Report: Health system margins shrink as hospital revenue grows

Editor's Note

Operating margins for health systems declined across the US in early 2025 even as hospitals reported steady revenue growth, according to a February 27 report from Strata Decision Technology.

The median operating margin for U.S. health systems dropped to 1.0% in January, down from 2.1% in December, marking the lowest margin in over a year. This decline follows a period of relative stabilization in 2024 after pandemic-driven volatility, the report states. Despite this downturn for health systems, hospitals saw a slight increase in operating margins, with a 1.9 percentage point rise from January 2024 to January 2025 and a smaller 0.3 percentage point month-over-month increase.

“Health systems across the country had a shaky start to 2025,” said Steve Wasson, Chief Data & Intelligence Officer at Strata. “While health system operating margins largely stabilized in 2024 after the turbulence of the pandemic, they remained uncomfortably thin. We saw encouraging trends with gross revenue growth outpacing expense increases last year. These and other positive performance trends will need to continue in 2025 in order for health systems to build a stronger foundation for operating margin growth.”

Gross hospital revenues continued their upward trend, with January marking the 21st consecutive month of year-over-year growth. Outpatient revenue saw the largest gains, rising 9.2% from the previous year, compared to a 6.7% increase for inpatient revenue and an 8.3% overall rise in gross operating revenue. However, after adjusting for patient discharges, net patient service revenue per adjusted discharge declined slightly by 0.4% year-over-year and remained flat month over month.

While both hospitals and health systems saw revenue growth outpace expenses in 2024, operating costs remained a persistent concern, the report reveals. Total hospital expenses increased 5.4% from 2023 to 2024, while health system expenses rose 6.4%. Labor costs continued to climb, with hospital labor expenses rising 4.2% in 2024 and 4.0% year-over-year in January 2025. Non-labor expenses, including supply and drug costs, grew even faster—supply expenses surged 6.8% in January, while drug costs increased 6.2%.

Contract labor expenses dropped 37.5% for hospitals and 22.7% for health systems from 2023 to 2024. According to the report, this suggests organizations have successfully reduced reliance on contract workers, which had surged during the pandemic.