A new American Hospital Association report shows hospital expenses rising far faster than reimbursement, forcing CFOs to rethink cost structures, revenue cycle strategy, and long-term capital allocation.
A new report from the American Hospital Association (AHA) unveils a sobering reality for CFOs: the cost of delivering care is rising at a pace that far exceeds reimbursement growth, creating sustained margin compression and operational strain.
According to the AHA’s latest analysis, hospital expenses increased 7.5% in 2025, which is more than double the rate of hospital price growth. This gap reflects a structural imbalance that CFOs can no longer afford to treat as cyclical.
While the drivers are familiar, they are also intensifying rapidly. Labor remains the single largest expense category, accounting for roughly 60% of hospital spending, while workforce costs alone rose 5.6% year over year. Simultaneously, pharmaceutical expenses climbed almost 14% and supply costs nearly 10%, which were fueled by inflation, supply chain instability, and the growing complexity of patient care delivery.
Yet cost inflation tells only part of the story. The report also highlights a meaningful shift in patient acuity and volume. Between 2019 and 2024, 36% of hospital cost growth was tied to treating more patients, while 19% stemmed from caring for sicker, more complex populations requiring additional staffing, monitoring, and specialized interventions. The pandemic also played a large role here.
Administrative Burden and Revenue Friction
For CFOs, revenue cycle challenges are emerging as a critical—and costly—pressure point. Hospitals spent an estimated $43 billion in 2025 attempting to collect payments already owed, including nearly $18 billion dedicated to overturning denied claims.
This administrative friction not only delays cash flow but also increases bad debt and operational overhead. Prior authorization requirements and claims denials, particularly within Medicare Advantage, are compounding inefficiencies, forcing health systems to invest heavily in back-end revenue cycle functions rather than patient-facing care.
Compounding the issue is chronic underpayment from public payers. Prior AHA analyses show Medicare and Medicaid reimbursement often falls short of the cost of care, creating structural losses that hospitals must offset through commercial payers or cost containment efforts.
The CFO Playbook
For CFOs, the challenge goes beyond navigating volatility; it involves fundamentally redesigning financial and operational models to thrive in a higher-cost, higher-complexity future.
Reducing denials, automating prior authorization workflows, and deploying AI-driven coding and billing tools is one way to unlock meaningful margin improvement without cutting services. Rebalancing labor models will also come into play, including care team optimization and expanded use of technology, which can help mitigate labor cost growth while preserving quality.
CFOs should also prioritize high-acuity, high-margin services. Service line rationalization, informed by contribution margin analytics, is increasingly essential as patient acuity rises. A stronger payer strategy will also be imperative. CFOs should pursue more aggressive contract negotiations and explore value-based arrangements that better align reimbursement with patient complexity.
Additionally, CFOs will have to work hard to preserve capital flexibility. With disciplined capital allocation that focuses on projects with clear ROI and operational impact, CFOs can preserve access as financing tightens.
A “Perfect Storm” for Hospital Margins
Taken together, these trends create what the AHA has described as a “perfect storm” of financial pressures: persistent cost growth, inadequate reimbursement, and shifting care patterns.
For many organizations, particularly rural and safety-net hospitals, these pressures are existential. Thin or negative operating margins limit access to capital, constrain strategic investments, and increase the risk of service line reductions or closures.
At the same time, hospitals must continue to invest in infrastructure, digital transformation, and workforce stabilization, even as borrowing costs remain elevated and liquidity is constrained.
Marie DeFreitas is the CFO editor for HealthLeaders.
KEY TAKEAWAYS
Hospital expenses are rising more than twice as fast as prices, compressing margins for health systems.
Workforce expenses remain dominant, but pharmaceutical and supply costs are accelerating rapidly.
The billions spent on denied claims and revenue cycle collections signal the urgent need for transformation.