Nonprofit hospital outlook improves, but headwinds remain, Fitch Ratings says

For the first time in over two years, Fitch Ratings has revised its outlook for nonprofit hospitals.

Nonprofit hospitals are still facing cost pressures, but they should show improved financial performance in 2025, according to Fitch Ratings.

Looking at 2025, the outlook for the nonprofit hospital sector has improved from “deteriorating” to “neutral,” Fitch said in a report issued Monday. Fitch assigned the “deteriorating” outlook for nonprofit hospitals in August 2022.

Now, hospitals are showing some improvement and Fitch is forecasting better operating margins for the coming year. But hospitals continue to face substantial cost pressures and margins are expected to remain below pre-pandemic levels, according to Fitch.

While hospitals still are dealing with higher costs, they are faring better financially, says Kevin Holloran, Fitch Ratings senior director and head of the U.S. healthcare sector.

“The rate of labor expense escalation in particular continues to attenuate as inflationary pressures subside, while balance sheets are benefiting from improving operating cash flows and strong equity market returns," Holloran said in a statement.

While the numbers may not be gaudy, Fitch is projecting steady improvement in operating margins in the coming year. The median operating margin for nonprofit hospitals should be between 1% and 2% in the coming year.

Fitch said its 2024 medians, which are based on audits of the 2023 fiscal year, showed steady, if modest, gains. The median operating margin for those ending the fiscal year Dec. 31 stood at 0.8%, and Fitch expects more moderate improvement in the coming year.

Even if median operating margins in 2025 approach 2%, the higher range of Fitch’s estimates, that would still fall a bit short of the 2019 fiscal year, which had median operating margins of 2.3%.

Hospitals are seeing better volumes, with health systems in growing markets seeing more robust business.

Hospitals are continuing to face difficulties in recruiting and retaining workers, but they are seeing more stability in labor expenses and health systems are generally relying less on temporary staffing agencies to fill vacancies.

“Labor costs are by far the largest expense for health systems, and spikes in salaries can have a pronounced effect on hospital operating margins, particularly as the sector historically operates with very thin margins even in ideal circumstances. Managing labor costs has made the difference between operational success and failure,” the Fitch report states.

In a September 2024 interview with Chief Healthcare Executive®, Holloran said that labor pressures are easing, but they remain a challenge for nonprofit hospitals.

“Things are trending in the right direction, but we still have a shortage of labor out there and that's not going to be fixed anytime soon,” Holloran said in September. “And we are going to live with these elevated salary, wage and benefit numbers compared to historic levels for the near term, if not the long term, quite frankly.”

However, some hospitals are likely to continue to struggle, as analysts have pointed out a growing gap between stronger nonprofit hospitals and those in financial distress. Analysts have also predicted that rural hospitals are likely to continue to face a difficult road.

Some hospitals will continue to be challenged by higher expenses costs, including drug expenses, and shifting payor mixes, Fitch says. Hospitals remain frustrated by what they consider inadequate reimbursements from the federal government.

President-elect Donald Trump’s return to the White House could bring important health policy changes that could affect hospitals. While Trump has indicated he doesn’t plan on cuts to Medicare, Fitch notes the possibility of changes for Medicaid programs and funding for the National Institutes of Health, the prime source of federal funds for medical research.

Still, Fitch sees a better forecast for hospitals, which figure to be much improved compared to 2022, the worst year on record for many health systems.

“Fitch expects margins to continue a slow but steady rebound into 2025 after years of profound operating displacement that started with the pandemic,” the report states. “Balance sheets remain healthy, and in fact are near all-time highs for many systems, which will continue to support ratings as operating results rebound.”