Healthcare Sector Insights: FY 2025 Likely Characterized by Stable Trends for Volumes, Rates, Margins but Well-Known Regulatory, Policy Wild Cards Loom

The trend of increasing stability, which has been underway within the healthcare industry since the second half of 2023, should continue through fiscal year 2025, especially for larger acute care and post-acute care providers with less-aggressive capital structures.

Additional key takeaways for FY 2025 are as follows:
 

• Low-to-mid-single-digit volume and rate growth, stable margins: Volume and rate growth for acute and post-acute care providers will likely range from low- to mid-single-digit percent. Wages (related to both permanent and contract labor) and EBITDA margin will probably remain steady in line with broader inflation trends.
   
• Continued investments in inpatient beds, ambulatory service centers, or ASCs, and other outpatient facilities: Larger health systems will probably continue investing in inpatient beds, ambulatory service centers, or ASCs, urgent care centers, and other types of outpatient facilities. Health systems will also probably continue partnering with nonprofits and academic institutions to expand upon existing capabilities. For example, HCA and Tenet are investing in inpatient capacity and outpatient facilities, and Ardent Health purchased 18 urgent care clinics in early January.
   
• Regulatory backdrop presents uncertainty: There are regulatory and policy wild cards related to items such as tariffs and Medicaid funding that could easily upend stability expectations.
   
• The industry continues to seek solutions to address claim denials: Healthcare organizations are spending, in aggregate, about $20 billion trying to follow up and appeal denied claims, which creates a burden and inefficiency in the system.
   
• We expect limited spread volatility for Encompass, HCA and Tenet: The relative stability of well-capitalized large care providers is reflected in current spreads. We expect limited spread volatility over the course of the year for Encompass, HCA, and Tenet based on fundamentals. Tenet appears to offer superior relative value.

 

Tenet is a high-quality credit, as exhibited by its free cash flow (calculated by subtracting distributions to noncontrolling interests), which amounted to 3.3% of total debt, and its diversification.

Tenet’s outlook calls for a roughly 15% to 25% year-over-year decline in capital expenditures for FY 2025, and a roughly 20% to 40% year-over-year improvement in cash from operations.

Tenet’s ASC business, which generated about 45% of total EBITDA, provides a ballast in the event that a Republican-led Congress scales back federal funding for Medicaid (see Medicaid discussion below), because the ASC business’ Medicaid exposure is de minimis.

At the same time, we think that in the event of an economic downturn, if there is a slowdown in elective surgery that negatively affects the ASC business, Tenet’s acute care segment may provide some support (assuming, in this scenario, that Medicaid funding has not been cut).

Further, Tenet’s in-house revenue cycle management business, Conifer (discussed below), helps bolster cash collections.
 

HCA Anticipating Slight Step-Down in Equivalent Admissions

For FY 2025, hospital operator HCA said that it expects 3% to 4% year-over-year equivalent admissions growth and 2% to 3% growth in net revenue per equivalent admission.

The anticipated volume growth would represent a slight step-down from FYs 2023 and 2024 levels:
 

In response to an analyst’s question, management explained that there are two considerations regarding the step-down in volume growth:
 

• Reduction in exchange volumes: HCA benefited from 40%-plus growth in exchange volumes in 2024 because exchange enrollment growth was about 30%. However, in FY 2025, exchange enrollment growth is expected to be in the mid-teens, so there will probably be less volume growth related to exchanges; and
   
• Nonrecurring benefit related to two-midnight rule in FY 2024: There was an admissions benefit related to the two-midnight rule, which applied to Medicare Advantage effective Jan. 1, 2024, that will probably not repeat in FY 2025.

Tenet Expects Growth in Line With FYs 2023 and 2024

Hospital and ambulatory surgery center operator Tenet anticipates same-hospital admissions growth of 2% to 3%, in line with FYs 2023 and 2024. Management said that it continues to see commercial rate increases in the 3% to 5% range.
 

