Even with some financial gains, hospitals face a ‘tenuous situation’

Through the first half of 2025, hospitals and health systems have generally rebounded financially, even if progress remains modest, analysts say.

Hospitals are seeing some modest financial improvements, but the performance of hospitals vary widely, and analysts project more headwinds with cuts to Medicaid.

Hospitals are seeing solid volume, and some health systems are doing better than in past years, says Erik Swanson, managing director of Kaufman Hall, a healthcare consulting firm.

“It has generally been relatively good as compared with prior years,” Swanson tells Chief Healthcare Executive®. “When we look at overall performance, that being said, is it at levels that one would really deem to be truly sustainable for an appropriate amount of reinvestments? I think the answer there is probably no.”

Hospital financial performance varies widely, Swanson says.

“Hospitals are doing better than they have, but are still very much in a tenuous situation,” Swanson says. “And we still have that dynamic where it is an uneven distribution of performance, such that those who are doing better have tended to still grow in strength, and those who have worsened have fallen.”

Hospitals had a 2.2% median operating margin in May, down from 2.5% in April, according to Kaufman Hall’s most recent National Hospital Flash Report.

• Read more: With Medicaid cuts, pain for hospitals isn’t imminent, but it’s coming

Higher expenses

Hospitals are dealing with higher labor costs, but they are now contending with higher prices in expenses for supplies, including prescription drugs and other goods.

“If there was a story around the expense side, it's really principally one focused around the non-labor expenses, more so than labor,” Swanson says. “So anything that would impact the pricing and utilization of those non- labor goods and supplies will certainly continue to challenge hospitals.”

Hospitals continue to wrestle with higher prices on drugs, and Swanson says tariffs could raise prices on pharmaceuticals and other supplies, which would impact hospitals.

But other factors are driving up increased expenses on drugs, he says.

“As the population ages, the requirement and need for some of the specialty pharmaceuticals are increasing, so that's certainly driving those costs up, and we're seeing some increased utilization in those types of goods as well,” Swanson says.

Some larger hospitals are setting up their own retail pharmacies, which is driving up costs, but also bringing in revenue.

But other hospitals are simply facing higher prices, and subsequently, more headwinds.

Labor challenges

Hospitals are facing higher expenses in paying staff, and health systems are still facing problems recruiting and retaining nurses and other key employees, says Kevin Holloran, senior director and lead of the U.S. nonprofit healthcare sector at Fitch Ratings.

“Labor is still a huge issue,” Holloran tells Chief Healthcare Executive®. “There is still a shortage.”

But hospitals aren’t seeing the staffing shortages they experienced a couple of years ago, Holloran says. They’re faring better at keeping some staff in their organizations.

Some health systems have been willing to sign off on bigger pay bumps in multi-year contracts in order to boost retention and build in some more predictability for expenses, analysts say. Some organizations are moving into “full employment models,” and employing staff directly, Swanson says.

Some health systems are also employing different strategies to meet staffing needs.

“A lot of those organizations have built up internal float pools, and depending on their size, these could be regional flow pools or even multi-state float pools,” Swanson says. “So there's a lot of strategies that they're pursuing there on how to deploy their staff most efficiently, and ensure that their staff relative to the demand is most aligned.”

As some health systems see more success in hiring and keeping staff, hospitals are relying less on staffing agencies to fill vacancies. That’s lowering some labor costs, and rates for contract labor have dropped, although they remain higher than pre-pandemic levels.

Some hospitals are also reducing labor costs for less positive reasons, with lower numbers of staff compared to the volume they’re seeing. “Hospitals are running quite lean from a labor perspective,” Swanson says.

Those hospitals that are spending more to pay and keep employees are finding that the investment is yielding benefits.

“Another interesting point here is some hospitals have pursued a strategy by increasing their wage rates to some degree, and those that have done that have actually outperformed those who have not,” Swanson says.

“They are finding that sweet spot, whereby increasing their wage rates is driving retention of employees, better recruitment and lower dependency on contract labor,” he adds. “So it's a very fine, tight rope to balance there and make sure you get that right.”

Solid volume, but some challenges

Hospitals have generally fared better with the volume of patients this year.

“Volumes are very solid,” Holloran says. “You know, we used to hear, well, the only thing that hasn't come back is our emergency room volume. But even that has come back."

More health systems are seeing upticks in patient volume, but they are modest, Swanson says.

“Volumes have generally grown,” he says. “We are not seeing the rapid growth like we did over the last few years.”

Outpatient volume continues to grow, but the rate of growth has slowed a bit, Swanson says.

More patients are going to urgent care centers and “minute clinics,” Swanson says. Some hospital systems with fewer outpatient options are taking a hit in volumes, while some hospitals have been building or acquiring urgent care centers.

“Those are the spaces in which the disruptors are playing,” Swanson says. “Seeing that shift towards volumes in those settings, that could be good for organizations that have it. For organizations that don't, that's going to be a headwind.”

Hospitals and health systems are bracing for the impact in cuts to Medicaid programs stemming from the tax package President Trump signed last month. Millions of Americans are projected to lose coverage, and hospitals and health systems say reductions in Medicaid could lead to reductions in staff and services, with some hospitals closing their doors.

Much of the impact of Medicaid cuts likely won’t be felt for a couple of years, analysts say.

Swanson says he expects solid performance from hospitals for the remainder of the year. “Beyond this year, that's where my outlook starts to go a little less neutral,” he says.

Holloran expects hospital operating medians to be solid in 2025, and he says he expects good performance in 2026. But beyond that, when some of the Medicaid cuts take effect and more Baby Boomers reach retirement age, that’s when hospitals will face serious problems.

“I think really, you start seeing some pain points in the sector, quite frankly,” Holloran says.

• Read more: Medicaid at 60: Warnings of ‘access at risk’