What healthcare professionals need to know about health system operating margins

What do healthcare professionals need to know about health system operating margins? In this article, originally published by our sister publication, Healthcare Innovation, Theresa Houck provides an overview of what hospitals and health systems are currently facing.

Read a snippet of Healthcare Innovation’s article below.

Closer look: Health system operating margin trends and what’s behind them

Hospitals and health systems are the backbone of U.S. healthcare. While their finances have stabilized since COVID-19, they’re still fragile. The industry has entered a period defined by razor-thin margins, ongoing cost pressures, widening provider disparities and increased administrative burdens.

During 2024 and 2025, patient volumes returned, elective procedures rebounded and revenue growth resumed. But beneath that improvement is a more complicated reality: operating margins — a measure of how well an organization manages revenue relative to operating expenses — are at historically low levels, often hovering around 1%.

Let’s take a closer look at what’s happening and why.

Key operating margin trends, 2025-2026

Hospital and health system operating margins are stabilizing in 2025-2026, settling into a “new normal” defined by higher patient volumes and mounting expense pressures, according to Kaufman Hall’s “National Hospital Flash Report: February 2026.” Margins remain narrow due to high labor, drug and supply costs, with many smaller or rural hospitals continuing to struggle.

Some of the report’s key findings include:

• Cost pressures are creating a shaky financial outlook. Hospital expenses are elevated in early 2026 compared to 2025, while revenues are pressured by an eroding payer mix and remain below sustainable levels.
• Softer, uneven volumes reflect shifting care patterns. Patient days have softened in early 2026, while the average length of stay remains steady, reflecting both demographic shifts and changes in where care is delivered.
• Outpatient revenue is rising in early 2026. Outpatient care offers significant benefits to both patients and health systems, though hospitals must manage lower reimbursement per case and a greater concentration of high-acuity patients.

In addition, the latest annual American Hospital Association’s (AHA) Costs of Caring report confirms hospitals and health systems continue to face increases in the costs of labor, supplies, medicine and infrastructure needed to adequately provide care and services. Highlights from the report include:

• Labor spending remains the top expense. About 60% of total expenses went to paying doctors, nurses, specialists and other professionals. In 2025, labor costs rose 5.6% from the previous year.
• Hospital costs to care for patients grew twice as fast as hospital prices. In 2025, hospital expenses grew 7.5%, more than twice the rate of growth in hospital prices. Hospital expenses for supplies increased 9.9% and drugs increased 13.6%.
• Hospitals are caring for more patients who are sicker. From 2019 to 2024, about 36% of hospital expense growth came from higher patient volumes, and 19% of the increase came from treating sicker, more complex patients requiring increased staff time, monitoring and specialized care.
• Hospitals spend billions to address administrative burden from insurer claims denials and prior authorization. Hospitals in 2025 spent $43 billion trying to collect payments from insurers for care already delivered. Excessive prior authorization requirements, claims denials and payment delays; repeated documentation requests; and evolving billing and coverage rules have contributed to these mounting expenses.
• Most hospital costs are tied to service lines where reimbursement falls short of the cost of delivering care. About 56% of hospital costs are tied to service lines where reimbursement is less than the cost of delivering care, including behavioral health, obstetrics, infectious disease, and burns and wounds. 

Against this backdrop, a clear divide is emerging. Large, well-capitalized health systems with scale, strong payer contracts and advanced operational capabilities are maintaining healthy margins. Meanwhile, smaller, rural and safety-net hospitals are struggling to stay afloat.

This widening gap is one of the most important trends in the sector. It suggests financial performance is becoming less about cyclical recovery and more about structural positioning. Scale, efficiency and payer leverage are increasingly determining which organizations can thrive and which are at risk.

Visit Healthcare Innovation for the full article.