For Tenet’s ambulatory service center business, United Surgical Partners International, or USPI, Tenet is estimating 3% to 6% same facility systemwide revenue growth with half from managed care pricing and half from volumes.

Encompass Same-Store Discharge Growth Likely Mid-Single Digits

Encompass, the largest owner and operator of rehabilitation hospitals, expects a Medicare pricing increase of 3.3% for the first quarter through the third quarter, and then an estimated 2.5% to 3% for the fourth quarter.

For managed care, management said it envisions a price increase of 2% to 3%.

Encompass’ volume trends are below:
 

The company did not provide explicit same-store volume guidance but is generally targeting a 6% to 8% discharge compounded annual growth rate through 2027.

About 91% of Encompass’ hospital admissions are derived from patients who were referred from acute-care hospitals, so it is fair to assume that if large health systems such as Tenet and HCA see volume trends in 2025 that are similar to 2024, Encompass should experience mid-single-digit same-facility year-over-year discharges, in line with its performance from FY 2025.
 

HCA Anticipating ‘Steady’ Operating Environment, ‘Rational’ Wage Inflation

HCA said that it expects EBITDA margin to range from 19.6% to 19.9%, compared with 19.7% in FY 2024. CFO Michael Marks said HCA’s guidance contemplates a “steady operating environment” with “rational” wage inflation, adding that the company is in a “good spot” on labor.

HCA’s salaries and benefits amounted to 44.1% of revenue during FY 2024, compared with 45.4% in FY 2023 and 45.1% in FY 2019.

HCA was asked about progress it has made to improve labor expenses, the pace of nurse and support staff hiring, and what guidance implies for labor costs.

Marks said that “a good way to measure the progress [HCA] has been making is [to look] at [its] use of premium labor or contract labor.” He said contract labor costs declined 8% year over year during the fourth quarter. Contract labor as a percentage of salaries, wages and benefits was down to 4.6%.

He added that the reduction represents “a lot of really good work that [HCA’s] teams have done, both in terms of improving the retention and reducing the turnover rates [HCA] has seen over the last couple of years coming out of the pandemic.”

HCA continues to add Galen nursing school campuses as well as nurses in its key markets and is seeing increases in enrollment at the Galen School of Nursing. HCA purchased a majority stake in Galen in January 2020.

Cost trends in the chart below show that total salaries, supplies and other operating expenses have hovered at around 80% of net revenue since FY 2019, with reductions in salaries as a percentage of net revenue in FYs 2022, 2023 and 2024:
 

Encompass Salaries, Wages, Benefits Per Full-Time Employee Up 3.25%-3.75%

Encompass said that it expects a 30-to-50-bps year-over-year FY 2025 EBITDA margin decline.

Management said during the fourth-quarter call that when compared with 2024, “you’ve got about $30 million of EBITDA that needs to be overcome moving from 2024 into 2025,” relating to items such as self-insurance accrual adjustments.

Encompass’ salaries and benefits amounted to 54.2% of revenue during FY 2024, compared with 54% in FY 2023 and 55.9% in FY 2019. The company’s salaries, wages and benefits per full-time employee rose 5.75% during FY 2024.

Encompass’ contract labor employees amounted to 1.4% of total full-time employees during the fourth quarter of 2024, compared with 1.6% during the fourth quarter of 2023 and 2.2% during the fourth quarter of 2022. Contract labor employees were 0.7% of full-time employees during the fourth quarter of 2019.

Encompass CFO Douglas Coltharp said the company has implemented “nursing and therapy career ladders,” which has encouraged its clinicians to seek incremental accreditations that are then accompanied by salary increases. The career leaders have helped with turnover. In 2024, nurse turnover was 20.4%, compared with 23.1% in 2023. However, fourth-quarter benefits expense per full-time employee rose 30.6% year over year compared with a 9.6% decline in the fourth quarter of 2023.

