Health System Operating Margins Declined at Year-End Following a Year of Sustained Expense Growth
Chicago, IL — February 4, 2026 — U.S. health system operating margins slipped at the end of 2025 after months of modest improvement, underscoring the ongoing financial strain caused by persistent expense growth, according to new data from Strata Decision Technology.
Median health system operating margins declined to 1.3% in December, down from 1.5% in November, as organizations continued to face rising labor and non-labor costs that tempered the impact of revenue gains. While margins were more stable overall in 2025 compared to recent years, they remained thin, hovering within just two-tenths of a percentage point of 1% for much of the year.
“Four months of improvement provided cause for optimism at the start of the winter months, which makes the December decline a concerning turn,” said Steve Wasson, Chief Data & Intelligence Officer at Strata Decision Technology. “For healthcare leaders heading into 2026, it’s a reminder that financial recovery remains uneven and highly sensitive to cost pressures.”
The margin decline occurred against a backdrop of continued and broad-based expense growth, with total expense, and total labor and non-labor expenses increasing year-over-year (YOY) each month of 2025. Total non-labor expense increases consistently outpaced labor expense growth. In December, total non-labor expense increased 9.0% YOY, total labor expense rose 4.2% YOY, and total expense was up 7.2% YOY.
Supply expenses were the fastest-growing category at year-end, increasing 12.3% YOY, while drug expense rose 6.1% YOY. Purchased services also continued to climb, with expenses up 5.1% YOY. Expense growth was more moderate after adjusting for patient volumes, with total expense per adjusted discharge increasing just 0.6% in December.
Patient demand remained uneven across care settings in December. Outpatient visits increased 7.2% YOY, continuing the ongoing shift toward outpatient care, while inpatient admissions rose 4.2% YOY. In contrast, emergency department visits declined 4.3% compared with December 2024, and observation volumes were essentially flat. Regional variation persisted, with outpatient growth strongest in the Midwest and inpatient growth most pronounced in the Northeast. Across service lines, most recent data from November showed uneven demand across specialties, with ophthalmology posting the largest YOY volume increase at 9.4%, followed by rheumatology at 5.4%.
Hospital revenues strengthened alongside outpatient volume growth, though gains were not sufficient to offset cost pressures at the system level. Gross operating revenue increased 11.1% YOY in December, driven by a 12.8% YOY increase in outpatient revenue and a 7.6% YOY rise in inpatient revenue. At the same time, hospitals also saw continued growth in uncompensated care, as bad debt and charity care increased 7.0% YOY.
Financial pressures extended to physician practices, where rising expenses continued to drive higher investment requirements. In the fourth quarter of 2025, median investment per physician full-time equivalent exceeded $343,000, representing an 11.5% increase from Q4 2024. Total expense per physician FTE rose to approximately $1.2 million, up 8.9% over the same period, with increases recorded across all census regions.
These findings are drawn from Strata Decision Technology’s latest Monthly Healthcare Industry Financial Benchmarks report.
About the Data
This report uses data from Comparative Analytics and Strata’s StrataSphere® database. Comparative Analytics offers access to near real-time data drawn from more than 135,000 physicians from over 10,000 practices and 139 specialty categories, and from 500+ unique departments across more than 1,850 hospitals. Comparative Analytics also provides data and comparisons specific to a single organization for visibility into how their market is evolving. StrataSphere is a unique and comprehensive data-sharing platform that helps providers leverage the power of a network that represents approximately 25% of all provider spend in U.S. healthcare. This report incorporates data from more than 650 hospitals from over 120 health systems with StrataJazz® Decision Support.
About Strata Decision Technology
Strata Decision Technology, LLC provides an innovative, cloud-based platform for software, and data and service solutions to help healthcare organizations acquire insights, accelerate decisions, and enhance performance in support of their missions. More than 2,300 organizations rely on Strata’s StrataJazz and Axiom solutions for market-leading service and enterprise performance management software, data, and intelligence solutions. To learn more about Strata and why the company has been named the market leader for Business Decision Support for more than 15 consecutive years, please go to www.stratadecision.com.