What You Should Know:
– U.S. hospitals nationwide experienced increases across most metrics—including revenues, patient volumes, and expenses—to close the first quarter of 2025. However, operating margins for health systems dipped below the 1% threshold in March for the first time in 15 months, according to new data released by Strata Decision Technology.
– While individual hospitals continued to show margin improvement, escalating non-labor costs put renewed pressure on overall health system financial performance.
Health System Margins Dip Below 1% Despite Hospital Gains
The median year-to-date (YTD) operating margin for U.S. health systems narrowed slightly to 0.9% in March, Strata’s data revealed. This represents a dip from the 1% margin maintained in both January and February, and a more significant decline from the 2.1% reported in December 2024. The last instance of the median YTD system margin falling below 1% was in December 2023, when it also stood at 0.9%.
In contrast, individual hospitals maintained positive momentum. The median change in hospital operating margin rose 2.1 percentage points year-over-year (YOY) when comparing March 2025 to March 2024. This marked the fourth consecutive month of YOY margin increases for individual hospitals. Month-over-month, the median hospital margin change saw a modest increase of 0.4 percentage points.
Rising Non-Labor Expenses Drive Cost Concerns
A key factor contributing to the pressure on health system margins was the continued rise in expenses, particularly non-labor costs. Total non-labor expense surged 9.1% YOY in March, significantly outpacing the 5.6% YOY increase in total labor expense. Overall total expenses rose 7.4% YOY. The non-labor increase was driven by double-digit YOY jumps in drugs expense (+11.5%) and supply expense (+10.8%), along with a 9.5% YOY increase in purchased service expense. These cost pressures persisted even after adjusting for patient volumes, with non-labor expense per adjusted discharge rising 5.7% YOY.
“We’ve seen some encouraging growth in hospital operating margins throughout the first quarter, but health system operating margins shifted in the wrong direction in March,” said Steve Wasson, chief data and intelligence officer at Strata Decision Technology. “The continued growth in non-labor expenses is particularly concerning heading into the second quarter, as many healthcare leaders brace for the impacts of tariffs, which are expected to drive up the costs of drugs and supplies even more.”
Patient Volumes Rebound While Revenues Continue Strong Growth
Following a dip in February (where YOY service line comparisons were affected by 2024 being a leap year), patient demand saw a resurgence across most metrics in March 2025 compared to the prior year. Outpatient visits led the growth, increasing 5.6% YOY, while inpatient admissions rose 4.6% YOY. Observation visits (+1.9% YOY) and emergency department visits (+1.8% YOY) also saw increases.
This rise in patient volumes helped sustain strong revenue growth. March marked the 23rd consecutive month of YOY increases across the three key gross revenue metrics tracked by Strata. Gross outpatient revenue saw the largest increase at 10.0% YOY, followed by gross operating revenue (+9.7% YOY) and inpatient revenue (+9.6% YOY). Revenues also grew on a volume-adjusted basis, with net patient service revenue (NPSR) per adjusted discharge up 4.9% YOY.