Like HCA and others across the acute and post-acute care industries, Encompass has seen a reduction in salaries as a percentage of net operating revenue since FY 2022:
 

Tenet Anticipating 30-Bps EBITDA Margin Improvement at Mid-Case

Tenet is anticipating an EBITDA margin to range from 19.3% to 19.9% in FY 2025, compared with 19.3% in FY 2024.

Tenet’s salary, wages and benefits were 41.3% of revenue, down from 43% in the same period a year earlier, and contract labor expenses amounted to 2.1% of salaries, wages and benefits, compared with 2.8% in the fourth quarter of 2023.

In contrast with HCA, Tenet’s cost trends relating to its hospital segment show that costs have consistently remained above 80% of net revenue:
 

 

CommonSpirit’s revenue rose 7.8% year over year during the six-month period ended Dec. 31, 2024, to $19.534 billion. EBITDA for the six-month period was $882 million, up 18.2% year over year from $746 million.

Salaries and benefits (about 50% of operating expenses) rose 5.2% over the six-month period.

The cost of supplies rose 10.7%. CommonSpirit said it is working to reduce supply costs through renegotiation of supply-chain contracts and vendor consolidations.

It remains to be seen whether CommonSpirit is able to successfully renegotiate contracts with “firm pricing” clauses that mitigate against the risk of tariff-related cost increases.

Although CommonSpirit benefited from reduced contract labor spending, the hospital operator said that it is aiming to improve its operating performance by deploying “standard department staffing models across the organization as well as reduc[ing] contract labor utilization and spend.”
 

Labor and margin trends look stable over the horizon, but care providers face tariff-related uncertainty

Global medical supplier Cardinal Health CEO Jason Hollar said on Cardinal’s fiscal year 2025 second-quarter earnings call on Jan. 30 that “if there are widespread tariffs anywhere from the 10% to 25% range,” there will be corresponding price increases. He said Cardinal is “well positioned competitively to be able to pass on those price increases” and will do whatever it can to minimize the impact given that it operates with thin margins.

Unsurprisingly, in a scenario where there are widespread tariffs, larger health systems are better positioned because of their negotiating leverage.

Purchasing organizations can help hospitals with supply-chain efficiency because under a purchasing organization health systems negotiate as one, and use the corresponding increase in leverage to obtain discounts from manufacturers and distributors.

Discussing tariffs, hospital operator HCA Healthcare said that over the years, its HealthTrust Group purchasing organization has been implementing tariff mitigation strategies such as fixed-price contracting, supply-chain mapping and risk assessments, and de-risking and diversifying supply chains, especially away from China.

For 2025, about 70% of HCA Healthcare’s supplies are contracted with “firm pricing.”

HealthTrust was formed in 1999 by HCA Healthcare, LifePoint Health and Triad Hospitals (Triad, which HCA spun off in 1999, was bought by Community Health in 2007 for $6.8 billion). HealthTrust is a group purchasing organization that serves 1,800 hospitals and health systems in the United States and United Kingdom and 69,000 other locations, including ambulatory surgery centers, physician practices, long-term care and alternate care sites. HealthTrust and Tenet renewed their partnership for supply-chain optimization on May 4, 2021.
 

In FY 2025 Tenet will probably look to continue expanding capacity. Tenet CEO Saumya Sautaria said the company would build volumes into facilities where capacity was taken off line during the pandemic.

A key performance indicator to continue monitoring is Tenet’s capacity, because improvements regarding its assist utilization could provide margin uplift.

During Tenet’s fourth-quarter 2024 earnings call, an analyst noted that Tenet has “made a lot of progress the last few years” improving its “[salaries, wages, and benefits, or SWB,] and contract labor metrics,” and asked whether there are any areas of particular focus that will “drive efficiency in 2025 and beyond.”

Sutaria said Tenet is “continuing to work on” asset utilization, calling it an area where the company can prove in comparison to what management looks at “as kind of the gold standard out there.”

