Amid market turbulence, hospitals strive for stability in their financials

At a time of potentially significant headwinds for investment returns, operational performance becomes even more pivotal for hospitals.

Recent financial results are mixed as indicators of whether not-for-profit (NFP) hospitals can readily absorb large investment-income losses.

Operating margin plateaued for the sector in February, according to Strata Decision Technology’s latest monthly report. Median year-to-date margin for NFP health systems was 1%, the same as in January and down from 2.4% in December. For individual hospitals, the year-over-year margin change was a 1.4% increase, but the month-to-month trend decreased by that same number.

Hospitals in recent months had not seen the substantial monthly swings in labor and other costs that marked much of the previous few years, said Steve Wasson, chief data and intelligence officer at Strata.

“What that spoke to me was just this era of stability [in which] the CFOs, CEOs could think about the future with a planning lens that they could be more confident around,” Wasson said.

Now, he said, “I’m eating those words a little bit as we move into February and March [data analysis], just given the wild ride that we’ve all been on.”

Head-spinning headlines

Recent events, including historic volatility in the major market indices, do not afford hospital finance executives much time to relax.

President Donald Trump’s 90-day pause of a sweeping tariffs policy provided short-term cause for relief but also left uncertainty about what will come next. For now, tariffs on non-electronic imports from China are at 145%, and baseline tariffs remain at 25% for many goods from Canada and Mexico and 10% for imports from all other countries that do not strike a trade deal with the U.S.

Trump also recently has spoken of applying a tariff, potentially starting at 25%, on pharmaceutical ingredients.

Widespread tariffs would “erode [hospitals’] margins, which the big guys can handle, the small guys cannot,” Wasson said.

To that point, the latest edition of Kaufman Hall’s National Hospital Flash Report, which uses Strata’s data, described a 44.6% spread in operating margin performance between the 5^th and 95^th percentiles of hospitals and a 17% spread between the 25^th and 75^th percentiles.

Another Kaufman Hall report posited that the current environment is not conducive to strategic merger-and-acquisition (M&A) activity, as seen in the relatively paltry number of transactions in Q1. The report identified only five such transactions, compared with 18 per quarter in 2024.

In those five deals, the average revenue of the smaller party was $279.3 million, right around half of the corresponding figure ($559 million) for 2024.

“The uncertainty felt today is reminiscent of the uncertainty that surrounded healthcare organizations at the height of the COVID pandemic,” the report states.

Hospital operational performance and strategic planning are both vulnerable in such a scenario.

“I just can’t imagine the CFOs [are able] to anchor on anything,” Wasson said. “You’re just in a holding pattern for much longer than people are comfortable.”

Payer trends

As seen in Strata’s data, a 7.4% year-over-year rise in inpatient revenue — compared with 4.4% on the outpatient side — partially reflects contractual increases that providers have secured from commercial payers.

“Your performance last year dictates what you’re going to do this year from a reimbursement perspective, or how aggressive you’d be,” Wasson said. “I think some of those negotiations from the last couple of years are now kicking in. [Providers] are demanding that reimbursement. We’re seeing that, but also [higher] volumes.”

Increased price transparency has helped providers determine valid asking prices, he added.

After the COVID-19 pandemic, “There was just such a focus on expense control, which is still the case, but it was all-hands-on-deck on expenses and keeping [your] operation afloat,” Wasson said. “Now that [there are] stabilizing factors coming in, it’s like, ‘All right, now we have this negotiation we’ve got to really get serious about.’”

Even if commercial negotiations are taking a positive turn, Wasson added, hospitals with greater reliance on Medicaid are wary about the future of that program. Republicans in Congress are looking to enact spending cuts that would be expected to affect Medicaid.

A recent report by Fitch Ratings found that Medicaid reimbursement as a percentage of gross patient revenue was 16.2% for hospitals with an early 2024 fiscal-year end (FYE), down from 16.6% for all hospitals (excluding children’s hospitals) in 2023 and up from 15.9% in 2019.

“Federal budget cuts that may decrease Medicaid reimbursement and increase uninsured care would reduce hospitals’ ability to recover operating costs,” the report states. “Providers, particularly those with a higher share of Medicaid patients, could cut services, close locations or reduce staff.”

Strong points

Reflectors of hospital operational performance suggest the sector is in a better position to withstand possible economic shocks than it was over the previous few years.

Labor costs have stabilized as hospitals continue to put the era of substantial contract labor utilization behind them. Labor expenses increased by 2.2% year-over-year in February, compared with 5.7% for non-labor expenses, according to Strata’s report.

Gross operating revenue rose by 5.1% year over year, spurred by increased revenue from inpatient admissions, even as outpatient, observation and emergency visits all declined.

Fitch’s report assessed the agency’s portfolio of rated NFP hospitals that have early FYEs and found “notable improvement” in 2024, relative to 2023.

Full-year 2024 results should be at least as good, according to the report, but medians will remain “well below pre-pandemic levels, even at the higher end of the rating spectrum.”

The median operating margin for the subset of hospitals with early FYEs was 1.2%, up from minus-0.5% in 2023, according to Fitch. Days cash on hand remained steady at 220 days, while cash-to-debt ticked up from 170.2% to 178.5%

Personnel costs as a share of operating revenue declined from 55.4% to 54.5%, contributing to the improved financials and reflecting a lesser reliance on contract labor.

Median cost growth came in at 6.9% year-over-year and “would have been even higher without the sector’s ongoing efforts to recruit and retain talent, streamline operations and optimize supply chains,” the report states.

Those efforts rarely have been more important than in the current climate.