Dive Brief:
Nonprofit hospitals with early fiscal year end dates improved their financial performance in 2024 compared with 2023, according to an analysis published last week by credit rating agency Fitch Ratings.
Providers that ended their fiscal year in the first half of 2024 reported operating margins of 1.2%, compared with -0.5% in 2023. The results are likely a bellwether for the sector’s performance across 2024, according to the agency.
Although an improvement from 2023, the financials will likely remain “well below” pre-pandemic levels and providers could face further headwinds from potential funding cuts to Medicaid.
Dive Insight:
Reducing labor costs, particularly for pricey contract workers, contributed to improve operating profitability last year, according to the credit ratings agency. When analyzing mid-year results, personnel costs as a percentage of total operating revenues fell to 54.5% in 2024 compared with 55.4% in 2023.
Persistently high labor costs have been a challenge for providers since the COVID-19 pandemic caused hospitals to stem staffing shortages with contract labor.
Although hospitals’ financial performance improved last year, the tight market for healthcare workers has continued to prove challenging for health systems.
Wage expenses increased by a median of nearly 7% year over year — and costs would have been even higher if nonprofit hospitals hadn’t moved to improve retention and recruitment, streamline operations and optimize their supply chains, according to Fitch.
Still, hospitals’ operating performance improved last year thanks to revenue growth, boosted by higher patient volumes, improved revenue cycle management and positive updates to their contracts with insurers. Hospitals with early fiscal year end dates saw a median revenue increase of more than 9% year over year, according to the report.
Improved performance and stronger investment returns allowed systems to invest more in capital expenditures in 2024 relative to 2023, according to the report. Nonprofits are mostly focused on developing ambulatory care segments and improving their IT systems, including through investments in artificial intelligence and cybersecurity.
However, there could be headwinds on the horizon for nonprofit hospitals. Congressional Republicans are currently weighing spending cuts to Medicaid, the safety-net insurance program that provides coverage to millions of low-income Americans. If enrollees are removed from the program, a growing number of uninsured patients could drive down demand for healthcare services and increase hospitals’ burden of uncompensated care.
Meanwhile, hospitals are drawing more revenue from the safety-net insurance program than they were before the pandemic. The median Medicaid reimbursement as a percentage of gross patient revenue was 16.2% for hospitals that ended their fiscal years early in 2024, compared with 16.6% in 2023 and 15.9% in 2019, according to the credit ratings agency.
“Federal budget cuts that may decrease Medicaid reimbursement and increase uninsured care would reduce hospitals’ ability to recover operating costs,” Fitch wrote. “Providers, particularly those with a higher share of Medicaid patients, could cut services, close locations, or reduce staff.”
Hospitals should have more available cash to weather potential Medicaid cuts, the report added. Nonprofits with early fiscal year end dates had about 220 days of cash on hand, while their cash to debt ratio improved slightly year over year from to 178.5% from 170.2%.
