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Nonprofit hospitals and health systems rated by credit ratings agency Fitch raised their operating margins and extended their financial recovery during 2025, according to Fitch Ratings. The overall operating margin, with the median rising to 1.5% from 1.1% the prior year, showed the third consecutive year of improvement following the historical sector trough of 0.2% in fiscal 2022.
That’s the good news.
However, notable divergence across rating categories and the passage of H.R. 1, the so-called One Big Beautiful Bill Act, raise concerns that fiscal 2025 might represent a brief operational peak before conditions become more challenging, according to Fitch sector head Kevin Holloran.
Tighter Medicaid eligibility and funding rules could weaken the payor mix beginning in 2027. “This could test providers’ financial cushion, raise questions about whether recent gains can be sustained and add financial strain, leading to broader credit pressure,” according to Holloran.
Passage by the Congress of H.R. 1 has introduced a new era of uncertainty, one in which the balance sheet cushion accumulated during the past five years will be tested, according to Holloran and Mark Pascaris, senior director, U.S. Public Finance at Fitch. AI-driven efficiencies might need to be accelerated to find margin stabilization. “Fiscal 2025 may ultimately prove to be an operational peak for the sector before a new and more challenging chapter begins, according to Holloran and Pascaris.
Fitch analysts believe there is a fundamental mismatch between an organization’s ability to control revenues and expenses — the 75/75 conundrum — wherein roughly 75% of expenses are variable in nature and can grow quite suddenly, while 75% of revenues are effectively fixed over the intermediate period and much more difficult to influence. This situation continues to define the sector’s structural challenge. More than incremental change will be necessary to advance healthcare to genuinely sustainable levels of cash flow, according to the analysts.
Approximately 11,000 Baby Boomers will turn age 65 each day during the next four years. By 2030, the last Boomers will turn 65 and the oldest will turn 85 creating a simultaneous surge in demand for advanced/additional care and a paucity of available skilled workers. Without significant investment in AI-driven productivity, remote care delivery and alternative staffing models, the intense labor challenges of the 2022–2024 period might be repeated or worse, the analysts projected.
Despite meaningful improvement in personnel costs in fiscal 2025, the underlying labor supply-demand imbalance is also structural in nature. Macro trends, including an aging population, historically low birth rates and competition for clinical talent across industries, will reassert labor pressure, according to Fitch analysts.
“A 1.5% median margin is progress, but it’s not enough to fund the innovation and capital investment our healthcare facilities need,” said Alice Ayres, president and CEO of the Association for Healthcare Philanthropy. “That’s exactly where philanthropy and strong community ties come in. They’re what let hospitals invest in new technology and programs that operating margins alone can’t cover. And with Medicaid funding set to shrink in 2027, the systems that have built those donor relationships now will be the ones with real options later.”
