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What the medians show
Fitch’s annual review of audited fiscal 2025 results covers 222 rated nonprofit hospitals and systems. The median operating margin rose to 1.5% from 1.1% in 2024. Sixty-seven percent of providers posted a positive operating margin, up from 64% a year earlier and roughly half in 2022.
Labor drove much of the gain. Personnel expense fell to 52.6% of operating revenue from 53.5%. Solid patient volumes and slower growth in supply, drug and equipment costs also helped.
Context matters, though. A 1.5% median is still lower than any pre-pandemic year in Fitch’s 20 years of data. And Fitch found that gains are increasingly concentrated among the strongest systems, while sector-level balance sheet ratios can hide weaker organizations.
Why Fitch sees a turning point
The concern is policy. The federal budget law enacted last year is expected to reduce Medicaid enrollment and restrict the provider taxes and state-directed payments that many states use to support hospital rates. Fitch expects the material effects to begin in 2027.
Fitch identified the most exposed groups: lower-rated systems, Medicaid-dependent providers and organizations with thin margins and limited cash. For those hospitals, falling Medicaid revenue could drain liquidity and make it harder to fund growth or maintain capacity.
Medicare will not fill the gap. CMS’s final inpatient rule for fiscal 2027 gives a net 2.3% rate increase, a 3.2% market basket less a 0.9-point productivity cut. The AHA called the update inadequate.
How to use the next 18 months
For most systems, the window between now and 2027 is the time to prepare, while operations are still relatively strong.
- Quantify Medicaid exposure by source. Separate base Medicaid rates from supplemental and state-directed payments, since the latter carry the most policy risk.
- Protect labor gains. The drop in labor expense as a share of revenue is the main driver of recent improvement. Lock in staffing models and contract labor controls before volumes or payer mix shift.
- Build liquidity. Set a days-cash target that would hold up under a multiyear decline in Medicaid revenue, and sequence capital projects accordingly.
- Look beyond the medians. Benchmark against peers with similar ratings and payer mix, not the sector average, which Fitch says increasingly reflects the strongest performers.
- Brief the board and rating agencies early. A credible plan for 2027 will matter more to analysts than strong 2025 results alone.
Archive entry for Aug 12, 2026, added Nov. 11, 2026.