Sautaria made similar “gold standard” references during Tenet’s second-quarter 2024 earnings call, when asked whether there is a path for Tenet to narrow the gap between its capacity utilization, in the low-50% area, and HCA’s, in the low 70s:
 

He said at the time that although HCA and Tenet measure utilization differently so the comparison is not exactly apples to apples, Tenet is “very cognizant of the fact that [it has an] improvement opportunity,” adding that Tenet “definitely take[s] notice of” the way HCA manages capacity utilization.
 

CommonSpirit Expanding Ambulatory Care Capacity

CommonSpirit explains that as clinical innovation drives the transition of acute care services to lower acuity settings, CommonSpirit is expanding its ambulatory care capacity in order to accommodate its goal of seamlessly “car[ing] for patients across all care settings.”

CommonSpirit offers home health and senior living services. The company is assessing whether there is a way to “better align with and support [its] markets’ needs for the full continuum of care.”

The company is exploring other services across the continuum such as ambulatory surgery and imaging to “determine their potential as system verticals.”

HCA Expects to Continue Complementing Hospital Network With Surgical Facilities

Similarly, according to HCA CEO Samuel Hazen, the company has bought outpatient businesses and complemented its hospital networks “with rural facilities and surgical facilities and so forth,” which is expected to continue into 2025.

HCA is also focused on adding capacity through bed additions.

Tenet Continues With Its Strategy of Expanding Acuity as Ambulatory Facilities

Within its ASC business, Tenet is committed to investing $250 million a year for M&A, and expects to add 10 to 12 new centers in 2025.

ASC total joint procedures in Tenet’s ASCs grew 19% year over year. Tenet is focused on expanding high acuity case volumes such as hips, knees and shoulders surgeries, and reducing exposure to lower acuity procedures that can also be done in office buildings.

Sautaria said there are similar tailwinds for cardiovascular procedures as they migrate toward outpatient settings. He noted, however, that there are important safety and payor mix considerations, and that the capital expenditure required to build a cardiac center is higher than other service lines.

He said the cardiovascular market should evolve but “slower than people like to think.”

Encompass Continues Expansion, Taking Share From Skilled Nursing Facilities

During FY 2024, Encompass invested over $450 million into capacity expansions. The company opened seven new hospitals and added 107 beds to existing hospitals, adding 427 beds in aggregate.

In 2025, Encompass expects to open seven new hospitals with 340 beds and one satellite hospital with 50 beds. The company also expects to add 100 beds to existing hospitals.

Encompass is also making investments to “consistently produce quality outcomes for medically complex, high-acuity patients.”

CEO Mark Tarr says the reason Encompass is taking market share from nursing homes is that Encompass is able to treat higher acuity patients. The company “continue[s] to see increasing numbers of stroke and other neurological types of patients,” and management “think[s] the outcomes that [Encomass is] able to get versus what previous referral sources saw from nursing homes” is changing referral patterns.

Bain’s Surgery Partners Proposal Underscores Demand for ASC Platforms

Bain Capital submitted a proposal dated Jan. 27 to ambulatory service center operator Surgery Partners to take Surgery Partners private at $25.75 per share, representing a 26.7% premium to Surgery Partners’ Jan. 24 closing price. Bain has a 39% stake in Surgery Partners.

ASCs will probably continue to benefit from the migration of procedures, from inpatient to outpatient settings, in 2025 and beyond, so the subsegment has received a lot of interest and attention from strategic and financial buyers.

For the last five days, Surgery Partners’ stock has traded at a low of $25.35 to a high of $26.10.

The stock closed on Feb. 14 at $25.87 and is trading today at $25.97 per share. The trading prices suggest that the market is pricing in the increased likelihood of a topping bid, underscoring the relative attractiveness of the subsegment.

Bloomberg reported in August 2024 that UnitedHealth and TPG were “among the suitors” looking at a potential acquisition of Surgery Partners.
 

High-single-digit revenue growth driven by volumes and rates, along with revenue collection challenges, could provide growth opportunities for revenue cycle management companies such as Waystar, R1 RCM and Ensemble in FY 2025 and beyond.

