What You Should Know:
– A new Strata Decision Technology report on the financial performance of U.S. hospitals and physician groups, drawn from monthly data from over 1,600 hospitals and 135,000 physicians, reveals that health system operating margins dipped to 0.9% in July 2025. While health systems continue to benefit from steady revenue growth, they face persistent pressures from rising expenses.
– The report finds median year-to-date (YTD) health system operating margin was 0.9% in July, down from 1.2% in June, though it remained consistent with levels since January. For U.S. hospitals, the median change in operating margin rose 1.4 percentage points year-over-year (YOY) but slipped 0.2 percentage points month-over-month.
Non-Labor Costs Drive Expense Growth
The nation’s hospitals continue to experience significant expense growth compared to 2024, with non-labor expenses rising faster than labor expenses. Total non-labor expenses increased by 8.7% from July 2024 to July 2025, while labor expenses rose by 5.3% over the same period. Overall, total expenses grew by 6.8% YOY.
Supply and drug costs drove the largest increases, climbing by 10.6% and 9.5% respectively, compared to July 2024. This trend is expected to continue as the industry feels the impacts of federal tariffs. Non-labor expenses grew YOY across all regions, with hospitals in the South reporting the largest increase at 9.5%.
Outpatient Revenue Leads Growth
Hospitals reported continued strength in gross revenues, marking the 27th consecutive month of YOY growth. Outpatient revenue posted the largest YOY gain, rising by 12.0% from July 2024 to July 2025. Inpatient revenue increased by 7.2%, while gross operating revenue grew by 10.6% over the same period.
Patient demand was mixed but trended upward overall. Outpatient visits posted the strongest gains, rising by 6.6% compared to July 2024, as patient care continues to shift to more convenient and lower-cost outpatient settings. For example, outpatient upper gastrointestinal endoscopy saw a 21.2% YOY increase, and routine outpatient diagnostic echocardiograms were up by 20.9%.
Physician Practices Face Mounting Expenses
Physician practices also faced mounting expenses, with per-physician expenses rising for practices across all regions. The median per-physician expense reached a national median of $1.1 million annualized in July, up 6.9% from 2024 and 16.6% compared to 2023. Meanwhile, revenues rose as well, with the median net patient service revenue (NPSR) per physician FTE increasing by 4.7% over 2024. Physician productivity also improved, while support staffing levels declined.
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