Hospitals see financial gains, but the clouds are forming

In many respects, nonprofit hospitals and health systems are enjoying a rebound in their financial performance.

In the 2025 fiscal year, hospitals continued to see improved margins, Fitch Ratings analysts said in a webinar Wednesday. Operating margins have risen, albeit modestly, and most hospitals rated by Fitch have ample cash on hand. Health systems have also undertaken more capital projects than in recent years.

Mark Pascaris, senior director and analytical lead of Fitch Rating's U.S. nonprofit hospitals, says there are encouraging signs for health systems.

“Balance sheets have frankly never been better,” Pascaris says.

Still, Fitch Ratings maintains a neutral outlook for the nonprofit hospital sector, and analysts point out the recovery has been uneven.

Some health systems have lagged behind hospitals with more resources, with some barely breaking even, or operating in the red. It’s worth noting that Fitch generally rates stronger hospital systems, so its rated universe doesn’t include some struggling providers.

Plus, nonprofit hospitals have not managed to climb back to pre-pandemic operating margins, and Fitch analysts say it’s unclear if that will happen.

As Pascaris says, “The question, of course, for the sector is: Will we ever get back to the pre-pandemic pace of operating margin?”

Bracing for Medicaid cuts

Hospitals are preparing for the prospect of Medicaid cuts unfolding over the next several years. Analysts project that Medicaid spending will drop by about $1 trillion over the coming decade, with millions of Americans expected to lose Medicaid coverage. The Medicaid reductions were included in HR 1, also known as the One Big Beautiful Bill Act, signed by President Trump last year.

Healthcare executives have warned that health systems will likely have to cut services due to looming Medicaid cuts, with some hospitals potentially closing their doors.

“There's no doubt that as a sector, not-for-profit hospitals are facing some revenue headwinds over the next eight eight-plus years, and that speaks really to a need for some structural change within this sector, probably assisted by heavy use of technology, including artificial intelligence,” Pascaris said.

Kevin Holloran, senior director and sector leader of the not-for-profit healthcare group at Fitch Ratings, said hospitals have some time to prepare for the Medicaid cuts. The bulk of the reductions in Medicaid funds are projected to take place from 2030 to 2035.

“The biggest thing that we're concerned about going forward is HR1, the One Big Beautiful Bill,” Holloran said.

“We've got some time to pivot and make changes in the sector before the full impact, if you will, really starts to rear its head,” he said.

The analysts said preparing for the Medicaid cuts has dominated discussions among nonprofit hospitals.

Capital spending rises

Still, many nonprofit systems are doing better. The median operating margin for nonprofit hospitals rose to 1.5% in the 2025 fiscal year, up from 1.1% in the previous year, according to a Fitch Ratings report released last week. It’s the third consecutive year of improved margins, up from the average of 0.2% in 2022.

“Operating margins have improved. That's maybe the biggest highlight for the fiscal 25 medians,” Pascaris said.

Nonprofit hospitals enjoyed a median of 212 days of cash on hand, which Holloran noted is a key metric for many analysts. Median cash-to-debt rose to 188% in 2025, up from 169% the previous year.

Capital spending reached a 17-year high in 2025

“I think there was a little bit of pent-up demand in terms of the capital need coming out of the pandemic and the labor-demic, and we start to see an uptick in terms of spend,” Pascaris said.

Despite the uptick in capital spending, many facilities are getting older, which Holloran said is worth watching.

“The average age of plant, which is not the world's greatest measure sometimes, is beginning to tick up,” Holloran said. “So you kind of say, digging a little bit of a hole there, and that's long term usually not a very good thing.”

Remaining cautious

Even with some solid financial performance, Holloran said it’s worth paying attention to the uneven nature of the recovery, and that’s why Fitch is cautious about the sector’s outlook.

Holloran said Fitch’s cautious posture reflects the fact that many systems aren’t doing as well as others.

“It's an unfinished recovery,” Holloran said.

He pointed out that even with better balance sheets, the median operating margin of 1.5% is well below the 3% operating margin that health systems typically want to reach, which allows for more investments.

“Anything above that is gravy,” Holloran said. “Anything below that, you know, you have to make some tough decisions. And this recovery is again uneven, and really does have sort of this top-tier phenomenon effect.”

Hospitals are also beginning to see more patients without insurance coverage after the expiration of subsidies supporting the Affordable Care Act, with some dropping insurance due to higher premiums. Around 2.6 million fewer Americans had coverage under ACA plans in February 2026, compared with the same time last year, according to an Associated Press analysis.

Pascaris said that could have an impact on the margins of some systems.

“The lapse of the ACA subsidies is probably having a bigger effect than some health systems anticipated,” Pascaris said.

Still, nonprofit hospitals may continue to see modest gains throughout the 2026 fiscal year, and perhaps even into 2027.

“Right now, based on the trajectory we're seeing, we think that there might be a little bit of further improvement in operating margin over the next year to year and a half before (HR 1) really starts to bite,” Pascaris said. “But time will tell.”