What's Happening?
U.S. hospitals have reported their strongest financial performance of 2025 in November, with operating margins reaching 1.5%, marking the fourth consecutive month of improvement. This increase is attributed to a 0.3% rise from October's 1.2% margin. Despite
these gains, hospitals continue to face significant financial pressures due to rising expenses, particularly a 9.3% year-over-year increase in drug costs. The financial strain is also evident in physician practices, which require substantial subsidies to remain operational. The median total expense per physician full-time equivalent has increased by 8.2% from 2024, reaching approximately $1.1 million annually. This situation has forced health systems to heavily subsidize their ambulatory networks. Additionally, there has been a shift in patient behavior, with a 2.0% increase in inpatient admissions driving a 6.4% rise in inpatient revenue, while emergency and outpatient visits have declined.
Why It's Important?
The financial improvement in U.S. hospitals is significant as it suggests a potential stabilization in an industry that has struggled with razor-thin margins post-pandemic. However, the rising costs, especially in pharmaceuticals, pose a challenge to sustaining these gains. The increase in drug costs and the financial burden on physician practices highlight the need for effective resource management and cost control. The shift in patient behavior towards higher-acuity inpatient services could impact hospital revenue streams and operational strategies. As hospitals prepare for 2026, aligning resources with demand and managing non-labor expenses, particularly drug costs, will be crucial for maintaining financial health.
What's Next?
As hospitals plan for 2026, the focus will likely shift from mere survival to strategic alignment of resources. With gross operating revenue up by 5.3%, hospitals will need to reassess their cost structures and focus on controlling non-labor expenses. The ability to manage rising drug costs and the investment required to support physician practices will be critical. Health systems may need to explore new strategies to align resources with areas of highest demand while ensuring financial sustainability. The ongoing challenge will be to balance cost control with the need to provide high-quality care.
