Current Operating Margin Performance
Hospital operating margins continued their downward trajectory through July 2025, despite maintaining robust patient volumes across the healthcare sector. According to Kaufman Hall’s comprehensive monthly performance report, the healthcare industry faces a complex challenge of balancing strong demand with escalating operational costs.
The firm’s operating margin index revealed a median 1.7% margin across nationwide hospitals during the seven-month period when including health system allocations for shared services costs. When excluding these allocations, the margin improved to 5.3%. While these figures represent the lowest point for 2025, they still surpass hospital performance during the corresponding period in 2024.
July-Specific Performance Metrics
Analyzing July in isolation, the median operating margin reached 2.6% with health system allocations and 6.2% without such considerations. This marks a notable decline from June’s figures of 3.4% and 7%, respectively, indicating accelerating margin pressure within the healthcare sector.
Erik Swanson, managing director and data analytics group leader with Kaufman Hall, emphasized the concerning trend: “While performance has generally been strong this year, hospital profitability has decreased slightly over the past few months.”
Revenue Trends and Patient Volume Analysis
Hospital revenue patterns reveal a mixed performance landscape. Daily net operating revenues remained flat from June to July but demonstrated impressive 8% growth year-over-year, suggesting underlying strength in healthcare demand.
Inpatient vs Outpatient Revenue Dynamics
Daily inpatient revenue increased by 2% month-over-month and 7% year-over-year, while outpatient revenue showed even stronger growth at 3% monthly and 12% annually. This trend reflects the ongoing shift toward outpatient care delivery models and improved healthcare access.
Net patient service revenue per adjusted discharge fell 2% month-to-month but remained 3% higher compared to July 2024. This metric, combined with a 1% monthly and 3% year-over-year reduction in average length of stay, suggests somewhat reduced patient acuity levels across hospital systems.
Patient Volume Indicators
Daily discharges increased 1% month-over-month and 4% year-over-year, with adjusted discharges rising 2% and 6% respectively. Emergency department visits grew 1% both monthly and annually, while daily operating room minutes expanded 2% monthly and 3% year-over-year, demonstrating consistent healthcare utilization growth.
Expense Management Challenges
Hospital expenses present the most significant challenge to maintaining healthy margins. Total daily expenses remained relatively flat from June to July but surged 7% compared to the previous year, creating substantial pressure on healthcare profitability.
Labor Cost Analysis
Labor expenses maintained stability from the prior month but increased 5% year-over-year, reflecting ongoing workforce challenges and competitive compensation requirements in the healthcare industry.
Non-Labor Expense Breakdown
Non-labor expenses decreased 1% from June, revealing a complex cost structure. While purchased services improved by 5%, both supply expenses and drug costs increased by 3% monthly. Year-over-year comparisons show more dramatic increases: non-labor expenses up 9%, purchased services 7%, supply expenses 12%, and drug expenses 12%.
Bad Debt and Charity Care Impact
Bad debt and charity care continue presenting persistent challenges for hospital financial performance. While daily bad debt and charity care dipped 1% from June to July, the metric remains 10% higher year-to-date in 2025 compared to 2024, creating sustained financial burden.
This trend reflects broader healthcare affordability challenges and changing patient demographics, requiring hospitals to balance mission-driven care with financial sustainability.
Hospital vs Health System Performance
A concerning disparity exists between individual hospital margins and broader health system performance. Operating margins for health systems run approximately one percent lower than individual hospital margins, pointing to potential structural challenges.
This gap suggests that health systems face additional overhead costs and complexity that individual hospitals avoid, creating strategic questions about optimal organizational structures in healthcare delivery.
Future Outlook and Strategic Responses
The combination of solid-but-declining margins and uncertain future outlook has prompted many hospitals to implement proactive resilience strategies. Expense increases and concerns over potential revenue cuts tied to legislative changes, including the summer’s One Big Beautiful Bill Act, have directly influenced several hospitals and health systems to launch organizational restructuring and workforce reduction initiatives.
Strategic Adaptations
Healthcare organizations are increasingly focusing on:
- Long-term financial resilience building
- Operational efficiency improvements
- Technology adoption for cost reduction
- Revenue diversification strategies
- Strategic partnerships and consolidation
Industry Implications and Recommendations
The Kaufman Hall report, based on operating data from 1,300 nationwide hospitals collected through Strata Decision Technology, provides crucial insights for healthcare leadership. The advisory firm’s findings suggest that successful hospitals must balance multiple competing priorities while maintaining quality care standards.
Healthcare executives should prioritize expense management, particularly in supply chain and pharmaceutical costs, while exploring innovative revenue enhancement opportunities. The persistent growth in bad debt and charity care requires strategic attention to patient financial services and community health initiatives.
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