Strain on Hospital Finances as Costs Surge Catch Up
Hospitals Face Slide in Profitability Amid Rising Costs
A new report by Kaufman Hall has revealed a decline in hospital profitability in July, with total expenses, including labor, non-labor, supply, drug, and service purchases, all increasing year over year.
According to the National Hospital Flash Report, non-labor costs, specifically supplies and drugs, rose significantly, with supply expenses increasing by 12% and drug expenses increasing by the same margin on a per calendar day basis compared to the same period last year. This trend is adding strain to hospitals' bottom lines, as increasing bad debt and charity care are also putting pressure on profitability.
Bad debt and charity care remained 9% higher than July 2024, despite falling by 1% on a per calendar day basis compared to June. The fragile nature of the financial recovery hospitals have been working toward is highlighted by these rising expenses and increasing bad debt and charity care.
Despite the decline in profitability, net operating revenue per calendar day continued to grow in July, up 8% year over year. Adjusted discharges per calendar day improved by 2% from June and by 6% over the same period last year.
Inpatient and outpatient revenue per calendar day rose 2% and 3% month over month, and 7% and 12% year over year, respectively. However, revenue growth was outpaced by the increase in non-labor costs, putting further pressure on hospital profitability.
The average monthly operating margin for hospitals in July was 2.6%, down from 3.4% recorded in June. This marks the lowest level in 2025, with the median operating margin for hospitals in the calendar year-to-date slipping to 1.7%. Operating margins for health systems are about 1% lower than hospital margins, indicating potential challenges for hospitals and health systems to weather future uncertainty.
Organizations under particular pressure that make their future uncertain, as presented in Kaufman Hall's analysis, typically include healthcare providers facing financial and operational challenges due to shifting market dynamics, regulatory changes, and economic pressures. These factors place significant strain on their sustainability and strategic planning.
The average monthly operating margin includes all allocations for the cost of shared services received from health systems. The average length of stay declined by 1% month over month and by 3% year over year, suggesting a trend towards shorter hospital stays.
In conclusion, while hospitals continue to see revenue growth, the increase in non-labor costs, particularly supplies and drugs, is outpacing this growth, leading to a slide in hospital profitability. The fragile state of the financial recovery, highlighted by the rising expenses and increasing bad debt and charity care, underscores the challenges hospitals face in maintaining profitability and sustainability in the current economic climate.
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