According to a recent study of hospital trends, analysts at Kaufman Hall (KH) announced that hospital finances, on the whole, are “holding steady,” while noting that the gap between financially sound facilities and those that are struggling is widening. The report notes:
2024 was certainly a period of stabilization. However, it was also a year in which we continue to see the variation between the top performers and bottom performers grow. So, while overall, the industry seemed to stabilize, the distribution of some of those gains and losses were unequally spread.
Migration in Settings
Part of the rebound for many hospitals has been a continuing transition to outpatient care settings. Analysts at KH found that during the pre-pandemic years, the one metric that was most closely associated with hospital financial performance was emergency department (ED) visits. That trend broke during the course of the pandemic. Per the KH observers:
Organizations that have an ambulatory footprint, and for hospitals with substantial hospital outpatient-type departments, the ability to move care into those settings has generally been a way in which organizations have strengthened themselves. But not all organizations have that ambulatory footprint, and not all hospitals have that size of outpatient departments. For those that do not have that, they have typically struggled as compared with those that did have a strong ambulatory presence.
According to the KH findings, outpatient revenue per calendar day increased seven percent from September to October 2024 and 13 percent year over year, “outpacing inpatient revenue's growth of one percent and six percent, respectively.”
Kaufman Hall expects the increase in outpatient activity to continue in 2025. According to Fitch Ratings, health systems' capital spending will be focused on IT and developing ambulatory networks, since improving access points will be a top priority. Fierce Healthcare analysts stated that providers will be looking to “diversify their portfolios and expand their footprint in areas like surgery centers, urgent care clinics and imaging,” noting that this could drive more merger and acquisition (M&A) activity in the ambulatory space.
And, of course, this growing disparity between the “haves and have-nots” could also provide M&A opportunities as lower-performing facilities may find it increasingly difficult to retain their independence. Partnering or merging with larger or more financially secure institutions may be their best option.
Modest Margin Gains
Analysts from Fitch Ratings have indicated that hospitals should expect modest gains in their operating margins over the coming year. They see encouraging signs with labor pressures easing a bit and improved volumes. Fitch revised its outlook for nonprofit hospitals in December from “deteriorating” (a designation in place for the last two years) to “neutral,” noting that the median operating margin for nonprofit hospitals should be between one and two percent in the coming year.
During a recent webinar, Kevin Holloran and Mark Pascaris of Fitch Ratings provide reasons for their optimistic outlook 2025. For example, while there remains a labor shortage, wage pressures have eased a bit. In addition, patient volumes are up, resulting in better revenue flow. But they also indicated that these positive indicators aren’t being universally felt, as some hospitals continue to face significant financial pressures. Here’s how Pascaris, senior director and analytic lead of Fitch Ratings’ nonprofit healthcare team, characterized the current situation:
The sector continues to face a lot of headwinds. There's still a lot of fragility. That hasn't changed, but we're in a better position today than we were a couple of years ago.
Of course, much of the future cannot be predicted because so much is still up in the air. We have yet to see legislation and rulemaking from the new congress and administration, which could have any number of effects within the healthcare space. Should there be massive deportations involving millions of people, what financial impact will that have on American hospitals? Will there be a new pandemic to contend with in 2025? If so, what will be the implications for facilities that are just now recovering from the last public health emergency? While the general outlook appears to be on the upswing for the nation’s front-line care centers, it doesn’t hurt to have contingency plans safely ensconced in the desk drawer. After all, stuff happens.