January data shows margins narrowing amid weaker patient demand, highlighting a more fragile operating environment.
Hospitals began 2026 in a bind as costs remained elevated and fewer patients walked through the door, translating to increased financial pressure, according to the latest data from Kaufman Hall’s National Hospital Flash Report.
Based on data from more than 1,300 U.S. hospitals, the analysis revealed that the monthly operating margin index for January was 2.1%, inclusive of all allocations for the cost of shared services received from health systems. Comparatively, that figure was 4.9% for December.
The most immediate shift came from weaker patient demand. After periods of stronger demand in 2024 and parts of 2025, January showed a decline. Adjusted discharges were down 3% month-over-month, emergency department visits dropped 4%, and average length of stay increased 4%. Seasonal factors played a role, according to Kaufman Hall, but the bigger issue is how sensitive hospital finances have become to even small volume swings.
That sensitivity is partly related to the transition in care delivery. More procedures are moving to outpatient settings, and while that can create operationally efficiency, it often comes with lower reimbursement. Hospitals are increasingly dependent on higher-acuity inpatient care to drive revenue, even as those cases are more expensive to manage.
At the same time, hospitals are still grappling with higher costs. January showed total expenses per calendar day rising 5% year-over-year, with labor and supply costs both up 5%, and drug expenses climbing 7%. Those increases are persisting even as volumes fluctuate.
The workforce remains at the center of that issue. Though the reliance on contract labor has eased, hospitals are continuing to invest in staffing to stabilize operations and improve retention.
Revenue challenges are also building in ways that are just as significant. Bad debt and charity care rose 8% year-over-year in January, indicating that hospitals are seeing more patients who either cannot pay or are covered by lower-reimbursement plans.
Coverage changes tied to Medicaid redeterminations and the expiration of enhanced Affordable Care Act subsidies are likely to increase the number of uninsured or underinsured patients. For hospitals, that means a growing share of care that is either underpaid or not paid at all, widening the gap between gross revenue and what is ultimately collected.
Between revenue dependent on payer mix and consistently rising costs, the combined effect is a financial model that is becoming harder to sustain for hospitals without renewed discipline.
“Increased expenses, especially in labor, and the persistent increase in bad debt and charity care are not likely to ease this year,” Erik Swanson, managing director and data and analytics group leader at Kaufman Hall, said in a statement. “Overall structural costs are poised to go up. Hospitals will need to be strategic about where to allocate resources and how to manage spending in what could be a challenging economic environment.”
Performance is also varying across the industry. Larger health systems with scale, stronger payer mix, and more developed outpatient strategies are better positioned to navigate these pressures, while rural and safety-net providers are more exposed to rising uncompensated care and cost inflation.
That divide is expected to grow, with financial strain continuing to push some organizations toward partnerships or consolidation as a means for survival.
Jay Asser is the CEO editor for HealthLeaders.
KEY TAKEAWAYS
Hospitals saw operating margins drop to 2.1% in January as lower patient volumes took their toll.
Expenses rose 5% year-over-year, with continued increases across labor, supplies, and drugs.
An 8% jump in bad debt and charity care, combined with looming coverage losses, signals worsening reimbursement dynamics.