2025 is expected to be a recovery year for hospitals and health systems' finances.
Providers’ financial performance has vastly improved since the COVID-19 pandemic stunted the healthcare industry a few years ago. In 2024, many hospitals and health systems benefited from higher patient volumes, wider operating margins and more favorable financial markets that drew investment returns.
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Analysts and industry observers are looking for those trends to continue in 2025, but high labor costs and inflated expenses will also create challenges for providers. Meanwhile, cybersecurity remains an important focus among executives, with hospitals and health systems investing more than ever in safeguards to prevent damaging attacks.
Here’s a look at five trends to expect in the new year and how they could affect financial performance.
Operating margins will continue to improve.
Hospitals and health systems can generally expect improvement in their operating margins in 2025, though margins aren’t likely to recover to pre-pandemic levels, said Erik Swanson, senior vice president of data and analytics at consulting firm Kaufman Hall. He said 2% margins wouldn’t be out of the question for health systems.
To achieve better margins, providers will continue to diversify their portfolios in areas such as pharmacy, imaging and urgent care, in addition to assessing whether certain services benefit the bottom line, Swanson said. Some providers have cut emergency services and maternity care.
A Moody’s Ratings report published in November estimated the median operating cash flow margin will land at 7% in 2025 for the nonprofit healthcare sector, signaling financial stability.
The pace of recovery is slowing, but that isn’t necessarily a bad sign.
Providers have been implementing performance improvement strategies for multiple years, focusing on areas such as revenue cycle management and contract negotiations. Success with these strategies makes it harder to achieve the same rate of improvement in the future, said Matthew Cahill, vice president at Moody's.
As for whether a return to pre-pandemic margins is in the cards, “the short answer is we still don’t know,” said Mark Pascaris, senior director at credit rating agency Fitch Ratings.
Labor costs are still a cause for concern.
Labor costs are growing at a slower rate compared with prior years, but analysts say the issues behind those rising costs haven’t been fully addressed.
In 2025, healthcare providers will continue to struggle with staffing shortages, worker burnout and increased demand for services among an aging population. Nearly 60% of health system executives say they expect workforce challenges to influence their organizational strategies in the new year, according to Deloitte's U.S. healthcare outlook survey published earlier this month.
Salaries and wage rates have also reset to a higher level than they before the COVID-19 pandemic, Pascaris said.
Labor cost increases proved to be a nationwide concern in 2024. Rochester, Minnesota-based Mayo Clinic, for example, reported a 7% year-over-year increase in salaries and benefits in the first nine months of 2024, according to the system’s most recent financial report. Altamonte Springs, Florida-based AdventHealth saw a 12% increase during the same period, while Intermountain Health in Salt Lake City reported a 5% increase.
Despite the upfront cost, providers may benefit in the long term by voluntarily implementing wage rate increases to attract and retain talent in a competitive labor market, Swanson said.
Expense growth is not going away.
Providers are also spending more on supplies and purchased services. Analysts don’t expect the trend to abate in 2025, even with a cooling inflation rate.
“There are no signs in any of the data that we’re seeing that expenses will diminish,” Swanson said.
Rising pharmaceutical costs continue to be a key point of tension for providers, some of which saw double-digit increases in 2024. Ohio-based Cleveland Clinic reported an 18% year-over-year jump in pharmaceutical expenses during the first nine months of 2024. Renton, Washington-based Providence reported a 15% increase during the same period.
Tariffs on foreign medical supplies — implemented under the Biden administration and expected to continue under President-elect Donald Trump — could also drive up costs for providers on personal protective equipment, syringes and other products.
Swanson said expense burdens are widening the gap between the sector’s best and worst financial performers, which could lead to more mergers and acquisitions as providers try to survive.
Supplemental payments will play an important role.
State-directed and other supplemental payment programs bolstered providers’ bottom lines this year and are likely do the same in 2025.
Industry watchers have raised concerns about the future of government-led programs under the new Trump administration, but getting rid of a lifeline like Medicaid supplemental payments would be a tough sell, for-profit system executives said at the Wells Fargo Healthcare Conference in September.
Analysts also say they aren’t expecting any major shifts in the near term.
Cybersecurity will remain a big investment focus.
Technological capabilities, particularly cybersecurity, will be an important part of providers’ capital spending plans in 2025. Sixty percent of health system executives say they will prioritize cybersecurity enhancements, according to the Deloitte survey.
Multiple cyberattacks hit the healthcare industry this past year, including big data breaches at Change Healthcare, Kaiser Permanente and Ascension.
Many healthcare organizations view cyberattacks as a matter of when, not if. Failing to invest in safe systems or cyber insurance could lead to more expensive issues down the road, including an operational standstill.
“Every day you’re down could cost millions of dollars,” Cahill said.
Cybersecurity accounted for 7% of information technology spending among providers and other healthcare companies in 2023, an increase from 5% in 2019, according to a Moody’s survey released in April. Cahill said increased spending could be related to rising insurance premiums, widespread implementation of multifactor authentication and third-party maintenance costs, among other reasons.
