Hospitals reduced expenses and improved throughput in March, but rising uncompensated care and worsening payer mix are limiting margins, Kaufman Hall’s latest data reveals.
KEY TAKEAWAYS
Hospital margins improved in March, but year-to-date performance remains below 2025 levels despite operational gains.
Expenses declined month-to-month, potentially signaling short-term stabilization, though drug and supply costs are significantly higher year-over-year.
Health systems are being pushed toward targeted resource allocation and outpatient-focused service-line strategies.
Hospitals are showing signs of stronger operational discipline in early 2026, but those gains have yet to translate into meaningful financial growth.
While margins improved modestly and expenses dipped slightly month-to-month in March, hospitals continue to face persistent pressures like an eroding payor mix and a rise in uncompensated care that are offsetting operational progress, according to Kaufman Hall’s latest National Hospital Flash Report.
The average monthly operating margin, inclusive of health system allocations for the cost of shared services, increased from 1.8% in February to 2.9% in March. That jump pushed the adjusted year-to-date operating margins to 1.7%, up from 1.3% in February. However, Kaufman Hall’s data shows hospitals are well below 2025 levels overall, highlighting that recent gains have not been enough to reverse financial headwinds.
Expenses declined across the board on a month-to-month basis, suggesting some short-term stabilization after earlier increases. Decreases were seen in total daily expenses (4%), daily labor expenses (2%), daily non-labor expenses (5%), daily supply expenses (1%), daily drug expenses (1%), and daily purchased service expenses (8%).
Still, costs remain elevated on a yearly basis, particularly related to drugs (10%) and supplies (11%). Even with the March dip, expense relief has been uneven and not yet sustained enough to materially improve margins.
At the same time, hospitals continue to demonstrate incremental operational improvements. The report found a 2% reduction in average length of stay month-over-month and a 3% drop year-over-year. Meanwhile, daily outpatient revenue stayed flat in March but rose 12% year-over-year, indicating efforts to improve throughput and shift care to lower-cost settings. Adjusted discharges increased 4% year-over-year in March, and equivalent patient days per calendar day fell 3% month-over-month and 2% year-over-year, pointing to gains in capacity management and patient flow efficiency.
Less encouragingly, hospitals are still contending with higher levels of bad debt and charity care, which jumped 18% year-over-year, reflecting a worsening payer mix and ongoing challenges with government payers relative to commercial reimbursement.
“Hospitals continue to see the effects of payor mix erosion and cost pressures,” Erik Swanson, managing director and data and analytics group leader at Kaufman Hall, said in a statement. “Proactive steps to strategically allocate resources and manage spend, through areas such as length of stay, outpatient care and growing expenses, will continue to be key.”
Regional variation is also a defining feature of the current environment. The Northeast posted margin improvement despite historically weaker financial performance, while hospitals in the West saw the most pronounced increases in drug expenses. Those two outliers showcase the uneven cost and revenue forces across markets.
For hospital leaders, the latest data is further evidence that operational improvement alone is unlikely to fully restore margins right now. Many health systems have already spent the past several years striving to improve efficiency in areas like staffing and throughput, meaning future gains may be harder to achieve through traditional cost-cutting alone.
Instead, executives must prioritize more targeted resource allocation and service-line strategy, especially as hospitals invest more in outpatient settings.
HENRY KOTULA 