Large nonprofit systems’ finances are strong — but will it last?

Modern Healthcare – Tuesday, September 2, 2025
By Caroline Hudson

Many large health systems are showing strong balance sheets as second-quarter earnings reports roll out, but some analysts say the upswing is likely on a time limit.

Talk about major funding cuts related to the new tax law President Donald Trump signed in July are dominating executive board rooms industrywide. However, much of the $1.1 trillion in Medicaid and exchange cuts won’t take effect for a couple of years. As a result, systems reporting strong balance sheets with improving margins and patient volumes will likely see that trend continue in the second half of 2025 and 2026, analysts said.

Mark Pascaris, senior director at credit ratings agency Fitch Ratings, said he expected to see improvement this year among nonprofit hospitals and health systems. Fitch upgraded the sector outlook to “neutral” from “deteriorating” in December.

“There’s just been a systematic focus for most in the industry targeting things like productivity improvement and general expense savings,” Pascaris said. “These are efforts that go back two to three years.”

That focus has translated into higher operating margins in 2025.

Ohio-based Cleveland Clinic saw its operating margin improve to 5.6% in the second quarter, compared with 1.3% in the first quarter and 1.2% in the year-ago period. It attributed the improved performance to strong outpatient demand and new Medicare Advantage contract agreements that went into effect in January.

Sacramento, California-based Sutter Health reported a 4% margin in the second quarter, up from 1.8% in the first quarter and 3% in the year-ago period.

Sutter Chief Financial Officer Jonathan Ma said the system has made progress expanding services and is seeing more patients than last year.

Patient volumes remain strong.

Rochester, Minnesota-based Mayo Clinic reported a 7.3% jump in admissions in the first half of the year, while Salt Lake City-based Intermountain Healthcare reported a 2.5% increase in inpatient admissions. Altamonte Springs, Florida-based AdventHealth recorded a 2.3% increase in admissions.

Vanessa Chebli, analyst at Moody’s Ratings, noted that smaller systems are seeing improvements as well, albeit at a slower rate than the larger entities. Large systems with more resources often have an advantage in navigating market disruption.

“These systems have the operational scale and flexibility to respond to industry challenges faster than those with smaller revenue bases,” Chebli said.

She also said debt-to-operating revenue ratios have been decreasing for years as systems work to reduce debt levels, which has a positive impact on balance sheets.

Pascaris said the new tax law may actually drive better financial performance this year and in 2026, as many systems try to increase cash flow and strengthen their balance sheets in anticipation of the pending changes.

“If you’re not generating a better margin in 2025 and 2026, then what does that say for the subsequent years when the ‘Big Beautiful Bill’ cuts start to take effect?” he said.

Operating performance largely depends on geography and investments the system has made, said Suzie Desai, managing director and healthcare sector lead at S&P Global U.S. Public Finance Ratings. She cautioned there will still be potential headwinds moving into next year, including the fate of enhanced premium tax credits.

But management teams at the large systems, especially those seasoned by the COVID-19 pandemic and subsequent “labor-demic,” have the ability to balance short- and long-term challenges.

“While they’re trying to improve their operations and continuing to maintain strong cash flow over the next year or two, they do have the capability and the capacity to also think over the next three to four years, what do they need to do to position themselves well,” Desai said.

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