A hospital corridor
Operating margins for hospitals and health systems remain thin despite continued revenue growth, according to a new analysis from Strata Decision Technology. The findings, based on monthly data from more than 135,000 physicians and over 1,850 hospitals, reveal that margin performance has remained largely stagnant throughout 2025.
In August, health system margins rose slightly to 1%, up from 0.9% in July. Hospital margins increased by 0.2 percentage points year over year but declined 0.5 percentage points compared to the previous month — leaving overall performance essentially flat, Strata reported.
This stagnant performance reflects sustained cost pressures across the healthcare sector. Non-labor expenses rose 5.7% year over year in August, outpacing labor costs, which grew by 4.6%. Rising supply and purchased service expenses were the primary drivers. Although drug costs increased only 1.7% year over year, they remain a consistent cost burden. On a month-over-month basis, total expenses declined slightly, with non-labor expenses falling 0.9% and labor expenses holding steady.
Regional differences were notable. Hospitals in the Northeast saw the most improvement, with margins up 3.7 percentage points year over year. The South and West posted more modest gains of 0.5 and 0.3 percentage points, respectively. In contrast, Midwestern hospitals experienced a 0.8-point decline.
Hospital size also influenced performance. Large hospitals with more than 500 beds saw median margins fall by 1.1 percentage points, while mid-sized hospitals with 200–299 beds also reported declines. Smaller hospitals with between 26 and 99 beds, however, saw a 1.4-point increase year over year.
August marked the 28th consecutive month of gross revenue growth across operating, inpatient, and outpatient services. Outpatient revenue continues to outpace inpatient, with hospitals in the West reporting an 8% increase in outpatient income.
Patient volume trends were mixed. Compared to the previous year, inpatient admissions rose 2.4%, and outpatient visits increased 1.1%. However, emergency department visits fell 2.2%, and observation stays declined 0.6%. Month-over-month, volumes declined across the board, with outpatient visits dropping 4.7%, and inpatient admissions falling 1.2%.
Most service lines saw year-over-year and monthly volume increases. Ophthalmology led with 12.8% growth year over year, followed by genetics at 11.2%. Infectious disease was one of the few service lines to experience a decline, down 11.1%.
Among 15 common procedures, demand rose year over year for 11 and declined for four. Outpatient upper GI endoscopy saw the highest growth at 19.2%, followed by outpatient PET scans at 17.7%. The sharpest decline came from inpatient primary knee replacements, down 14.8%, reflecting the ongoing shift toward outpatient care.
In physician practices, expenses remain elevated. The median annualized expense per physician full-time equivalent (FTE) hit $1.1 million in August—a 5.8% increase over 2024 and a 15.4% jump from 2023. Revenues also rose, with the median net patient service revenue (NPSR) per physician FTE reaching $776,129, up 4% from 2024 and 14.7% from 2023. Gains in physician productivity helped offset some of the rising costs, according to Strata.
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