Hospital revenue surges, but rising expenses raise concerns

Hospitals’ financial performance continues to improve this year, but expense trends are worrying, according to an industry tracker.

Overall hospital revenue on a volume adjusted basis increased in the latest Kaufman Hall (KH) hospital flash report. The monthly report — the latest runs through June — uses financial data for more than 1,300 hospitals from Strata Decision Technology.

Hospitals’ KH median operating margin index reached its highest point in June — 3.7%, when including allocations to hospitals from corporate, physician and other entities. It’s also the highest since December, 7.3%, when not counting those allocations. 

Other findings, per calendar day, included:

• 9% increase year-over year (YoY) in net operating revenue
• 7% increase in YoY inpatient revenue
• 12% increase YoY outpatient revenue

“Hospitals continue to demonstrate a fair amount of financial stability through current date 2025 and we expect that to continue through the remainder of the year,” Erik Swanson, managing director at Kaufman Hall, said in an interview.

That revenue is driven by multi-year highs in hospital inpatient and outpatient volumes, he said. Also important is that such volumes have been consistent, which has allowed hospitals to more efficiently staff for them.

Expense rise

However, the ongoing increase in non-labor expense raised concerns for Swanson.

“There are certainly some headwinds and pressures related to the non-labor expense side of the equation, which includes purchased services, supplies and drugs,” Swanson said.

The expense rise YoY per calendar day includes:

• 8% increase in non-labor expense
• 9% increase for supplies
• 12% increase for drugs
• 8% increase for purchased services

“As we move into 2025, there has been an attenuation of the labor expense,” Swanson said. “Ultimately, non-labor expense is the area of major challenge.”

The increase in non-labor expenses is driven by both its price and amount used. Price increases have particularly hit purchased services, such as revenue cycle, IT, environmental, linen and maintenance services. Much of that stems from vendors retaining high prices from the inflation spike in recent years.

Drug prices have especially increased for specialty drugs, such as chemotherapy and other infusion drugs. The trend of increased morbidity among hospital patients has fueled greater use of those high-cost drugs.

“These are very tricky areas for hospitals because the amount of control that hospitals have over these is limited, as relative to something like labor expense, over which they have a great deal more control,” Swanson said.  

Bad debt implications

Bad debt rose in June compared to May and outpaced the growth rate in previous months. Bad debt and charity care per calendar day was 47% higher year-to-date (YTD) compared to YTD 2022.

Factors driving the bad debt increase include:

• Ongoing Medicaid determinations
• Increase in emergency department (ED) use by uninsured and underinsured
• Increasing ED use by those with access issues

“As we look at the hospitals, what that means is that you’re ultimately going to be seeing, over the long term here, higher acuity patients going to the hospital and many of those, as I previously alluded to, may be going to the hospital because they don’t have access to care elsewhere,” Swanson said. “So those who are commercially insured may be receiving care and frankly at higher rates — our physician flash report would corroborate that notion — but those patients coming to the hospital are doing so because it is their only way to access care.”

Additionally, commercially insured patients may be less able to afford the out-of-pocket costs for their health insurance, which leaves hospitals to attribute the patient responsibility to bad debt or charity care, Swanson said.

“The populations and the types of patients accessing that ED care has shifted and it has unfortunately moved in the direction of higher proportions of un- and underinsured patients,” Swanson said.

The rise in ED volumes that is part of the bad debt challenge has been ongoing since before the COVID-19 pandemic and continued since then.

Improvement targets

In the run-up to the 2027 start of major hospital revenue hits expected from provisions of the One Big Beautiful Bill Act (OBBBA), many organizations are pushing to cut expenses and increase revenue.

Swanson said health systems preparing for those cuts need to remember that those health systems with higher proportions of outpatient revenue outperform organizations with lower proportions.

“As we think about the [OBBBA] and some of those impacts, site-neutrality changes, etc., the ability of organizations to focus on delivering care in lower-cost settings is really, really critical,” Swanson said.

Additionally pursuing more value-based care, especially the potential upside of taking on financial risk, can benefit organizations, he said.

Cost reductions likely will come from continuing to push on the cost levers many organizations already use.