Financial Performance Gap Widens Between Top and Bottom Hospitals, Report Finds
Hospital operating margins remained steady in September; however, a growing disparity in financial performance between top-performing and struggling hospitals is becoming increasingly apparent, according to the latest report from Kaufman Hall.
Stable Overall Margins Mask Uneven Performance
Kaufman Hall’s recent Hospital Flash Report revealed that the year-to-date adjusted operating margin across hospitals was 2.9%, marking a slight improvement over the previous month. While this suggests general stability within the sector, the data uncovers a significant divergence among hospitals: those in the top financial quartile reported robust operating margins averaging 14.7%, whereas hospitals in the bottom quartile posted negative margins of -1.8%.
“The gap between strong performers versus struggling hospitals continues to widen,” said Erik Swanson, managing director and leader of data and analytics at Kaufman Hall. “Patient volumes are increasing while margins hold steady. Hospitals need to think about how to manage increased volumes despite flat margins.”
Increasing Demand and Operational Challenges
The report emphasizes that demand for emergency department services and inpatient care is expected to rise. Success in managing patient throughput efficiently will become increasingly critical for hospitals striving to maintain or improve financial health amidst these pressures.
Trends in Medical Group Investments and Labor Costs
For the first time since the COVID-19 pandemic, median investment or subsidy per provider within medical groups has plateaued. In Q3 2025, median subsidy per provider was $237,911, a marginal decline from $239,338 in Q2 2025. This measure, representing net patient service revenue minus total expenses divided by provider full-time equivalents (FTEs), had previously shown a rising trend over recent years.
Notably, the subsidies varied widely, from $141,371 at the lower end to $325,634 among the top performers. Labor remains a substantial cost driver, comprising 84.2% of total expenses. “While the median subsidy last quarter held relatively flat, a closer look at the data shows that this trend is likely driven by higher performing practices that are better able to manage costs and grow revenue,” stated Matthew Bates, managing director and physician enterprise service line leader at Kaufman Hall. “The differentiation between practice performance is significant, and demonstrates that it is possible to strategically contain labor costs.”
The report further highlights a continued shift in the healthcare workforce composition, with advanced practice providers (APPs) increasingly comprising a larger portion across both primary care and specialty providers.
Rising Drug and Supply Costs Apply Additional Pressure
Hospitals continue to face financial strain from rising non-labor expenses, particularly drug and supply costs. Kaufman Hall’s data shows that drug expenses increased substantially in September, driven in part by the adoption of more advanced pharmaceuticals. Compared to 2022, supply costs are up by 26%, while drug expenses have surged 31%.
Broader Industry Trends
The September report follows a prior flash report released that same month, which indicated that hospital financial performance has softened in recent months. Although patient volumes and revenues are on the rise, hospitals simultaneously face elevated levels of bad debt and charity care. Expense growth, especially among non-labor categories, is outpacing revenue growth, creating ongoing financial challenges.
Conclusion
The widening financial performance gap between top-tier and struggling hospitals underscores the need for targeted strategies focusing on cost management and operational efficiency. As demand for hospital services grows, the ability to optimize patient throughput and control labor and non-labor expenses will be paramount for sustaining hospital financial viability.
Jeff Lagasse
Editor, Healthcare Finance News
[email protected]
Healthcare Finance News is a publication of HIMSS Media, providing healthcare decision-makers with insights into the latest financial and payer developments shaping the business of healthcare.