In a change, hospital revenue growth is outpacing expenses

Nonprofit hospitals continue to see higher expenses, but for the first time in a few years, they are seeing revenue growth that outpaces those higher costs.

Hospitals saw better operating margins in 2024, with revenue growth outpacing higher costs for the first time in years, according to Moody's Ratings.

Hospitals also saw improved operating medians in 2024, according to a new report released Thursday by Moody’s Ratings. The median operating margin for nonprofit hospitals rose to 1.5% in the 2024 fiscal year, compared with 0.5% the previous year.

Still, hospital operating margins haven’t returned to what they were before the arrival of COVID-19. And some hospitals aren’t faring as well as others.

“Financial performance remained below pre-pandemic levels across the portfolio,” the Moody’s report states.

Nonprofit hospitals saw revenue growth of 9.3% in 2024, which marked a three-year high. It’s also the first time since the 2021 fiscal year that revenue growth exceeded growth in expenses.

Still, hospitals continue to grapple with higher costs, with the median growth rate in expenses of 7.3%, according to Moody’s. Hospitals are continuing to face high labor and supply costs, including higher prices for drugs. Health systems have also fared better at controlling their labor expenses, as they’ve raised pay for staffing in hopes of improving recruiting and retention and reducing their reliance on staffing agencies.

Health systems enjoyed better volumes in 2024, which boosted revenues. Hospitals reported better revenue for inpatient and outpatient services in 2024, Moody’s reports. Inpatient admissions rose by a median increase of 4.8%, the highest level in five years.

But hospitals did get a one-time boost from a settlement over disputes in payments from the federal government’s 340B drug discount program.

But Moody’s said stronger patient volume and more revenue from commercial insurance companies offer more lasting benefits for nonprofit hospitals and health systems.

In its review of nonprofit hospital financial performance in 2024, Fitch Ratings also found an uptick in revenues that surpassed growth in costs. Mark Pascaris, a senior director for Fitch Ratings, said that was among the most encouraging signs for hospitals last year.

“It’s the first time in a while where we did see a year when revenue growth exceeded expense growth so that was nice to see,” Pascaris said in a webinar Tuesday.

While health systems continued to see outpatient volume rising, the pace of growth has slowed a bit, according to the new Moody’s report. Outpatient surgeries rose by 2.7% in 2024, the smallest uptick since 2020.

Nonprofit hospitals saw nearly half of their gross revenues coming from Medicare. Medicare accounted for a median of 48.3% of gross revenues, the highest level in five years. On the flip side, Medicaid’s percentage of gross revenues tumbled to a five-year low, according to Moody’s.

Financial analysts expect hospitals to continue to see solid returns in 2025, even if they aren’t quite stellar. But analysts expected cuts in Medicaid to pose major financial pressures for hospitals and health systems by 2027, when some of the changes take effect.

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