Hospitals should fare better financially in 2025, but system remains fragile

After a few trying years, nonprofit hospitals and health systems should continue to see improved financial performance in 2025.

Kevin Holloran, left, and Mark Pascaris of Fitch Ratings predict that nonprofit hospitals will see modest but steady growth in 2025.

Analysts from Fitch Ratings say they expect to see hospitals recording modest gains in their operating margins over the coming year. They see encouraging signs with labor pressures easing a bit and improved volumes. Fitch revised its outlook for nonprofit hospitals in December from “deteriorating,” a designation in place for more than two years, to “neutral.”

During a webinar Tuesday afternoon, Kevin Holloran and Mark Pascaris of Fitch Ratings outlined some of their reasons for optimism in 2025. But they also said those gains aren’t universal, as some hospitals continue to face financial pressures.

“The sector continues to face a lot of headwinds. That hasn't changed, but we're in a better position today than we were a couple of years ago,” says Pascaris, senior director and analytic lead of Fitch Ratings’ nonprofit healthcare team.

But he says, “There's still a lot of fragility.”

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Improved margins

Operating margins have seen slow and steady improvement, and Pascaris says, “We expect that that will continue into 2025.”

Nonprofit margins generally should see operating margins between 1% and 2% in 2025, says Holloran, senior director and Fitch’s head of the nonprofit healthcare and higher education group. As Holloran says, that’s significantly better than 2022 and 2023, and would show gains compared to 2024.

However, operating margins remain below 2019, the year before the arrival of the COVID-19 pandemic.

“Margins are still not back to pre-pandemic levels,” Pascaris says. “We're getting there. It's getting better, but we're not there yet.”

Holloran notes that nonprofit hospital leaders repeatedly point to a 3% operating margin as a sign of financial health.

As Holloran says, hospital leaders tell him, “That's the level we need in order to pay our bondholders, pay our bills, put some money away, and to invest in plant. And anything less than 3% makes doing those four things very, very hard.”

With margins under 3%, hospitals are typically saving less or investing less in their facilities, Holloran says.

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Labor woes easing

Hospitals are having more success in controlling labor costs, which is a key factor in their improved performance, the analysts said.

Health systems are paying more in labor than a few years ago, but they’ve built in some predictability in costs by brokering contracts with staff. And they’ve fared better with hiring and keeping talent, so hospitals haven’t had to rely as heavily on staffing agencies.

The ability to control labor costs has been the main ingredient in determining success for nonprofit hospitals.

“Management teams in the sector have worked very, very hard over the last couple of years to manage those labor costs, and the results of that are starting to show,” Pascaris says.

“The labor force has has settled down significantly compared to where we were two years ago, but we are reset at a higher rate in terms of labor costs as a percentage of revenue,” he says.

Volumes have grown

Hospitals and health systems are seeing much better volume over the past two years, and that’s expected to continue, the analysts say.

“There was a lot of worry that volumes wouldn't come back. They have,” Holloran says.

Hospitals have seen improved volumes over the past few years, the analysts note.

“In most hospital systems that we rate, volumes are at least back to pre-pandemic levels,” Pascaris says. “Probably most actually are above that.”

Health systems are also looking to offer more outpatient options.

“There's a lot of emphasis on access points as being a real differentiator and a real driver,” Pascraris says. “In terms of consumer preference, people don't want to drive an hour to go to the hospital. They'd rather have a nice outpatient, ambulatory setting five minutes down the road.”

Strong, steady, and struggling

While many nonprofit hospitals are seeing improved financial performance, the gains aren’t universal.

Holloran points to continued “trifurcation” in the nonprofit hospital sector. Some hospitals are faring very well, many are holding steady, but some are struggling mightily.

Some nonprofit hospitals and systems “have extremely strong operating margins,” Holloran says. “They have operating margins that most people would love to have.”

The vast majority of hospitals rated by Fitch have “a stable outlook,” he adds.

But some hospitals are finding it harder to stay afloat.

Smaller hospitals, particularly critical access hospitals, are likely to see more headwinds.

“These folks really struggled, I think, during the last few years, during the pandemic, during the labor-demic. And I think we'll continue to see that, moving forward,” Pascaris says.

Children’s hospitals have generally fared well, aided by the fact that they have outperformed other hospitals in fundraising, he says.

“Children's Hospitals are often the best fundraisers in any given market,” Pascaris says. “Because, hey, who wants to say no to kids?”

Typically, hospitals that are faring better are providers based in areas with more population growth, such as Florida, Texas, Arizona, and Georgia, among others, Holloran says. Hospitals based in areas with older populations and little growth are more likely to struggle.

Capital expenditures

While some hospitals and health systems had to put the brakes on their plans to spend more on facilities due to the COVID-19 pandemic, providers are beginning to invest more in facilities.

As Pascaris says, investments in capital projects are “re-accelerating.”

“I actually had anticipated that the sector would have retrenched even more in terms of capital spending,” Pascaris says, referring to the pandemic. “I mean, in some it did, but generally speaking, capital spending remained relatively intact.”

In 2025, hospitals are likely to put more money into improving facilities.

“I do think we have seen, and will continue to see into 2025, a pick-up in (capital expenditures). I don't think it's going to change wildly,” Pascaris says.

What produces anxiety

The Fitch analysts also discussed some of their worries about long-term challenges for the nonprofit hospital industry.

The combination of a shortage of clinicians and an aging population poses a serious problem for the industry and the nation more broadly.

“I think the one that I've been touting … for several years now is the aging, the graying of America,” Holloran says. “And I keep telling people I've got 2030 circled on my calendar. By my math, that's the last year where the final members of the baby boomer generation turned 65.”

“It poses a real tough scenario that makes me think that we could have a repeat of 2022, 2023, when we had this absence of labor out there in the workforce,” Holloran says.

Pascaris says he has been worried for years about the mounting federal debt and its implications for healthcare.

“At some point, someone is going to start caring about the federal budget deficit and the federal debt,” Pascaris says. “I don't know exactly when that's going to happen, or exactly what kind of form that will take, but when it does, that will be a pressure point for American hospitals.”

He says it may be more of an issue in the 2028 election cycle. But he adds, “At some point this is going to become a major political item that will have to be discussed, and when it does, healthcare will be a part of that conversation.”