limited supply of nurses and other clinicians.

The report notes that other positions have become increasingly difficult to fill.

“The gap between supply and demand will also continue for other skilled positions such as laboratory and imaging technicians,” the report states.

Hospital leaders have noted the difficulty in filling a variety of important roles. Matthew Cook, president and CEO of the Children’s Hospital Association, told Chief Healthcare Executive® in a recent interview that pediatric hospitals continue to see staffing shortages, and they go beyond physicians and nurses.

“There are a lot of other positions that people don't normally think of that support a children's hospital that have also seen significant shortages: pharmacy techs, radiology techs, respiratory therapy providers,” Cook said. “So it's really a broad-based issue.”

While the rate of wage growth is expected to subside, Moody’s says labor expenses will continue to outpace reimbursement from government payers.

“Hospitals with the highest exposure to Medicare and Medicaid revenue, a function of demographics and patient base, will face the biggest challenges,” Moody’s said.

• Read more: Hospital mergers and acquisitions rise in 3rd quarter, biggest number in 7 years

Hospitals are generally relying less on staffing agencies to fill positions, which was a driving factor in higher labor expenses during the height of the pandemic.

“Temporary nurses are returning to the permanent healthcare labor force because of fatigue related to a lifestyle that can include significant travel, while management teams have made permanent employment more attractive by enhancing salaries and benefits and offering more flexibility,” Moody’s said.

Some California hospitals are also going to feel more financial pressures from a state law that raises the minimum wage for healthcare workers to $25 per hour. The wages are being phased in more gradually for smaller hospitals.