Hospitals across the U.S. are seeing both higher revenues and higher expenses, and operating margins have begun to contract slightly, according to March data published by Strata.
After holding steady at 1% in both January and February, operating margins for U.S. health systems narrowed slightly to 0.9% in March. Non-labor expenses rose faster than other expenses, due in part to double-digit increases in both drug and supply expenses versus the same month last year.
Nationally, patient demand was up, with outpatient visits outpacing inpatient admissions. This compares with decreases in patient demand in February.
Gross outpatient revenues led overall hospital revenue increases, jumping 10% year-over-year as hospitals and health systems continued to see care shift from inpatient to outpatient settings.
Per-physician expenses rose to $1.2 million in the first quarter, representing an increase of 3% from Q4 2024 and 10.3% from Q1 2024, data showed.
WHAT'S THE IMPACT
While health systems saw a slight decrease in operating margins at the end of the first quarter in March, operating margin trends for U.S. hospitals were up for the month. The median change in hospital operating margin rose 2.1 percentage points from March 2024 to March 2025, marking a fourth consecutive month of increases.
Margin changes varied by geography. Hospitals in the Northeast saw the biggest increase, with median change in operating margin up 3.1% year-over-year, while hospitals in the Midwest had the smallest increase at 1.5% YOY.
Hospitals across the country continued to see expenses rise across most measures, with non-labor expenses seeing the biggest year-over-year increases. Total non-labor expense jumped 9.1% from March 2024 to March 2025. Total labor expense was up 5.6%, and total expense increased 7.4% over the same period.
Drug expense had the biggest increase at 11.5% year-over-year, followed by supply expense at 10.8% and purchased service expense at 9.5%.
Patient demand was up overall. Outpatient visits had the biggest YOY increase at 5.6%, followed by inpatient admissions at 4.6%. Observation visits increased 1.9% and emergency visits were up 1.8% from March 2024 to March 2025.
THE LARGER TREND
A recent Fitch analysis looking at nonprofit hospitals and health systems specifically with early fiscal-year ends (FYEs) performed better financially as compared with the prior year, with the median operating margin for providers with early FYEs improving to 1.2% in 2024 – up from -0.5% in '23.
A decline in personnel costs, particularly a continued drop in contract labor use, contributed to the improvement. Personnel costs as a percent of total operating revenues fell to 54.5% in 2024 from 55.4% in 2023 when comparing midyear FYEs.
There are still labor challenges that are pushing base salary and wage expenses higher, leading to a significant median YOY expense increase of 6.9%. According to Fitch, this would have been even higher without the sector's ongoing efforts to recruit and retain talent, streamline operations and optimize supply chains.
Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.