Rising Healthcare Costs Strain Health System Margins
•February 20, 2026
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Companies Mentioned
Why It Matters
The margin decline signals tighter profit windows for providers and heightened cost‑pass‑through pressure on insurers, reshaping budgeting and pricing strategies across the sector.
Key Takeaways
- •Median health system margin fell to 1.3% in December
- •Labor expenses rose 4.2% YoY, supply costs up 12.3%
- •Supply chain tech spending outpaces pharmacy price growth
- •Insurance lines face persistent medical cost pressure
- •Healthcare wages rose 4.3% in 2025, staffing shortages persist
Pulse Analysis
The latest data underscore a perfect storm of demand and cost pressures in U.S. healthcare. An aging population and expanded coverage are fueling higher utilization, which lifts revenue but also magnifies labor, supply and drug expenses. Even after adjusting for volume, non‑labor costs are rising, squeezing the already thin operating margins that many systems rely on for reinvestment. This dynamic forces executives to balance short‑term profitability with long‑term capital projects, especially as insurers grapple with rising claim costs across commercial and public programs.
Supply‑chain dynamics are shifting dramatically. For the first time in a decade, technology and facility expenditures have overtaken pharmacy price growth, driven by investments in robotics, advanced imaging and theranostics. These capital‑intensive initiatives promise clinical gains but require substantial upfront outlays, prompting health systems to reevaluate service‑line strategies and align pharmacy, capital and analytics functions. The resulting cost structure compels leaders to adopt more sophisticated spend‑management tools and negotiate smarter contracts to preserve cash flow while maintaining innovation.
Labor market tightness adds another layer of complexity. Healthcare added over 80,000 jobs in January, accounting for more than half of total U.S. job growth, and wages rose 4.3% in 2025. Persistent staffing shortages, especially in technical and support roles, are driving wage inflation and prompting organizations to boost minimum pay rates and enhance retention programs. As compensation pressures mount, providers must refine compensation strategies, invest in workforce development, and leverage technology to improve productivity, ensuring they can sustain service quality without further eroding margins.
Rising healthcare costs strain health system margins
Systemic challenges are showing few signs of easing in healthcare financial operations.
As identified by federal actuaries, increases in the use and intensity of hospital services drove a big recent jump in national healthcare spending. Those volume-based metrics represent a boost for hospital revenues but a roadblock to cost reduction.
That dichotomy had a net unfavorable impact on hospital operating margins at year’s end, with Strata Decision Technology reporting this month that the median health system margin dipped from 1.5% in November to 1.3% in December.
“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 and intelligence officer at Strata. “For healthcare leaders heading into 2026, it’s a reminder that financial recovery remains uneven and highly sensitive to cost pressures.”
Against the backdrops of an aging population and a sustained post-pandemic increase in care demand, driven in part by the expansion of healthcare coverage, labor costs rose by 4.2% year-over-year in December. Supply expenses jumped by 12.3% and drug expenses by 6.1%, including an 11.1% increase from the prior month.
Labor expense per calendar day declined by 1.2% from November to December, but increases were seen year-over-year (4.2%) and were more pronounced when comparing CY25 to CY22 (12.3%), according to Kaufman Hall’s monthly report, which uses Strata’s data set.
Yet the cost spikes may be more tenable when adjusted for volume increases. Per adjusted discharge, labor expenses fell by 0.4% year-over-year, while non-labor expenses ticked up by 0.9%, Strata reported. The continued influx of patients helped hospitals reap a year-over-year revenue increase of 11.1%.
Medical cost trends weigh heavy
Whereas high healthcare utilization can be seen as a mixed bag for providers, it is nothing but a drag on finances in the insurance sector.
“Medical cost trends remain elevated, and importantly, they’re not isolated,” Bradley Ellis, senior director for the U.S. Health Insurance Sector with Fitch Ratings, said during a webinar hosted by the credit-rating agency in January. “We’re seeing upward pressure across nearly every major line of business, from commercial to Medicare Advantage to Medicaid and the ACA exchange market.”
“These trends are persistent,” Ellis added. “They’re not softening as quickly as many hoped.”
Ellis highlighted rising demand for behavioral healthcare services, pharmacy spending growth from advancements in products such as GLP-1 drugs and gene and cell therapies, and billing patterns that reflect increasing “provider leverage and coding intensity.”
That last factor illustrates how efforts to maximize reimbursement become increasingly pivotal in a high-cost environment.
“Providers are still dealing with rising operating costs that outpace what insurers have been willing to pay in recent years,” Ellis said.
A shift in healthcare supply chain costs
In the immediate term, the most notable cost increases are being seen in supplies, particularly technology and facility expenditures.
For the first time in more than 10 years, those items overtook pharmacy spend in anticipated cost growth, according to Vizient’s new report on spending projections for the healthcare supply chain.
The report projects a 2.84% increase in pharmacy prices over a 12-month period starting in July 2026, down from a 3.35% estimate for 2026 in a report issued six months ago. Meanwhile, spending on purchased services is set for a steeper rise, including 5.66% for hardware and software and 4.5% for IT services.
Technological advancements, such as robotic platforms and pulsed field ablation, are driving up IT costs, said Carina Dolan, associate vice president for clinical oncology, pharmacoeconomics and market insights with Vizient.
“We are seeing this advancement in technology that is creating better outcomes for our patients,” Dolan said.
But deploying the technology means health systems “have to purchase those systems, create new service lines, possibly upgrade what they had, so it can carry a large upfront capital investment as they’re working toward these specialty service lines,” Dolan added.
The impact on service line strategies is exemplified by theranostics, a personalized approach to cancer care that integrates molecular imaging with precision radiation.
“Healthcare is just becoming more complex,” Dolan said. “It’s technologically intensive inside health systems right now, and it’s really infrastructure-dependent. It’s really organizations having to integrate pharmacy and capital and clinical alignment, and even to some degree optimizing their analytics in order for them to work holistically together — to be able to manage their costs while advancing their innovation and their patient care capabilities.”
Persistent wage growth and labor market tightness
The industry’s demand for labor shows few signs of relenting, with the Wall Street Journal recently describing healthcare as the engine currently driving the U.S. job market (login required). In December, for example, hospitals added 16,000 jobs and the healthcare industry overall added 21,000, comprising more than 40% of economywide gains.
Job growth industrywide was yet more robust in January, adding 82,000 positions, meaning it accounted for 63% of positions added across the economy. However, the increase in the hospital sector (18,000) was relatively muted next to ambulatory services (50,000).
Wage growth has moderated following the extensive use of contract labor as the pandemic unfolded. Nonetheless, according to a survey by the consultancy group SullivanCotter, healthcare wages increased by 4.3% in 2025, an acceleration relative to 2024 (2.7%).
While wage bonuses for clinical staff were pared back, close to half of the healthcare organizations in the survey said they had increased minimum pay rates during the previous year. Support staff received some of the biggest increases, including 5.5% for clinical technicians.
“Healthcare organizations continue to face significant frontline staffing shortages,” the survey summary states, and that’s reflected in the wage increases for roles such as surgical techs, respiratory therapists, radiology/medical imaging techs and security officers.
“It will be important for organizations to sharpen their market compensation strategy, reallocate budget resources, invest in compensation expertise, and continue building advancement opportunities to keep employees engaged and retained,” Steve Meyers, consulting principal with SullivanCotter, said in a news release.
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