U.S. Hospitals Struggle with Thin Margins Amid Rising Costs

U.S. healthcare organizations are grappling with significant financial challenges as they close the third quarter of 2025. Operating margins remain perilously thin, with data indicating a slight increase to 1.1% in September. This figure highlights the ongoing struggle against rising expenses that continue to outpace revenue growth.

Expense Pressures Intensify Across Hospitals

The primary factor affecting hospital financial performance has been the steep rise in non-labor expenses, particularly in the areas of supplies and pharmaceuticals. According to Strata Decision Technology, drug expenses surged by 12.8% year-over-year (YOY), while supply costs increased by 12.1% during the same period. These substantial hikes resulted in a total non-labor expense growth of 9.3% YOY, significantly higher than the 5.0% increase in total labor costs.

Overall, total hospital expenses rose 7.5% YOY, underscoring the relentless financial pressures that hospitals are facing. Disparities in these expenses were evident across different regions, with hospitals in the Midwest experiencing the most significant YOY increase in drug expenses at 17.3%, followed closely by the West at 15.7%.

“Operating margins have faltered throughout the first three quarters of 2025 as healthcare organizations feel the full weight of rising expenses,” stated Steve Wasson, Chief Data and Intelligence Officer at Strata Decision Technology. He emphasized the need for organizations to manage expenses rigorously to maintain performance amid challenging economic conditions.

Outpatient Care Drives Revenue Growth

While expenses have surged, there has been a noticeable shift in patient demand towards outpatient care, which has contributed to revenue increases. Nationally, outpatient visits rose by 9.8% YOY in September, with the South and Midwest leading the charge. Inpatient admissions also saw a 5.3% YOY increase, while emergency visits experienced a slight decline of 0.5%.

Mirroring these trends, gross operating revenue increased by 11.4% YOY, driven largely by a 12.8% increase in outpatient revenue and a 9.8% rise in inpatient revenue. These figures reflect a significant adaptation within the healthcare sector towards more efficient care models.

In a positive development for physician practices, there are early signs of financial relief. The median investment required to support practice operations decreased YOY for the first time in 2025, with the median investment per physician full-time equivalent (FTE) falling to $311,264 in the third quarter, a decrease of 4.7% from the previous quarter and 1.8% from Q3 2024.

Despite the high median total expense per physician FTE, which stands at around $1.1 million (up 3.9% YOY), there was a slight decrease of 1.3% compared to Q2 2025.

The data presented here draws from over 650 hospitals and 135,000 physicians, covering approximately 25% of all provider spending in U.S. healthcare, utilizing the StrataSphere® database and Comparative Analytics.

As hospitals navigate these financial pressures, the focus remains on balancing expense management while adapting to changing patient care trends. The ongoing adjustments in practice operations and service delivery models will be critical as the healthcare landscape continues to evolve.