The hospital sector bounced back from a November slip to finish out the year with steady operating margins and healthy patient volumes, though some underlying performance metrics signal challenges on the horizon, according to Kaufman Hall.
The healthcare advisory firm’s latest monthly check-in of over 1,300 hospitals’ operating data showed an indexed adjusted year-to-date operating margin of 1.3% at the end of 2025 (including health system allocations for the cost of shared services). A monthly version of the same index was 5% for December.
Whereas the prior month had substantial drops in volume and efficiency metrics, December’s daily discharges were 5% higher month-to-month and 1% higher year over year. Adjusted discharges were 5% higher for both comparisons, and the average length of stay dropped by 1% from November and 4% from the prior year’s December.
Daily net operating revenue rose 7% month to month and 8% year over year, with more funds coming in from inpatient and, more so, outpatient settings. Net patient service revenue per adjusted discharge increased 2% from November and 1% from the prior year.
On expenses, hospitals’ total daily expense rose just 2% from November but 8% from the preceding December, with non-labor expenses driving the spend on a total and per-adjusted discharge basis.
With 2025 in the books, the firm acknowledged that margins were stronger across 2025 than in the preceding years. Patient volumes have also increased annually across all service areas, and with growth coming faster for outpatient volumes, “hospitals will likely have a greater proportion of high acuity patients with elevated costs of care,” going forward, according to the report.
Kaufman Hall also flagged the past year’s “persistent gap” between recoded gross and net operating revenue, as well as a jump in bad-debt and charity-care metrics. These together, per the report, show “an eroding payer mix, likely a higher proportion of government vs. private payers and more uninsured patients.”
“With some data suggesting a lingering ‘new normal’ for hospitals, healthcare organizations need to be very strategic about diversifying services and managing expenses to build financial stability,” Erik Swanson, managing director and data and analytics group leader at Kaufman Hall, said in a statement. “Demand in outpatient services is on the rise, and hospitals without an outpatient footprint will struggle.”
As annual Medicare reimbursement reductions and the multi-year phase-in of Medicaid funding cuts cast a looming shadow over margins, hospital sector analysts, including Kaufman Hall, have noted a growing divide between high- and low-performers hidden behind the industry’s stable medians. Also challenged are the 41.2% of rural hospitals operating in the red, for whom a recent report suggests the government’s $50 billion Rural Health Transformation fund may not be a sweeping fix.