Despite economic volatility, Fitch still expects healthcare providers to experience a “modest margin expansion” this year due to easing inflationary pressures and reimbursement increases, according to an April 9 report.
The firm anticipates healthcare providers will see Medicare and commercial rate bumps 3% to 4% this year as rates increase and the volume of high acuity cases grows with the aging population.
The workforce challenges plaguing healthcare providers over the last several years are lessening as well, according to the report.
“Chronic personnel shortages will continue to ease, suppressing wage inflation and reducing reliance on costlier external agency labour,” the report notes. “Wages are unlikely to exert pressure on provider margins in 2025, with revenue growth likely to match or exceed wage growth.”
The healthcare providers in a more stable financial situation will be in the best position to grow over the next few years. Struggling hospitals will continue to have challenges, and some may seek merger or acquisition partners to stay operational.
“Less leveraged providers are likely to use rising [free cash flow] to reinvest in growth and buy back stock,” said the report. “Capex is unlikely to change from 2024, as acute care providers build new towers to expand services and relieve capacity constraints in high-growth markets. Additionally, providers are expanding the reach and value of their networks by adding attractive de novo outpatient assets.”
Fitch predicts healthcare providers will target tuck-in acquisitions of outpatient offerings as value-based care becomes more pervasive. Urban and suburban healthcare providers are investing in new inpatient capacity as well, according to the report.
There are some headwinds, however. Fitch said while CMS changes are less likely to affect near-term credit fundamentals, possible Medicaid reimbursement cuts next year could have more of an impact.
