Hospitals are seeing slim margins in 2026

Hospitals are seeing some improvement in their financial performance in 2026, but those gains are relative.

A new Strata Decision Technology report examining hospitals in the first half of 2026 illustrates the subdued performance for many hospitals. At the start of the year, median hospital operating margins were in negative territory (-0.6% in January and -0.3% in February.

Hospital operating margins have moved into positive territory as the year has progressed, but the numbers are hardly lofty, with median operating margins reaching 0.7% by June. This comes after a solid second half of 2025, when hospital operating margins ranged between 1% and 1.5%.

Alina Henderson, vice president of healthcare solutions for Strata Decision Technology, tells Chief Healthcare Executive® that health systems are clearly facing some headwinds.

“The margin just continues to be compressed everywhere,” Henderson says.

But she says the headwinds vary in different regions, as hospitals and health systems are facing challenges that reflect what’s happening in their regions and markets.

More outpatient care

Hospitals are continuing to treat more patients in outpatient settings, especially those with less serious conditions. Health systems are increasingly focusing inpatient beds on those with the most serious illnesses and complex conditions, a trend Henderson says is only going to continue.

Midwest health systems are seeing higher portions of revenue from outpatient care than other regions, according to the report.

Notably, gynecology inpatient volumes fell by 8% in the first half of 2026, reflecting the shift of more hysterectomy procedures to outpatient facilities, due to advances in less invasive techniques.

“More and more what we're seeing is that inpatient care is being tied to the higher-acuity piece, and that's what we see in these service lines that have high outpatient volumes,” Henderson says.

At the same time, regions with significant population growth, such as Florida, are also adding or planning on more inpatient beds, particularly with an aging population and an influx of seniors likely to need hospital care.

“The conversation that I have with CFOs in the Midwest and in the Southwest is very different from the conversations I have with CFOs in Florida. Florida's margin management programs are largely centered around expanding bed capacity,” she says.

Rising labor and supply costs

Health systems are continuing to see rising costs in labor and supply expenses. Hospitals in the West are seeing significantly higher labor and supply costs, with labor and supply expenses about 50% higher than the rest of the country. Health systems in the Midwest and Northeast are seeing higher drug costs than other regions.

In some cases, supply costs are outpacing increases in labor costs. Part of that stems from the fact that hospitals have raised salaries after the COVID-19 pandemic, with health systems opting to pay more to staff in hopes of relying less on staffing agencies. So labor costs are increasing, but hospitals are building in more predictability in staffing costs.

“What we're seeing now is less variability, less immediate growth in that space,” Henderson says of labor costs.

Health systems are also planning for higher volumes of patients without insurance, with Medicaid cuts and new eligibility requirements that are expected to lead to millions losing coverage. Hospitals are investing more in urgent care and other outpatient clinics, as they expect more patients without insurance turning to hospital emergency rooms for care.

“They're recognizing that if we can keep patients healthier, we can keep them out of the hospital,” Henderson says. “We can get things done. It doesn't require them to come into a place where there are more complex risks and more complex settings.”

Bigger hospitals, higher expenses

Bigger hospitals and health systems also are seeing higher labor, supply and drug costs, according to Strata’s report. Costs consistently rise based on the number of beds in hospitals.

Importantly, those higher costs go beyond the fact that bigger hospitals are caring for more patients, the report states. Even adjusted for the size of the organization, the costs are higher.

Henderson says the higher costs could reflect patients with more serious illness, and larger hospitals often get patients transferred from smaller facilities. Bigger hospitals also offer more services, academic research and different staffing levels.

Still, Henderson says the consistent higher costs at bigger hospitals is a bit unexpected.

“I really was surprised that the larger systems are still continuing to manage at such a high expense rate, and I think I was expecting to see more efficiencies at scale in those numbers,” Henderson says.

“Maybe these large systems are also struggling on how to manage costs when they have such a big enterprise to manage,” she adds.

Understanding service lines

Now more than ever, Henderson says hospitals must have a keen understanding of which services are growing in different communities and regions, and which services are less profitable.

“I think it's really understanding your P&L (profits and loss) at a service line standpoint, really understanding not just for that entity, that facility, what does our accounting general ledger structure tell us about our finances? When we really look at costing and the utilization of those resources, how are we delivering care? That's where the answers are going to be about what levers to pull,” Henderson says.

“The general ledger is going to give you those lagging indicators of what the numbers are, or what they're telling you,” she adds. “But it's the utilization data, the review of the service line analytics that are going to give you insights on where you can actually pivot and move.”