Hospital margins improve, but return to pre-pandemic levels is ‘open question’

Most health systems saw modest gains in their financial performance in 2024, and they could fare a little better when 2025 comes to a close.

Mark Pascaris, director of Fitch Ratings, says nonprofit hospitals generally saw modest financial gains in 2024, but there are pressures on the sector.

Still, even with better balance sheets, hospital operating margins have yet to return to the levels seen before the COVID-19 pandemic emerged over five years ago, analysts from Fitch Ratings say.

It’s becoming less clear if that will happen.

“Are those ratios going to get back to what the sector had enjoyed pre-pandemic? I think that's still very much an open question,” says Mark Pascaris, a senior director at Fitch Ratings. “And keep in mind, this is a sector that, even in the best of times, operates at a tight margin.”

With looming cuts in Medicaid coming in the next couple of years, the prospects of returning to pre-pandemic margins could become more dicey.

Fitch Ratings held a webinar Tuesday running down the financial performance of hospitals in 2024, with discussion of what could be coming.

The median operating margin for 2024 ended up at 1.1%, which marked an improvement from 0.4% the previous year, according to Fitch. It was an uptick, but a bit less than the 1.6% median operating margin Fitch had projected earlier in the year.

Margins in the nonprofit hospital sector are typically lower, with even high-performing systems seeing margins of 3%-5% during good times, Pascaris says.

Some reasons for optimism remain, including hospitals doing a better job of controlling labor costs. Hospitals are relying less on staffing agencies.

“The labor issues … there are some markets where they’re still a challenge, but generally speaking, and most markets, most health systems, have found a way to deal with what had been a really pronounced level of contract labor,” Pascaris says.

After delaying some work, more hospitals are boosting their spending on capital projects and facility improvements, Pascaris notes.

Health systems finished 2024 with a median of 215 days of cash on hand, a metric watched closely by the hospital industry. It marked a bit of an improvement from the previous year (211 days).

But there are certainly areas of concern, with rising prices for supplies, including drugs. Even as hospitals have controlled expenses on staffing, labor costs remain high. THe impact of tariffs could also pose more headaches, Pascaris says.

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The nonprofit hospital sector continues to experience “trifurcation,” with hospitals generally landing in one of three areas, he says.

“Most health systems in our rating rated portfolio are operating in that band, pretty close to break even, maybe a little bit better,” Pascaris says. A small number of health systems are doing very well, and a small number are facing real financial problems.

So far this year, 80 nonprofit hospitals have received stable outlooks from Fitch, but those with negative outlooks are outpacing those with positive outlooks (13-7).

Fitch expects this trifurcation in nonprofit hospitals to continue, and Pascaris says “it may even be accelerated” by the Medicaid cuts in the tax package President Trump signed last month.

States will be phasing in changes to Medicaid gradually, as they face changes to how states can support their Medicaid programs and new work requirements for some recipients.

The changes are likely to lead some states to reducing the number of patients who are covered and cutting benefits. Hospitals are also bracing for an influx of more patients without insurance, and health systems have warned that Medicaid cuts could lead to hospitals cutting services, reducing staff, and some vulnerable facilities closing.

Looking at 2025, Fitch expects nonprofit hospital performance to remain steady, and perhaps improve on 2024 numbers. Hospitals could continue to fare well in 2026.

But by 2027, as states begin reacting to Medicaid changes, health systems may be facing greater cost pressures in treating more patients without coverage.

“Because of the anticipated Medicaid funding cuts that will hit largely starting in 2027 that in anticipation of that, a lot of management teams, driven by a lot of their boards, will really demand some tightening of their expenses,” Pascaris says.

With mounting pressures with Medicaid changes in the near future, the nonprofit hospital sector continues to see uncertainty, he says.

“Margins are improving, definitely much better than what we saw a couple of years ago, still well behind where we were in the pre-pandemic time frame,” Pascaris says. “And I think the question for us as analysts and for the industry in general, is, what is the new normal?”

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