Dive Brief:
For the first time in 27 months, Fitch Ratings is revising its credit outlook for the nonprofit hospital sector — lifting it from deteriorating to neutral in its 2025 outlook report and adding that hospitals have made “enough meaningful strides” to warrant the revision.
Hospitals have seen “steady improvement” on operating margins, according to the Monday report. The trend is attributable to providers’ success controlling labor expense growth, as well as stronger cash flows and equity returns.
Fitch predicts margins will continue to improve, with operators reporting median operating figures between 1% and 2% in 2025. However, if President-elect Donald Trump announces cuts to Medicaid or supplemental Medicaid funds, margins could be adversely impacted and the sector’s outlook may be reverted to deteriorating.
Dive Insight:
Since Fitch rated the nonprofit hospital sector’s outlook as deteriorating in August 2022, analysts have struggled to predict when — and whether — providers would rebound.
Labor expenses in particular weighed down operating margins, leading Fitch to repeatedly call recruitment and retention the make-or-break determinant of a provider’s financial success.
Now, the staffing picture has stabilized for most nonprofits — although labor costs still remain above pre-pandemic levels.
Across the sector, median operating margins for the Dec. 31 fiscal year are predicted to be positive, at 0.8%, according to the report. Although the margin is a step in the right direction, it lags the fiscal year 2019 median operating margin of 2.3% considerably.
The industry will continue to see a trifurcated recovery in 2025, with about 20% of Fitch’s rated providers seeing credit rating improvements, 65% remaining at the same rating and 15% expected to see a rating decline, according to the report.
“Going forward, Fitch believes it will be organizations with the resources to invest in key capital needs, including AI and IT infrastructure, that will lead continued trifurcation of credit quality,” the report said.
Meanwhile, less successful providers may be failing to contain drug expense growth or successfully manage shifting payer mixes and strong competition.
However, the whole industry could be set back by disruptions to payer programs that lead to volume softening, according to a statement from senior director Mark Pascaris. The report calls out the potential impact of “major policy shifts” that could cause broad segments of the population to lose healthcare coverage under the new administration.
Trump has offered few details about his health policy plans, saying as recently as this weekend that he has “concepts” of a plan for healthcare in an interview with NBC’s Meet the Press. However, some experts are concerned the incoming president may seek to shrink the Medicaid program, which covers almost 80 million Americans annually.
“The election of President-elect Trump promises to bring what could be transformative change to healthcare policy,” the report said. “There is an expectation that premium subsidies and [National Institute of Health] funding could be particularly at risk in the short term, with potentially longer-term pressures on Medicaid programs, although to date the incoming administration appears to favor keeping many entitlements in place, especially Medicare.”
