The nation’s leading nonprofit healthcare providers struggled financially during the quarter ended March 31.
Most of the major systems, including Kaiser Permanente, Mass General Brigham, Cleveland Clinic, Mayo Clinic, Ascension and Providence, recorded operating margins that were flat or lower than this time last year, despite growing patient volumes.
The results come as analysts have been sounding the alarm with escalating urgency about how headwinds, including market volatility and policy changes in Washington, could harm provider finances.
Of the major nonprofits, only Mayo Clinic achieved a 3% operating margin — the “magic number” necessary to guarantee systems’ financial health, according to Kevin Holloran, senior director of credit rating agency Fitch Ratings. Still, that margin is well below Mayo’s performance last year, when it recorded a 7.7% margin.
Providence, which restructured its executive team in January and froze nonclinical hiring in April, logged the lowest operating margin of -3.1% compared with last year’s operating margin of 2.3%. Ascension, Mass General Brigham and CommonSpirit also reported negative operating margins. However, CommonSpirt’s margin marked an improvement relative to the same period last year.
Some of that difficulty was predicted. Ascension, for example, suffered a major cyberattack during the fourth quarter of 2024 that disrupted patient services. The system has been working to recover since then, but progress has been slow.
Even Kaiser, which has a large, well-diversified portfolio, suffered financial setbacks. The Oakland, California-based provider recorded an operating margin of 2.9%, compared with last year’s 3.4%.
Nonprofit health systems’ operating margins
Nearly all of the health systems’ operating margins declined year over year.
Market volatility, poor investment returns reduce providers’ cash
All major nonprofits said their investment portfolios underperformed during the quarter compared to the same time last year.
Kaiser attributed market conditions to nonoperating income dropping more than $780 million year over year. Providence reported $105 million in investment gain, compared with $205 million the prior year; Mass General Brigham logged $55.2 million in investment income, compared to $710.9 million last year; and Mayo Clinic’s investment and contribution return fell 20.6% year over year.
Threats to health systems’ investment portfolios shouldn’t be taken lightly, a Fitch report said last month. The money serves as a rainy day fund and can offer extra liquidity to help health systems weather operational challenges without dinging systems’ credit scores.
From 2020 to 2023, when the markets were strong, investment returns helped add 28 days to providers’ median days of cash on hand, allowing systems to carry a median of 220 days of cash on hand sector-wide, the report said.
A modest 25% reduction in investment income could cut the sector’s median days of cash on hand to 215 days, while a more severe 75% reduction in investment income could slash available cash to 205 days.
Tempered liquidity is concerning as health systems stare down possible cost pressures, including changes to state supplemental payments for Medicaid, higher costs for supplies and the possible burden of caring for more uninsured individuals should Congress implement cuts to Medicaid.
Rahul Singh, national industry lead of providers at West Monroe, worries some providers might opt to slow their investments in areas like technology as they see looming challenges and declining investment portfolios.
“If they’re not generating enough cash flow from these investments, then it makes it even more challenging to invest in some of these capabilities, because they’re also losing money on operations,” Singh said. “In the past, they were offsetting some of that in a bull market.”
It could put health systems in a catch-22: Providers may think they’re cutting costs by reducing spending on new advancements, but without spending on new capabilities, they’ll be unable to perform at a higher level.
Cutting jobs isn’t a solution for the investment income shortfall either.
“It maybe helps in the short term, but it doesn’t solve the structural, long-term issues,” Singh said. “You have to re-engineer or use technology, automation — but those require investments. In the absence of having the ability to make those investments, I think folks are just cutting headcount. That shows up in other places… which has kind of a cascading [negative] effect.”
More pain expected ahead
The results released in recent weeks ended March 31 — before disruptions caused by President Donald Trump’s Liberation Day, when he announced intentions to levy tariffs on most of the country’s trade partners, and before the CMS and Congress set their sights on cutting Medicaid and supplemental payment programs.
Cuts to the safety-net program could increase hospitals’ uncompensated care and their ability to recover costs, Fitch said in a report last month. “Providers, particularly those with a higher share of Medicaid patients, could cut services, close locations, or reduce staff,” the report said.
Health systems also nodded to the possibility that headwinds could intensify, and some said they’re making preparations now.
Mass General Brigham, for example, said it sought to get ahead of labor and supply cost inflation, an ongoing capacity crisis and possible federal policy changes when it laid off hundreds of staff and restructured in February. The health system said it was also “developing action plans to mitigate potential financial impacts” of any policy changes out of Washington.
Providence also said it was preparing for Medicaid cuts and attributed its quarterly performance in part to shifting economic headwinds and policy changes on the state and federal level.
“While we have made significant progress in our key operating performance metrics in recent years, the last several months have brought greater uncertainty around Medicaid funding, with only slight increases in Medicare rates,” said Providence CFO Greg Hoffman in a statement. “Rather than sitting on our hands, Providence is preparing for every scenario and is proactively redesigning our operations to ensure our Mission continues to thrive whatever happens.”
Executives from CommonSpirit echoed concerns about changes to Medicaid during a recent earnings call. CFO Daniel Morissette said he is most concerned about eligibility requirements, including changes to beneficiaries being able to sign up retroactively, work requirements and requiring enrollees to recertify twice during the year.
“We’re very concerned about Medicaid cuts,” Morissette said. “So we, of course, have survived for many, many decades, and we’ll figure out a way to do it. We certainly hope that these cuts are less than the initial commentary that has come from some of the legislative group.”
