The greatest threat to nonprofit hospitals’ operations and cash flow isn’t cost pressures, but policy uncertainty and “significant structural changes to federal healthcare spending” under recently passed legislation, Fitch Ratings warned in a new report.
The agency’s latest report, compiling the audited fiscal year 2024 data of its rated nonprofit hospitals and health systems, generally brought good news on the sector’s financial health.
Median operating margins among these organizations rose from 0.4% in fiscal 2023 to 1.1% in fiscal 2024—an expected recovery trajectory Fitch attributed to reduced reliance on contract labor and patient volumes for most providers “at or well beyond pre-pandemic levels.”
About 64% of the agency’s related portfolio of nonprofits logged a positive operating margin in fiscal 2024, up from 55% the year prior. Though gains were generally shared across rating groups, Fitch acknowledged a widening range in operating margins and credit quality between the top and bottom performers.
Fitch’s preferred liquidity metrics also remained stable from year to year and remain solidly above pandemic low points. Median days of cash on hand was 215.1 days in fiscal 2024 compared to 211.3 days the year prior, according to the report, and cash to debt rose year over year from 163.7% to 169.2%. The improvements came despite an above-average amount of new debt issuance and capital spending among the nonprofits during calendar year 2024.
Taken alongside a gradual slowing of negative rating changes, Fitch said the numbers back its sector outlook revision from “deteriorating” in 2024 to “neutral” in December.
But while negative pressures like higher wages and other inflationary expenses appear to be manageable, “a litany of new legislative concerns, the most prominent of which are legislated declines in Medicaid and Exchange enrollment levels, on top of potentially higher tariffs” will likely threaten nonprofits’ long-term operating performance and predictability.
Nonprofits’ balance sheets and the delayed phase-in of the One Big, Beautiful Bill’s Medicaid provisions led Fitch to predict continued incremental improvements in fiscal year 2025, but that progress will likely end in the following two years “without some new positive interventions.”
Further complicating healthcare’s long-term sustainability are a likely erosion of overall payer mix as the Baby Boomer generation ages into Medicare, hospitals’ limited control over their revenues, early signs of capacity constraints amid rising volumes, the federal debt and, again, a shrinking pool of potential healthcare workers due to shifting demographics.
Fitch noted that nonprofit hospital and health system leaders already appear to be prioritizing operational improvements in fiscal 2025 to get ahead of the looming challenges.
The ratings agency also said it expects leaders within the sector “to experiment with new labor strategies, including the use of AI and other technologies, to improve productivity,” and that broader uncertainty “will lead [to] many providers pooling their resources and developing joint strategies, up to and including an elevated pace of M&A activity.”