S&P Global predicts a "stable but shaky" 2025 for the nonprofit acute healthcare sector as revenue and demand for services remain strong, but challenges and uncertainty persist.
"Hospitals and health systems have made strides on managing labor challenges. That said, higher expenses related to both staffing and benefits, as well as drug and supplies, require management teams to maintain aggressive annual operating initiatives," the report authors noted.
Seven things to know:
1. S&P gave the sector a stable outlook as hospitals have been able to reduce labor-related and inflationary expenses. Most providers report improving margins, though they are still below pre-pandemic levels, and a trend toward increased capital spending may affect hospital balance sheets next year.
In 2024, a quarter of hospitals received an 'AA' rating, and 44% more received an 'A' rating. Both 'AA' and 'A' ratings were down slightly year over year. There were 3.7 downgrades to every upgrade this year.
"Management teams have made gains on efficiency and throughput to address the healthy demand and rising volumes, which have resulted in good revenue growth that has begun to outpace expense growth," according to the report.
2. President-elect Donald Trump's administration and the Republican Congress will have opportunities to adjust ACA coverage, Medicaid eligibility and more. S&P predicts any action on healthcare would happen in late 2025.
3. A rapidly expanding pool of Medicare beneficiaries and increased administrative issues for insurers "could negatively affect revenue yield," according to the report. Government and private payers have increased reimbursement rates, but in many markets growth hasn't kept pace with inflation; in 2024, reimbursement growth dropped from 9.4% the year prior to 4.7%.
4. Cyberattacks and physical security risks are increasingly common and stand to affect provider liquidity. Leadership teams are grappling with the right management strategy to prevent cyberattacks and respond when they do occur.
5. S&P expects consolidation to increase for improved efficiencies and strategic geographic positioning. Federal and state governments have placed healthcare deals under more scrutiny over the last few years, but Mr. Trump's FTC chair could reverse course.
Hospitals and health systems can strengthen their credit profile through mergers and acquisitions, although not all partnerships are fruitful; those with "aggressive new strategies or significant debt" may cause issues.
6. Divestitures are rising among hospitals and systems with cash flow constraints. These organizations are evaluating the services most needed in their communities and realigning focus.
"We expect increased partnerships, particularly in areas that may not be core or needed to be controlled, but still need alignment to reduce care costs and improve care delivery (rehabilitation, urgent care, etc.)," the report notes. "There is more scrutiny around these strategies, particularly the full mergers, from state and federal agencies and an inability to enter into these types of arrangements could be a credit negative for the sector."
7. Staffing and labor woes won't go away. As the healthcare jobs open relative to the hire rate is headed to pre-pandemic levels and demand for care continues to risk, S&P expects health systems to go all in for hiring and retention.
"While we understand organizations are generally less reliant on external agency staff, over time and agency costs remain at slightly higher use rates for many providers than pre-pandemic," the report notes.