Hospitals and health systems reported slow margin improvement in 2024, and Fitch expects similar sluggishness in 2025. While some systems are reporting strong balance sheets, others see big financial headwinds in the coming year.
John Goodnow, CEO of Benefis Health System in Great Falls, Mont, told Becker's one of his top goals for the next year will be remaining financially viable while inflation and the cost of doing business outpaces payer rate increases. More than 75% of the health system's patients are covered by government payers: Medicare, Medicaid, Indian Health Services and Tri-Care.
"Having that high of a percentage of government payers (and that low of a percentage of commercial payers, approximately 20% at BHS) obviously makes the BHS financial picture much more challenging when compared to hospitals and health systems with higher percentages of commercial payers," said Mr. Goodnow. "That ongoing problem gets further compounded when governmental rate increases are so much less than inflation in our cost of doing business, as was the case in 2024, and as will also be the case for 2025."
Next year, CMS plans to increase hospital inpatient and outpatient services 2.9% on average and is proposing a 2.83% rate cut in physician payments. For systems like Benefis with a high percentage of employed physicians, the rate cut is disastrous.
"Further, commercial insurers are very much pushing back against rate increases, which further complicated the financial challenge," said Mr. Goodnow. "A pretty ugly picture."
Health system leaders are also dealing with rapid cost escalation, particularly within the workforce and supply chain. While nationally, the average hospital and health system wage growth slowed to around 4% in 2024, many health systems are still seeing large increases. Mr. Goodnow said Benefis reported 7.2% wage and salary cost increases and 6.7% bump in benefits costs over the last year. When adding in contract labor, overall staffing costs grew by 13.3%.
Large systems and academic medical centers are also feeling the pinch. Stephen Rinaldi, senior vice president and chief revenue officer of University of North Carolina Health Care System in Chapel Hill, said labor and supply cost increases exceed reimbursement rate growth for the system, and cited Medicare Advantage as a significant headwind for next year. Medicare Advantage consistently reimburses lower than fee-for-service Medicare plans, and they are rising in popularity. Mr. Rinaldi is taking a measured approach to overcoming these challenges.
"In the coming year, we will continue to work with our payer partners to ensure we have agreements that properly consider future inflation and performance targets," he said. "We must also do our part to embrace innovation, technology and the many tools at our disposal to be as efficient as possible while delivering the quality care our patients expect and deserve."
Sean Fadale, president and CEO of Nathan Littauer Hospital and Nursing Home in Gloversville, N.Y., has a similar outlook.
"As our cost of doing business has escalated dramatically, from supply costs to the cost of employment, has led to an environment when costs are greatly exceeding our revenues," he said. "Couple this with payer challenges that negatively impact our revenue cycle, it creates an unsustainable environment to operate and it is critical we find ways to achieve better financial performance in the future."
The chasm between reimbursement and cost growth is exacerbated for hospitals in regions with shrinking populations and acute staffing shortages. Rural hospitals in particular have experienced the bleak realities of population shifts and lack of resources to care for their dispersed communities.
D. Richelle Heldwein, chief risk and compliance officer at St Johns health in Jackson, Wyo., told Becker's the system anticipates an "uphill battle" with a rapidly aging population and provider shortage creating gaps in care.
"With this also comes a payer mix that shifts much of our commercially insured patients into governmental programs that are lower paying programs for hospitals," said Ms. Heldwein. "This makes already strained margins even tighter. Add the need to pay more to recruit key clinical staff and it makes for a pretty stiff headwind in keeping an independent community hospital in the black."
A weaker balance sheet makes it more difficult for hospitals and systems to reinvest in facilities and capital equipment needed to provide top-level care. Technology is essential in operating a safe and thriving hospital; yet it is expensive, and not having the right IT limits access to care.
"Our strategic focus of access to care is helping us see these needs and gear up to meet the challenges that 2025 brings," said Ms. Heldwein.