Hospitals and health systems are in the midst of financial recovery after the pandemic, but potentially bigger challenges loom in the next five years.
Margin growth has slowed and rising expenses continue to pressure health systems, especially those without strong cash reserves to invest in digital transformation and capital projects to stay afloat. Health systems in high growth margins are seeing patient volumes grow alongside the shift from inpatient to outpatient care, according to Fitch's 2025 outlook published in December.
"To support this, capital spending is increasingly focused on IT and developing ambulatory networks, as improving access points is a top priority. It remains uncertain if healthcare operating margins will rebound to pre-pandemic levels, or if the 'new normal' will be metrics somewhere below those levels," the report notes.
Experts at Fitch expect margins to have a slow, steady rebound this year and noted that balance sheets are healthy for many systems. During the pandemic, healthcare teams became much more nimble and agile, changing quickly to meet the needs of the broader patient population. Many health systems have integrated nimbleness and resilience into their broader culture.
Margy Sargeant, CEO of Keck Medical Center of USC, told Becker's that razor-thin margins are still a big challenge for health systems.
"Nonprofit hospital operating margins nationally are hovering around 4% and are projected to stay low in 2025," he told Becker's. "Reimbursement increases are not keeping pace with increases in labor and supply costs. Finding resources for strategic investments, especially technology, has become increasingly difficult and isn't likely to ease in 2025."
This shift is essential, and not a moment too soon. Because even as financial trends slowly trend upward and health systems unveil 5-year strategic plans, more big roadblocks are ahead.
"As we approach 2030, when the final 'baby boomers' will reach age 65, this will result in a smaller workforce serving a larger and older population with a heightened need for care, which will contribute to sector headwinds," the Fitch report notes. "Moreover, at some point the realities of continued federal fiscal deficits and growing federal debts may pressure Medicare and Medicaid reimbursement through such challenges are beyond the scope of the current sector outlook."
Many hospitals now have capacity challenges and are unable to discharge patients to post-acute settings. They're finding creative partnerships and opportunities overcoming these challenges, including hospital-at-home. The expected big patient volume growth will come on the heels of increased capacity issues.
"Over the past five years, our health system has experienced a 54% rise in the number of unique patients seeking its services," said Craig Kent, MD, CEO of UVA Health. "Since 2019, surgical procedures have increased by 65%, hospital admissions have risen by 62% and emergency department visits have quadrupled."
The influx of patients will also be Medicare beneficiaries, an often challenging payer for hospitals. The rising popularity of Medicare Advantage plans is forcing hospital leadership to think differently about their balance sheets.
"Medicare Advantage remains a significant headwind as plan sponsors consistently reimburse at rates lower than traditional fee for service Medicare," Stephen Rinaldi, senior vice president and chief revenue officer of UNC Health Care System in Chapel Hill, told Becker's. "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. 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."
CMS has a goal of 100% original Medicare beneficiaries and most Medicaid beneficiaries in accountable care by 2030, exacerbating multiple financial challenges for hospitals.
"In Western Massachusetts, Medicare and Medicaid will be a large and growing share of our community and patient base," said Peter Banko, president and CEO of Baystate Health in Springfield. "These populations are already more than 70% of our revenue, with increasing value-based arrangements and the imperative to leverage very diverse care teams (physicians, nurses, navigators, and family members enabled by complex technology solutions)."
The care model transformation is forcing Baystate to zero in on care offerings, design target, delivery resources and care design. Hospitals facing a similar reality across the country are entering into creative partnerships, leveraging technology and focusing on revenue sources.
Jen Moore, vice president of payer relations and payment innovation at MaineHealth, said this year workforce challenges and rising costs, as well as contract labor, will remain big challenges. Limited capacity in long-term care facilities has driven up patient stays and utilization rates, which strains value-based contracts and impacts hospital margins.
"These financial pressures are compounded by payers exerting greater influence through tactics such as tougher contract negotiations, higher rates of claims denials, and steering patients toward lower-cost care settings," said Ms. Moore. "In this environment, hospitals must adopt adaptive strategies, with revenue diversification emerging as a critical element for survival and long-term sustainability."