The revenue cycle process can be grouped into three buckets: i) front-end, ii) mid-cycle and iii) back-end. During the front end of the process, insurance verification takes place and the health system determines whether the patient has active coverage. Care providers seek what is called prior authorization to ensure that the healthcare services will be covered. At the back end of the process, the care provider sends a bill, or a claim, to the insurance provider. Sometimes, insurance companies will deny payment.

Throughout 2024, companies have been vocal about experiencing higher claim and prior authorization denials. In many instances health systems have had to hire additional staff to deal with the billing process.

As the healthcare industry continues to grapple with increased prior authorization and claim denials from insurance providers, we think there will be greater demand for technology-based solutions such as Waystar’s Denial + Appeal Management software, which “uses AI to track and triage denials.”

Waystar said during its fourth-quarter 2024 earnings call that recent conversations have centered on the negative economic impact of denied claims, since healthcare organizations are spending, in aggregate, about $20 billion trying to follow up and appeal denied claims, which creates a burden and inefficiency in the system.

CommonSpirit’s Revenue Growth Affected by Challenges With Payor Denials

Not-for-profit health system CommonSpirit said in its earnings release for the three-month period ended Dec. 31 that EBITDA continues to be negatively affected by expenses growing at a faster pace than revenue even though there are “strong volume[s], lower length-of-stay, and higher productivity.”

Normalized revenue increases are “impacted by challenges with payors on denials and timely payments as well as payment increases from both government and non-government payors that are less than inflation.”

The company said it has multiple efforts to improve operating performance, including improving revenue realization through a focus on clinical denials prevention, escalation and resolution of payor disputes, collaboration with CommonSpirit’s revenue cycle vendor partners and ongoing managed care negotiations to reflect performance.

Tenet CEO Highlights Conifer’s Role in Contributing to Low Denial Rate

Similarly, Sautaria said during Tenet’s fourth-quarter call that there is a “constant back and forth of administrative costs that goes into adjudicating claims that probably is unnecessary,” but also acknowledged that “both sides have a point of view on that.”

He highlighted Tenet’s in-house revenue cycle management company Conifer, which “driv[es] initial disputes to a very, very attractive low rate of denials.”

HCA CFO Notes It Has Improved Capabilities Managing Denial Process

Hospital operator HCA also has an in-house revenue cycle manamagnet company, Parallon.

HCA CFO Michael Marks said during the company’s fourth-quarter 2024 earnings call that there has been “a lot of activity” related to claim denials and underpayments, but explained that HCA has “put a lot of effort over the last couple, two or three years in really beefing up [its] capabilities and managing through the denial and underpayment process.”

CMS Finalizes Rule Regarding Prior Authorization Denials

CMS has finalized a rule requiring Medicare Advantage organizations to send prior authorization decisions within 72 hours or seven calendar days depending on if the request is expedited or not.

Starting in 2026, payers must provide a specific reason for denying prior authorization.
 

Medicaid

The House draft budget resolution for FY 2025 states that the Committee on Energy and Commerce shall submit changes in laws to reduce the deficit by “not less than” $880 billion for the period of FYs 2025 through 2034.

The Energy and Commerce Committee oversees Medicare and Medicaid. There are widespread concerns spending reductions will target Medicaid.

The states and federal government share Medicaid financing. The federal government provides a guarantee to states for federal matching payments, known as the federal medical assistance percentage, or FMAP. The FMAP varies across states, but the floor is 50%. The lower a state’s average per capita income, the higher the match rate.

There are also a set of supplemental payments that states make, because Medicaid’s base payment rates do not cover the cost of providing care.

Tenet’s Medicaid patients accounted for 10% of patient service revenue in FY 2024. HCA’s Medicaid patients represented 6.6% of total revenue. [Tenet groups its Medicare and Medicaid managed care payors together into “managed care (71.4%),” making it difficult to determine how much managed Medicaid contributes to revenue, but it was 5.6% of HCA’s revenue.]

Medicaid represented 3.3% of Encompass’ revenue (managed care was 10.8%).