Nonprofit hospitals see margin improvement despite challenges

Photo: Peter Griffith/Getty Images

Nonprofit hospitals and health systems with early fiscal year ends (FYEs) performed better financially as compared to the prior year, with the median operating margin for providers with early FYEs improving to 1.2% in 2024 – up from -0.5% in ’23.

A decline in personnel costs, particularly a continued drop in contract labor use, contributed to the improvement, according to a new analysis from Fitch. Personnel costs as a percent of total operating revenues fell to 54.5% in 2024 from 55.4% in 2023 when comparing mid-year FYEs.

There are still labor challenges that are pushing base salary and wage expenses higher, leading to a significant median year-over-year (YOY) expense increase of 6.9%. According to Fitch, this would have been even higher without the sector’s ongoing efforts to recruit and retain talent, streamline operations and optimize supply chains.

The ratings agency expects workforce development to remain a central focus for health systems to address labor shortages and maintain sustainable profits.

WHAT’S THE IMPACT

Operating profitability also benefited from strong revenue growth, with a median increase of 9.1% for early reporting hospitals, data showed. Revenue growth was driven by higher patient volumes, favorable updates to payor contracts in recent years and improved revenue cycle management.

Hospitals are strategically investing in growth and efficiency projects, with capital spending as a percentage of depreciation increasing to 116.3% in 2024 from 107.5% in ’23, marking a return to a capital spending ratio more in line with pre-pandemic trends. 

The growth in capital expenditures, enabled by improved operating performance and strong investment returns, is increasingly focused on developing ambulatory networks and strengthening IT, including access points, data analytics, AI and cybersecurity to maintain competitiveness, Fitch said.

Early medians from last year show strong liquidity in hospitals’ and health systems’ financial profiles. Days cash on hand remained stable at approximately 220 days, while cash to debt improved incrementally to 178.5% from 170.2%.

The median Medicaid reimbursement as a percentage of gross patient revenue increased slightly to 16.6% in 2023 from 15.9% in 2019 for Fitch-rated hospitals, excluding children’s hospitals. This held relatively steady at 16.2% for hospitals with an early 2024 FYE, even with the decline in Medicaid enrollment in most states that followed the end of the public health emergency

In contrast, median self-pay reimbursement as a percentage of gross patient revenue has declined from pre-pandemic levels, dropping to 2% in 2023 from 2.8% in 2019, excluding children’s hospitals, and to 1.8% for hospitals with early 2024 FYE.

According to Fitch, these changes are partly due to Medicaid policy changes and Affordable Care Act expansion in several states. Federal budget cuts that may decrease Medicaid reimbursement and increase uninsured care would reduce hospitals’ ability to recover operating costs. Providers, particularly those with a higher share of Medicaid patients, could cut services, close locations or reduce staff.

THE LARGER TREND

A Kaufman Hall blog post from Managing Director Lisa Goldstein published in January showed that more nonprofit hospitals experienced credit downgrades than upgrades in 2024, though the difference between the two is not as great as it has been in previous years.

Goldstein reviewed the rating actions published by three credit agencies – Moody’s, S&P and Fitch – and said they collectively downgraded 95 facilities and upgraded 37 in 2024, compared to 116 and 33, respectively, in 2023.

Many of the downgrades occurred because expenses exceeded revenue growth, she said, despite the decline in use of contract labor and a recession of volumes back to pre-pandemic levels.

Most of the upgrades were due to lower-rated hospitals becoming merged into higher-rated systems, while many downgrades were due to outsized increases in debt to fund growth strategies.

Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.