Hospital financial metrics remain steady even as costs rise and reimbursement challenges await

The latest data on financials for the not-for-profit (NFP) hospital sector hints at the challenges in store.

While margins have not taken a significant hit for health systems, other metrics reflect rising costs, according to the latest monthly report from Strata Decision Technology.

Beyond that immediate concern is the prospect of reduced reimbursement not only in Medicaid but possibly also in the commercial sector.

Costs on the upswing

Supply costs rose by 10.6% and drug costs by 9.5% on a year-over-year basis in July, Strata reported. Those trends caused the year-to-date margin for health systems to tick down from 1.2% in June to 0.9% in July.

Drug costs especially show no signs of slowing, and the increase could accelerate if the Trump administration enacts plans to apply tariffs to imported pharmaceuticals and associated ingredients, said Steve Wasson, chief data and intelligence officer with Strata.

Sept. 25 update: President Donald Trump announced that tariff markups of 100% will apply starting Oct. 1 to the products of drug companies that don’t have a U.S.-based manufacturing plant or are not in the process of building one. Analysts noted that most big companies will likely be exempt based on that qualifier.

Oct. 1 update: The White House says implementation of pharmaceutical tariffs will be delayed to give Trump a chance to negotiate pricing deals with manufacturers.

“Even just the prospect of having tariffs added can drive costs up because suppliers start changing their patterns,” Wasson said. “I’m not saying it’s from that, but [increases are] happening.”

“It’s taken the wind out of the sails out of organizations’ margins,” he added.

General medical-cost inflation also is a factor in increasing drug costs. In an annual report (registration required), Vizient projects a 3.35% increase in drug prices for 2026, driven by GLP-1 drugs and, in inpatient settings, CAR-T cellular therapies.

“Probably one of the areas of highest spend, not necessarily utilization yet, but one that all of our [clients’] pharmacy departments are really looking into heavily, is cell and gene therapy,” said Carina Dolan, associate vice president for clinical oncology, pharmacoeconomics and market insights with Vizient, noting that specific data on those products is elusive because hospitals buy them directly from manufacturers.

Among supply costs, Dolan said, the largest increases are seen in capital investments, followed by areas such as food service and IT.

Payment constraints anticipated

On the reimbursement front, hospitals are not yet dealing with significant implications of the budget reconciliation law known as the One Big Beautiful Bill Act (OBBBA). But those concerns are looming.

In a new report, for example, the Commonwealth Fund projects that hospitals in expansion states will lose between 11.7% and 13.3% of their margin, on average, after the work requirement for Medicaid expansion beneficiaries begins in 2027. Safety-net hospitals are set to experience a margin decrease of between 25.9% and 29.6%. The report used projections by the left-leaning Urban Institute regarding the impact on the uninsured rate.

That type of reimbursement impact would be expected to stymie the sustained revenue growth recently seen among hospitals, with Strata reporting 27 consecutive months of year-over-year gains.

“If fewer people qualify for Medicaid benefits due to policy changes, a troubling shift in patient behavior is likely to put additional strain on hospital finances,” Strata stated in a Q2 trends report (registration required).

In orthopedics, for example, outpatient Medicaid cases had a median total-cost margin of negative $247 per case in November 2024, compared with negative $430 for emergency self-pay orthopedic cases.

“When care moves from outpatient to emergency settings, hospitals take a double hit: higher care costs combined with lower likelihood of payment,” the report states. “If care shifts occur in the wake of Medicaid reductions, hospitals could see a widening gap between cost and reimbursement, particularly in high-volume service lines.”

Strata’s hospital clients are not waiting for the relevant provisions of the OBBBA to take effect before adjusting their business models, Wasson said.

“People are shifting,” he said. “They’re thinking about those service lines where [the affected] population is highest, looking at what their reimbursement will be two years from now and making those adjustments.”

No longer a bulwark

There also are signs of pressure on the commercial market, which hospitals essentially rely on to subsidize other business segments, especially when those segments incur decreases.

“The only way to recoup it is through commercial,” Wasson said. “I think we’re going to see some pressure on commercial lives. And then the payers aren’t going to be gleefully coming in with higher rates.”

Financial pressure on employers may pose an issue. For example, Aon released a September report projecting a 9.5% increase in employer healthcare costs for 2026. The trend could affect benefit design and provider network configuration as companies look to manage costs without burdening employees.

“The continued rise in chronic conditions such as musculoskeletal and cardiovascular disease, alongside an increase in high-cost conditions like cancer, remains a primary driver of escalating medical costs in the U.S.,” Aon stated in a news release. “Simultaneously, hospital workforce expansion is enabling greater patient throughput, further contributing to higher levels of healthcare utilization.” 

A new report by KFF finds that premiums for the small-group insurance market are projected to rise by 11%. Higher prices for hospital care, physician services and pharmaceuticals are cited as leading factors.

Other drivers in the projected increase, according to surveyed insurers, include general inflation, labor shortages, uncertainty about tariff-driven cost increases, specialty drugs such as GLP-1s, and decreased enrollment and worsening risk pools in small-group plans.

Intensifying pressure on employee benefits is not the only issue to monitor in the commercial insurance segment. If unemployment increases, as some forecasts project, that will put additional curbs on the payer mix for hospitals.

“The unemployment rate would hit reimbursement on the commercial side,” Wasson said. “So, you lose one commercial patient, which really pays for two or three uninsured [patients].”