Nonprofit Hospitals' Cash Flow is Crunched. Can Leaders Right The Ship?

A new report illustrates a widening financial gap between top performing and struggling providers.

Nonprofit hospitals are struggling to achieve financial sustainability.

According to a recent S&P Global Ratings report, the average days of cash on hand for nonprofit hospitals and health systems in 2023 was just below 200—the lowest in a decade.

The decline was attributed to inflation and limited strengthening of reserves. Despite this, the report also stated that systems increased their capital spending, with some taking on new debt.

Additionally, there doesn’t seem to be a middle ground for nonprofit hospital and health system performance. Median operating margins ranged from 2.5% to -2.7%, with very few organizations’ cash flow returning to pre-pandemic levels.

Nonprofits often struggle to cut services to lower expenses due to their missions, while for-profit facilities have seen positive results in doing so. Also, where some organizations would look to raise prices due to increasing expenses, many states are instituting benchmarks to cap cost increases.

Financial need has been the primary driver for merger and acquisition activity in the nonprofit space, with health systems like Ascension recently selling 13 of its facilities to Prime Healthcare.

An October 2023 report from Fitch Ratings found that median operating and operating EBITDA margins for nonprofit hospitals suffered a significant decline between fiscal year 2021 and 2022.

Before that, operating costs had been offset by stimulus funding; but as those initiatives have phased out, organizations are reevaluating their financial strategies and curbing spending.

Workforce remains a significant pain point for nonprofit and for-profit providers alike, and leaders could benefit from examining hiring strategies and shifting away from expensive agency labor.

So how can finance leaders start to dig out?

Diversifying revenue sources would provide opportunities to expand into more lucrative service lines, like outpatient care. Nemaha County Hospital, located in Nebraska, saw the opportunity to place more emphasis on outpatient care after noting how many more outpatients the hospital treated than ER patients.

“As a critical access hospital, one thing that we have done to maintain financial stability is to make ourselves true to the critical access model of reimbursement,” the hospital’s CFO, Stacy Taylor, said. “We’ve stayed true to that outpatient business.”