Hospital Margins Softening as Expenses Catch Up

Financial challenges are adding up for hospitals to create “future uncertainty,” Kaufman Hall’s latest analysis found.

Hospital margins lost momentum in July, with profitability sliding despite steady revenue growth, according to Kaufman Hall’s latest National Hospital Flash Report.

Expenses continue to rise, while increasing bad debt and charity care are placing adding strain on organizations’ bottom lines, highlighting the fragile nature of the financial recovery hospitals have been working toward.

The average monthly operating margin for hospitals in July was 2.6%, inclusive of all allocations for the cost of shared services that they receive from their health system. That figure was down from 3.4% recorded in June, which was the highest mark since December.

Kaufman Hall’s median calendar year-to-date operating margin dropped to 1.7% with health system allocations, compared to 1.9% in June. Though the current margin is at its lowest point for 2025, it remains above the average of 1.4% for 2024.

The decline in profitability hasn’t stemmed from weak revenue, which continues to grow. In July, net operating revenue per calendar day was flat from June but up 8% year over year. Inpatient and outpatient revenue per calendar day rose 2% and 3% month over month, and 7% and 12% year over year, respectively.

In terms of volume, discharges per calendar day went up 1% on a month to month basis and 4% year over year. Adjusted discharges per calendar day improved by 2% from June and by 6% over the same period last year. However, average length of stay declined by 1% month over month and by 3% year over year.

One of the major areas where hospitals are feeling financial pressure is bad debt and charity care, which fell by 1% on a per calendar day basis compared to June, but remained 9% higher than July 2024.

Meanwhile, on a per calendar day basis, total expenses (7%), labor expenses (5%), non-labor expenses (9%), supply expenses (12%), drug expenses (12%), and purchases service expenses (7%) were all up year over year.

“While performance has generally been strong this year, profitability has decreased slightly over the past few months,” Erik Swanson, senior vice president of data and analytics at Kaufman Hall, said in a statement. “Bad debt and charity care also continue to rise. In addition, operating margins for health systems are about 1% lower than hospital margins. This points to potential challenges for hospitals and health systems to weather future uncertainty.”