Hospital finances got a reality check in August. After four months of relatively stable performance, year-to-date operating margins dipped to 2.5% including allocations, according to Kaufman Hall’s “National Hospital Flash Report,” which draws on data from more than 1,300 hospitals. Monthly operating margins for August came in at 1.8%, down from 3.8% in July.
The underlying story is not simply that revenues are weak. Gross operating revenue per calendar day grew year-over-year, outpatient volumes are up and net revenue is climbing. But bad debt and non-labor costs are climbing faster. The gap between what hospitals charge, what payers reimburse and what patients can afford is widening.
Six trends from the report.
1. Year-to-date margins slipped in August after months of recovery
The year-to-date operating margin through August hit 2.5% including allocations, down from 3.8% through July. Excluding corporate, physician and other entity allocations, the comparable figure was 8.0%. Monthly margins fell more sharply, with August’s 1.8% reading, marking the weakest single-month performance since February, when margins hit 1.4%.
Kaufman Hall described August as “notably weaker” than the prior four months and cited converging pressures from bad debt, payer mix erosion and rising expenses as the primary factors. That reading tracks with what the firm had noted earlier in the year.
“Increased expenses, especially in labor, and the persistent increase in bad debt and charity care are not likely to ease this year,” Erik Swanson, Kaufman Hall’s managing director and data and analytics group leader, said in a Becker’s report on January hospital data. “Overall structural costs are poised to go up.”
2. Revenue is growing but gross and net are diverging
Gross operating revenue per calendar day grew 9% year-over-year nationally, with outpatient revenue up 9% and inpatient revenue up 7% over the same period. Net operating revenue per calendar day grew 6% year-over-year. The widening spread between gross and net reflects the increasing weight of payer adjustments and write-downs, not a revenue mix that is weakening in absolute terms.
The mechanics behind that spread are already visible in system-level financial reports. Advocate Health’s commercial revenue share dropped from 51% to 45% year over year in the first quarter of 2026, while its Medicaid share rose from 17% to 22%. Chicago-based CommonSpirit Health cited “deterioration in payer mix” as one of the primary drivers behind its operating losses.
Each percentage point of shift from commercial to Medicaid carries real financial weight as well. Moody’s has estimated that a one-point move from commercial to Medicaid coverage is associated with a 0.5% to 1.0% decline in net patient service revenue and 50 to 150 basis points of operating margin compression.
Compared with 2023, gross operating revenue is up 26% nationally. Net operating revenue has grown 24% over the same period — a gap that reflects structural pressure accumulating over several years.
3. Non-labor expenses are the dominant cost pressure
Non-labor expenses per adjusted discharge rose 6% year-to-date compared with 2025, according to Kaufman Hall. Supply expenses rose 5% over the same period; drug expenses rose 6%. Kaufman Hall cited inflation in food and energy costs as a compounding factor. Compared with 2023, non-labor expenses per adjusted discharge is up 11%, supply is up 13% and drugs are up 10%.
Supply and drug expenses accounted for more than one-fifth of total hospital spending in 2024 with supplies representing 13% and drugs 9% of total expenses, according to the American Hospital Association. Those categories are not shrinking. Vizient projects overall hospital supply chain inflation will rise another 3.39% in 2027, with the highest pressure concentrated in IT hardware and software, purchased services, construction and capital equipment.
4. Drug costs are accelerating fastest at the largest hospitals
The expense pressure is not evenly distributed. Among hospitals with 500 or more beds, drug expense per calendar day rose 15.8% year-over-year and 12.4% year-to-date compared with 2025. Drug expense per adjusted discharge rose 21.9% year-over-year for the same cohort. Compared with 2023, drug expense per calendar day at hospitals with 500 or more beds is up 51%.
The 300–499 bed cohort showed drug costs up 12% year-over-year per calendar day and 13.4% year-to-date versus 2025.
5. Bad debt and charity care have risen nearly 50% since 2023
Bad debt and charity care per calendar day grew 13% year-over-year nationally and 15% year-to-date versus 2025. Compared with 2023, the increase is 49%. As a percentage of gross operating revenue, bad debt and charity care have climbed 7% year-to-date versus 2025 and 14% versus 2023.
Kaufman Hall identified increasing bad debt and charity care as one of the primary financial challenges facing hospitals and cited payer mix erosion as a contributing structural factor, which is expected to intensify as Medicaid eligibility changes under HR 1 take fuller effect in 2027.
6. Nearly half of hospitals are now operating at a loss
Roughly 43% of hospitals are currently operating at a loss, compared with roughly 33% before the COVID-19 pandemic, a 10 percentage point increase. Kaufman Hall noted that continued financial pressure may accelerate strategic repositioning and portfolio optimization efforts through partnerships as hospitals pursue long-term financial sustainability.
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