Hospitals are facing a stable outlook as the median operating cash flow margin nears 7%, although growth is slowing, according to a Nov. 13 report issued by Moody's Investor Services.
The report examines trends in the healthcare industry affecting hospital finances. Moody's found that although many hospitals are experiencing stronger revenue growth and more are expected to achieve sustainable operating cash flow in 2025, not all hospitals have reached this level of profitability.
Eight things to know:
1. Labor costs and inflation are likely to plague hospitals in 2025 even as the workforce stabilizes. The report noted workforce expense growth is likely to continue slowing but will remain above pre-pandemic levels as health systems focus on retaining employees and managing expenses.
2. The supply of healthcare employees next year will meet 94% of the demand, according to the Health & Human Services Administration. Union negotiations for safer staff levels and more pay could lead to contentious contract negotiations and work stoppages.
3. The supply costs are likely to stay high as drug costs are expected to see mid-to-high single digit percentage ranges, according to Moody's. Cost controls will be essential for hospitals in the future.
"Hospitals will form strategic alliances with companies specializing in areas such as revenue cycle, patient experience and care management, which will help drive down costs," according to the report.
4. Strong operating cash flow, coupled with low interest rates and high return from the investment market, will ensure days cash on hand stabilizes amid high capital spend. Moody's expects median operating cash flow margin to improve to 7% next year, a 1 percentage point increase over this year.
"This will allow most hospitals to approach financial stability – the ability to finance ongoing business needs while maintaining enough cash and cash equivalents to meet other obligations and unexpected events," states the report.
5. Next year Moody's expects revenue growth as hospitals increase operating cash flow and pose stricter cost controls. Hospitals will be able to finance business needs while keeping a fund for unexpected challenges.
"Healthy increases in commercial insurance reimbursement rates, volume recovery and greater adoption of state-directed payment programs will drive the revenue growth," states the report. "Cost controls will come from tighter expense management, including a slowdown in the growth of labor, medical supply and drug costs."
5. Around 60% of nonprofit hospitals next year are expected to have 6%-plus margin, up from 40% in 2023. However, pre-pandemic 78% of hospitals hit that threshold.
6. Moody's expects higher reimbursements from commercial insurers next year, hitting the mid-single-digit percent range. The reimbursement increase, alongside the adoption of state-directed pay programs, will drive revenue growth next year to hit 7%.
7. Cybersecurity budgets are still expanding as threats grow. Cybersecurity is expected to reach 7% of the total technology budget, up from 5% in 2019, according to the report.
8. If the healthcare sector's median operating cash flow margin increases to exceed 9%, or jumps by more than 200 basis points, Moody's would update its outlook to "positive." However, it could go negative if average margins drop under 6% or there is a 200 basis point decline.