The theme of growth in revenue and admissions was prevalent among some of the largest publicly traded health systems as they posted their earnings announcements recently. The discussions provided valuable insights into the key areas such as cost management, supply chain, labor, and mergers and acquisitions activity, offering both a historical perspective and an outlook for the remaining year.
Steady margins and strategic cost management drive growth
Margins improved in 2024 compared to 2023, driven by moderation in inflation, a stronger payer mix and improved rates. Fixed cost leverage also contributed to this growth. Health care systems expect to maintain this steady performance, with stable and rational wage inflation supporting consistent operations Opportunities for margin expansion are anticipated over the next few years, driven by these same factors. However, challenges remain, particularly in Medicaid and total reimbursement, where supplemental payment programs fall short of covering the cost of care. One company aims to generate margins on Medicare reimbursement as a measure of efficiency.
Generating margins from higher acuity procedures is a key growth strategy for some companies, though there is uncertainty about returning to pre-COVID margins for acute business. Increased physician expenses and the shift of profitable procedures from inpatient to outpatient settings pose challenges, despite recent improvements in acute business margins. Investments in enterprise resource planning platforms are driving efficiencies, streamlining workflows and reducing costs. Additionally, health care companies are focusing on organic system development to further enhance their operational capabilities.
Supply chain management and tariff mitigation
For one health care system, supply expenses declined by approximately 60 basis points for the full year, largely due to effective supply management following the implementation of an enterprise resource planning system. Organizations are closely monitoring tariffs, country-specific rates and exclusions for health care-related items. Tariff mitigation strategies, such as fixed-price contracting, supply chain mapping and risk assessments are being employed. Suppliers are also working on addressing risk and diversifying supply chains, particularly away from China.
One system indicated it had secured 70% of its supply spend with firm pricing for 2025, while another has established multiyear supply contracts with pricing protection to shift tariff risk. Managing supplies through vendor consolidation is also being used to optimize the supply chain. These measures are aimed at ensuring stability and efficiency in supply expenses amid a challenging economic environment.
Improved labor trends and stable wage inflation
Labor trends in the health care sector showed significant improvements in 2024. Overall, hourly rates increased, by 4% for one of the systems, in 2024, accompanied by a notable decrease in contract and temporary labor expenses including a 36% decrease from 2023 for another system. This success is attributed to effective recruitment and retention strategies, resulting in a competent and stable workforce capable of meeting demand. High employee retention, particularly among nursing staff, has been achieved through a strong focus on employee engagement and targeted hiring initiatives. Workforce development remains a priority to ensure continuity and capacity.
Looking ahead, inflationary trends in 2025 are expected to rise by 3.75%, which is lower than the increase seen in 2024 but still higher than the anticipated 3% range. Despite this, wage inflation is projected to remain stable, supporting consistent operational performance.
Strategic M&A drives growth and value
In the health care sector, M&A activity has been strong for the reporting health care systems. In 2024, one company strategically divested 14 hospitals to enable deleveraging, while simultaneously expanding its footprint by adding 70 ambulatory surgical centers. The company has committed $250 million annually towards M&A in the ambulatory space, supported by a robust pipeline of opportunities. This approach underscores a disciplined strategy focused on growth businesses that can add significant value.
Additionally, another company has been active in acquiring hospitals in key markets and purchasing outpatient businesses that complement its hospital network, including rural and surgical facilities. These acquisitions are part of a broader effort to enhance service offerings and strengthen market presence, while remaining focused on strategic growth and value creation.
Outlook
Health care systems reported that strategic partnerships will play a crucial role in advancing patient care and supporting the workforce to achieve desired community outcomes. Investments and collaborations in the hospital segment will enhance access to care, particularly through Medicaid partnerships with the federal government. Capital spending will focus on network development, adding bed supply, and expanding outpatient facilities to ensure clinical capabilities for delivering high-quality care. Investments in buildings and equipment, along with effective pricing strategies, will be key components of this effort.
Overall trends indicate moderate inflation, with medical specialist fees and physician costs growing at higher-than-normal rates. Salary increases are expected to be around 3.75%, slightly lower than in 2024, while inflationary trends are projected to drive a 3% increase. Strong demand for health care services is anticipated, with inpatient admissions forecasted to grow by 3 to 4%, driven by high-acuity volume.
These factors suggest a strong outlook for the health care sector underpinned by strategic investments and partnerships focused on enhancing patient care.
Get additional health care industry insights in our outlook.
