The financial situation of hospitals is somewhat stable but remains under significant pressure, mainly due to rising costs and reimbursement issues, according to data published last week by Kaufman Hall.
The consultancy analyzed data from 1,300 hospitals across the country and found that hospitals’ annual operating margins reached 1.9% in February – up from 1% the previous month but well below the 3.7% margin with which the sector ended 2025. The figures were adjusted to account for hospital shared service cost allocations.
On average, hospital margins are improving compared to the worst pandemic years, but they remain fragile and inconsistent across organizations, noted Erik Swanson, chief executive of Kaufman Hall.
“Overall, we are seeing levels of underperformance compared to last year. Expenses and input costs remain high and results are mixed in terms of volumes. Bad debts and charitable deductions are also higher than last year, which also creates some pressure on margins,” he said.
Expense growth continues to outpace or closely track revenue, limiting hospital margin improvement. In February, hospitals’ daily net operating revenues increased 5% from the previous month and 4% from a year earlier, but expenses increased 5% from January and 6% from a year earlier.
Nonlabor expenses — for purchased medications, supplies and services — are growing particularly quickly, the report found.
As the nation’s population ages, hospitals are seeing more older patients with chronic illnesses, a group that typically has higher acuity levels, Swanson noted.
“Spending on drugs in particular is quite high, and this is due both to the fact that more serious patients require more specialized pharmaceuticals and to the increasing prices of these drugs,” he noted. “Other costs also saw sharp increases last year, such as purchased services, and these have not fallen and generally remain quite rigid.”
The report also noted the wide variation in hospital performance across the country based on the organization’s size, geography and market position.
In Swanson’s view, having a strong payer mix is one of the characteristics that separates high-performing hospitals from struggling ones.
“Those with larger commercial populations outperform those without the same payer mix strength. Populations with higher levels of underinsured or uninsured patients also face a host of other socioeconomic determinants that can challenge hospitals,” he said.
The data also clearly shows that hospitals with higher levels of outpatient revenue outperform those without, he added.
Most hospital outpatient departments generate positive margins, so organizations with a stronger outpatient footprint will fare better. Swanson pointed out that this is a double-edged sword, however: As care expands more to outpatients, hospitals end up with more serious patients.
This not only poses a challenge for hospitals whose populations are typically older and sicker, but it also means that many patients who arrive at the hospital rather than an outpatient site may be those with other confounding health determinants, he explained.
“This leads to more expensive medications, used more often, as well as greater intensity of resource needs, ranging from work to non-work,” Swanson said.
Overall, he believes the data points to a hospital sector that maintains modest financial stability while facing sweeping structural changes in costs and care delivery.
Photo: Jackyenjoyphotography, Getty Images
