Hospitals’ financial positioning is somewhat stable but still under significant pressure, mainly from rising costs and reimbursement issues, according to data released last week by Kaufman Hall.
The consulting firm analyzed data from 1,300 hospitals across the country and found that hospitals’ year-to-date 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 hospitals’ allocations of shared services costs.
On average, hospital margins are improving compared to the worst of the pandemic years, but they’re remaining fragile and inconsistent across organizations, noted Erik Swanson, managing director at Kaufman Hall.
“Generally speaking, we’re observing levels of underperformance relative to last year. Expenses and input costs remain high and there are mixed results with volumes. Bad debt and charity deductions are also higher than they have been last year, which is also creating some margin pressure,” he stated.
Growth in expenses continues to outpace or closely track revenue, limiting hospitals’ margin improvement. During February, hospitals’ daily net operating revenue grew by 5% from the previous month and 4% from the prior year — but expenses increased by 5% from January and 6% from the previous year.
Non-labor expenses — for drugs, supplies and purchased services — are rising especially fast, the report showed.
As the country’s population ages, hospitals are seeing more and more elderly patients with chronic conditions, a group with typically higher levels of acuity, Swanson noted.
“Drug expenses in particular are quite high, and this is due to both higher acuity patients requiring more specialty pharmaceuticals and the increased prices of these medications,” he remarked. “Other costs experienced large rises last year too, like purchased services, and these have not fallen and typically remain quite sticky.”
The report also noted the nation’s wide variation in hospital performance depending on the organization’s size, geography and market position.
In Swanson’s opinion, having a strong payer mix is one of the characteristics that separate high-performing hospitals from struggling ones.
“Those with greater commercial populations outperform those without the same payer mix strength. Populations with higher levels of under- or uninsured patients also come with a host of other socioeconomic determinants that can challenge hospitals,” he declared.
The data is also clear that hospitals with greater levels of outpatient revenue outperform those without, he added.
Most of hospitals’ ambulatory services are producing positive margins, so organizations with stronger outpatient footprints will do better. Swanson pointed out that this is a double-edged sword though — as care expands further into outpatient settings, it’s leaving hospitals with higher acuity patients.
This not only challenges hospitals with populations that are generally older and sicker, but it also means that many patients coming into the hospital rather than an ambulatory site may be those with other confounding determinants of health, he explained.
“This leads to more expensive medications, used more often, along with greater intensity of resource needs spanning from labor to non-labor,” Swanson said.
Overall, he thinks the data points to a hospital industry that is holding onto modest financial stability while navigating sweeping structural shifts in cost and care delivery.
Photo: Jackyenjoyphotography, Getty Images
