Children’s hospitals see improved earnings, but brace for Medicaid cuts

Children’s hospitals are continuing to see better financial performance, but they must prepare for cuts in Medicaid funding in the coming years.

Nonprofit pediatric hospitals are reporting improved operating margins, according to a report from Fitch Ratings released this week.

The median operating margins for children’s hospitals rose to 3.3% in the 2025 fiscal year, up from 3.2%. Pediatric hospitals are enjoying more liquidity, with median days’ cash on hand rising to 401.7 in 2025, up from 356.2 the year before. Analysts pay attention to cash on hand, making it a key metric in assessing financial performance.

“Children's hospitals have extended the current recovery arc through 2025, and their defining strengths — deep liquidity and low leverage — have never been stronger,” Richard Park, a senior director for Fitch Ratings, wrote in the report.

At the same time, children’s hospitals have to prepare for looming cuts in Medicaid that will unfold over the next decade. Medicaid cuts are projected to reach about $1 trillion over the next 10 years, and millions of Americans are slated to lose coverage through new work requirements and increased eligibility checks.

Medicaid covers about half of all U.S. children. While there are no changes in the eligibility of children who are covered, the sweeping H.R. 1 tax package approved last year includes changes in how states finance their Medicaid programs, which will have a big impact on children’s hospitals.

• Read more: Hospitals see financial gains, but the clouds are forming

‘Making financial decisions today’

Matt Cook, president and CEO of the Children’s Hospital Association, told Chief Healthcare Executive® in a March 2026 interview that he’s worried about the impact of Medicaid cuts on pediatric hospitals.

“Children's hospitals are preparing for that, and so they're already making financial decisions today based on this expectation that implementation is going to carry forward and there is going to be a financial impact,” Cook tells Chief Healthcare Executive. “So they're already looking at ways to reduce costs, and I think that is problematic, because we'll see how much that impacts in terms of access to care.”

Hospitals must deal with new caps on state-directed payments. As the Fitch report notes, “Children's hospitals are disproportionately exposed given their reliance on SDPs relative to other provider types.”

A Manatt Health report commissioned by the Children’s Hospital Association found that state-directed payments account for 38% of total Medicaid funding for pediatric hospitals. The report found that the average state-directed payment for children’s hospitals was about $105 million.

H.R. 1 also places new caps on provider taxes, which also help finance Medicaid programs.

The majority of patients in most children’s hospitals are covered by Medicaid, so changes in funding are being watched closely.

“For most children's hospitals, well over 50% of their patients are Medicaid,” Cook said. “It's not uncommon to have children's hospitals where 70% of patients are Medicaid. Medicaid is the largest insurer for children's health care in this country, and so it just magnifies the impact of the workforce shortage.”

The Children’s Hospital Association has said that any cuts to state-directed payments will have an impact on the health of children.

Finding revenue elsewhere

Todd Suntrapak, president and CEO of Valley Children’s Health in California, said that Medicaid funding has been problematic even before the Medicaid cuts arrive.

He said that California’s base rate for Medi-Cal, the state’s Medicaid program, hasn’t increased in 14 years. He told Chief Healthcare Executive in a June interview that Medicaid cuts will likely mean a reduction of millions of dollars in aid to Valley Children’s.

Anticipating less support in federal funding, Valley Children’s is planning a mixed-use development with retail stores and apartments on its campus.

“We've known that eventually we were going to find ourselves in a position that we weren't going to be able to rely upon purely revenues associated with providing patient care to sustain the organization,” Suntrapak says.

Nathaniel Beers, MD, the president and CEO of Blythedale Children’s Hospital, told Chief Healthcare Executive earlier this year that he’s concerned about the impact of Medicaid cuts.

“We have to be really in tune with what each of the jurisdictions that we provide care for are doing, making sure that we are thinking together about how children can be protected, as states are forced to make some changes around Medicaid coverage, and how do we move forward, and making sure that we are developing our capacity and strength to do more fundraising, to acknowledge that there are going to be more gaps in care coverage because of more uncompensated care for us,” Beers said.

Lack of specialists

Even though children’s hospitals generally are on solid financial footing, they face problems with recruiting and retention.

There is a shortage of pediatric doctors, and doctors in some specialties are scarce.

Children’s hospitals and health face severe shortages of specialists in behavioral health. The Children’s Hospital Association says 72% of America’s counties lack a practicing child psychiatrist or adolescent psychiatrist. The problem is especially glaring as pediatric health systems see more patients with behavioral health needs.

With a shortage of pediatric specialists, families are waiting longer to get care for the kids. Patients are waiting 20 weeks, or longer, for certain pediatric subspecialty appointments, according to a report from the Children’s Hospital Association.

“There just aren't enough providers to meet the demand, and what that means at the end of the day is that when you have a parent who is trying to bring their child for a new visit, it can literally be half a year,” Cook said last March. “It can be six months, and that's true for some of the other specialties as well.”

The Fitch report also suggests children’s hospitals focus on attracting and keeping specialists.

“Organizations that can reliably recruit and retain subspecialty talent — rather than simply manage down agency staffing costs — are best positioned to capture the high-acuity growth the sector is targeting and to sustain the margin gains achieved in 2025,” the Fitch report said.