Nonprofit Hospital Margins Improving, but Threatened by Potential Medicaid Cuts

New analysis shows how finances for hospitals and health systems with early fiscal year ends are trending.

Nonprofit hospitals saw their financial performance perk up in the past year, providing reason for optimism going forward.

However, potential Medicaid cuts could negatively impact margins, even as reduced labor costs continue to boost profitability, according to a report by Fitch Ratings.

The analysis by the credit ratings agency revealed that the median operating margin for nonprofit hospitals with early fiscal year end dates in 2024 was 1.2%, a turnaround from -0.5% in 2023. Though that figure is trending in an encouraging direction, finances for even the best performing hospitals are "well below pre-pandemic levels," Fitch noted.

Workforce challenges remain at the forefront for CEOs, who dealt with a rise in median base salary and wage expenses of 6.9% year over year. Where organizations have made steady progress is in the declining usage of contract labor, which helped drop personnel costs as a percent of total operating revenues from 55.4% in 2023 to 54.5% in 2024 for nonprofits with early fiscal year endings.

CEOs are getting better at recruiting and retaining talent workforce, allowing them to make worthwhile investments in their workforce that will pay off in the long run.

"Fitch expects workforce development to remain a central focus for health systems to address labor shortages, enhance staff capabilities and maintain sustainable profitability levels," the report stated.

Providers with early fiscal year end dates also experienced median revenue growth of 9.1% last year, stemming from higher patient volumes, improved revenue cycle management, and favorable updates to payer contracts.

Gains in revenue are enabling organizations to pour resources into developing ambulatory networks and bolstering IT, such as AI and cybersecurity, Fitch highlighted.

Where hospitals, and especially nonprofits because of their obligation to serve their communities, may run into trouble soon is with Medicaid. The current administration has set out to reduce spending and the Medicaid program could fall into the crosshairs.

Providers with more exposure to self-pay and Medicaid reimbursement have less capability of bringing in revenue from other payer sources. Post-pandemic, the median Medicaid reimbursement as a percentage of gross patient revenue has "held relatively steady," according to Fitch, decreasing from 16.6% in 2023 to 16.2% in 2024.

Meanwhile, median self-pay reimbursement as a percentage of gross patient revenue has fallen from pre-pandemic levels and dropped from 2% in 2023 to 1.8% in 2024.

"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."