Nonprofit hospital sector to notch modest margin gains in 2026 as systems tighten up ahead of Medicaid cuts: Fitch

By Dave Muoio / December 10, 2025

Nonprofit hospitals and health systems are expected to continue their modest margin improvements through the end of 2025 and into 2026, though “systemwide operating margins may never recover to pre-pandemic levels” amid macroeconomic pressures and the longer-term threat of the One Big Beautiful Bill Act’s (OBBBA's) changes to reimbursement and coverage.

That’s the top-line read from Fitch Ratings’ 2026 outlook for the sector, published Tuesday. The agency forecast a median operating margin between 1% and 2% while noting largely healthy volume trends and strong balance sheets.

It also expects roughly equal numbers of ratings downgrades and upgrades among its portfolio of rated nonprofit hospitals and health systems, landing the sector a “neutral” outlook for the coming year. That said, “elevated macroeconomic pressure could revert the sector outlook to 'deteriorating,' especially if there is a decline in profitability and payer mix erosion,” according to the report.

A key factor in next year’s expected operating margins is the OBBBA. Though the law’s full hits to hospitals don’t begin to kick in until after 2026, “expense savings and top-line revenue opportunities are being accelerated” by management teams to get ahead of the legislated reimbursement cuts, Fitch wrote. Cash flow implications will also vary between different states, markets and levels of Medicaid exposure, Fitch wrote, meaning OBBBA operating challenges won’t hit all hospitals quite the same way.

In the meantime, Fitch said solid volume trends, “particularly in population growth areas,” have many systems upping their capital spending to improve access and capacity. This is being led by investments in outpatient services and access-focused technology, including artificial intelligence.

“That said, the industry is still investing in patient tower and bricks and mortar facilities, including capex for projects paused during Covid-19,” according to the report.

On labor, hospitals’ steepest expense line and a pain point during the pandemic, Fitch cited reports from management teams that use of external contract labor, employee turnover and job vacancy rates have all improved and are contributing to the steady margin gains. Again, these trends aren’t ubiquitous, as “providers that are still facing pronounced labor pressures are generating weaker operating results and have faced rating pressure.”

The uneven performances of nonprofit hospitals have been increasingly pronounced during recent years and have driven to what Fitch describes as a “trifurcation of credit quality.” This reflects a split into three groups of nonprofit systems: the top 20%, which are using their strong market positions and balance sheets to pursue increased growth; the middle 65%, which are expected to sustain or “stagnate” at their existing credit ratings; and the bottom 15% of deteriorating nonprofit hospitals.

Fitch said it expects these splits to be predictive of how well an organization will be able to navigate coming headwinds and that the trend could contribute to elevated merger and acquisition activity.

“Going forward, Fitch expects these organizations with robust resources will reinvest in capital needs and leverage technology and emerging tools such as AI to enhance labor productivity and clinical outcomes. Many of these hospital systems may look to opportunistic M&A activity and other partnerships to bolster positions in existing regions or access new markets.

“Conversely, many lower rated hospital systems will struggle as labor expenses persist and revenue opportunities tighten, thereby facing increased credit pressure, especially those providers in challenged service areas,” the agency wrote.