Hospitals likely to face more financial pressures in 2026

Hospitals and health systems should brace for more financial difficulties in the coming year.

Hospitals are seeing solid volumes, and they’ve made some progress in controlling labor costs, says Erik Swanson, managing director of Kaufman Hall, a healthcare consulting firm.

But hospitals should continue to face challenges with higher prices for supplies and a tight labor market, Swanson tells Chief Healthcare Executive®. So even though hospitals generally have solid if unspectacular operating margins, they may find it difficult to maintain modest performance.

“I think there's going to be more margin pressure,” Swanson says.

While he says there’s no data to indicate that the bottom is going to fall out, he says, “I think there are quite a few headwinds upcoming.”

The median year-to-date operating margin for hospitals was 2.7% in October, according to Kaufman Hall’s National Hospital Flash Report.

Rising supply costs

Some of those cost pressures come from rising prices for specialty drugs, he says.

“That can create quite a bit of a burden on systems,” he says.

Supply cost increases, largely due to specialty drugs, have been outpacing the rate of increases in labor costs.

“This is not only due to price increases, it is also due to utilization increases,” Swanson says. “So as the population ages, as it is in most areas, the need for things like specialty pharmaceuticals increase. You're dealing with more chronic conditions on a long-term basis.”

With the population aging, patients are likely to have longer hospital stays, and they are likely to be sicker, Swanson says.

And he expects to see that supply costs rise faster than labor costs in the coming year.

“The price of these goods are increasing, and then the utilization of them is also going to be increasing,” he says “So that's going to lead to some real pressures on the non-labor side, more so than on the labor side.”

Bracing for Medicaid changes

Hospitals are bracing for a spike in the number of patients that won’t be covered by Medicaid, due to the tax package dubbed H.R. 1. With changes in eligibility and changes in the way states can finance Medicaid programs, health systems expect to see more patients without the ability to pay.

The bigger changes in Medicaid eligibility, including work requirements for able-bodied recipients, won’t take place until 2027. But hospitals are making plans to deal with the looming Medicaid cuts and an uptick in uninsured patients.

“Many systems are undertaking analyzes of pressure, testing their own finances and operations, evaluating current levels of charity care and bad debt, including these shifting payer mixes in their forecasts,” Swanson says.

Hospitals have seen more charity care and bad debt, as states have revised eligibility for Medicaid over the past couple of years. They may be providing more uncompensated care in the not-too-distant future.

Gaps in performance

There is also a wide gap in financial performance between hospitals with strong finances and those that are seeing serious difficulties.

“Variation is quite large between the top and bottom performers,” Swanson says. “And some increased pressure, particularly on those lower-performing organizations, which also tend to be small and they tend to be rural, could lead to some real challenges there that the larger organization, those that serve more affluent populations, may not necessarily encounter to the same degree.”

Swanson says the gap isn’t widening between the financially strong and weak hospitals, but he says, “It is the largest it's ever been.”

“It is a very large gap,” he says. “It has not grown, though, over the last couple of months. But it is much larger than it was from a pre-pandemic period. So that is still quite, quite worrisome.”

Other analysts have noted clear divisions in the financial performance of hospitals. Mark Pascaris, a senior director at Fitch Ratings, told Chief Healthcare Executive® in an August interview that the nonprofit hospital sector continues to experience “trifurcation,” with hospitals generally landing in one of three areas. Most are breaking even and doing better, a small group is doing very well, and there is another group that is in a perilous situation.

As states prepare for Medicaid changes, health systems are expecting greater cost pressures and making tough choices.

“Because of the anticipated Medicaid funding cuts that will hit largely starting in 2027 that in anticipation of that, a lot of management teams, driven by a lot of their boards, will really demand some tightening of their expenses,” Pascaris said.

Tight labor market

Hospitals are going to have to deal with a tight labor market for the foreseeable future, analysts say. Many health system executives say they continue to struggle to recruit and retain nurses.

“We certainly know of some staffing shortages, nursing shortages, etc, that are pressuring organizations,” Swanson says.

Health systems need to use tools to staff appropriately for times when they are going to see more patients, and failure to do so can place more pressure on staff that may already be overworked.

‘Some hospitals are not using data and analytics the way they should to really ensure that there's great alignment of staffing to demand,” Swanson says. “And so you do have periods here when I look at these data, I worry a little bit about burnout.”

And he says staff that are under greater stress are more likely to have more turnover.

Swanson says the shortages go beyond clinical positions. Some health systems are struggling to fill administrative and “back office” positions, Swanson says.

“They're now competing with many other organizations that have instituted, you know, work at home policies and people are able to work a little more regionally rather than locally,” he says.

And some health systems are also finding more competition for workers as retailers have raised their minimum wages. “Some of the lower paid positions in health systems are competing with big box stores,” Swanson says.

• Read more: These warning signs are tied to nurses leaving hospitals