Things are looking up for U.S. nonprofit hospitals and health systems headed into 2025.

Fitch revised the rating for U.S.-based nonprofit hospitals from "deteriorating" to "neutral" in a Dec. 9 report, anticipating continued financial improvements next year. Fitch forecasted a median operating margin of 1% to 2% "barring unforeseen shocks" as the patient volumes are strong in many markets and hospital leadership teams focus on increasing access and capacity.

But there are still struggles ahead and at the hospital level, with negative outlooks outpacing positive outlooks.

Five things to know:

1. Fitch expects operating margins to have a "slow but steady" rebound next year, although it's unclear whether operating margins will return to pre-pandemic levels. The "new normal" may remain well below those averages after displacement due to the pandemic.

"Balance sheets remain healthy, and in fact are near all-time highs for many systems, which will continue to support ratings as operating results rebound," the report says.

2. Personnel cost inflation rates have "cooled considerably," according to the report and leadership teams have taken action to improve margins over the last two years. External contract labor has returned to near pre-pandemic levels and there is a decline in healthcare employee turnover as well.

"The sector, and particularly those providers with the resources and knowhow to reduce the use of contract labor and develop tools to enhance productivity, has adapted to recent challenges, which resulted in margins starting to stabilize and improve in the second half of 2023, a trend that continued into 2024," said Mark Pascaris, senior director of Fitch. "While staffing challenges remain, labor and inflationary pressures have eased. Along with ongoing volume growth, operating margins should continue to rebound into 2025 for the sector."

3. Despite the drop in contract labor, overall labor costs are still large expenses for health systems and a spike in salaries impacts margins. Hospitals often operate on thin margins and "managing labor costs has made the difference between operational success and failure," according to the report. The most successful organizations were able to recruit and retain staff across the board.

4. Health systems are seeing the shift from inpatient and outpatient care intensify, and capital spending is focused on boosting IT and ambulatory networks boosting access to care.

5. Headwinds and operational challenges for 2025 will likely include:

Growing drug expenses

Payer mix shifts

Strong competition

A decline of health insurance coverage

Policy shifts from a new presidential administration

Growing aging population will shrink the workforce and increase demand for care

Liquidity can help providers weather industry shifts and headwinds, according to the report.