Why pending healthcare policies look so daunting for hospitals

For both revenue and costs, ongoing policy developments pose a risk of aggravating trends that already are constraining hospital budgets.

The budget reconciliation bill in Congress and the imposition of extensive tariffs would add to ongoing pressures on hospital finances. Bad debt levels are rising among not-for-profit hospitals, as are supply costs, and those issues could become more severe if policies remain on their current track.

“The expenses aren’t going anywhere,” said Steve Wasson, chief data and intelligence officer with Strata Decision Technology. “The patient population will likely still be seen, but it will shift to bad debt or some other [category]. The expenses have to get covered somewhere, and margins aren’t expanding.”

Margins have stagnated in 2025, based on Strata’s data. The median year-to-date operating margin for health systems dipped to 0.9% in March from 1% in both January and February, according to the company’s latest quarterly report (registration required) on performance trends, marking the first time since 2023 that the metric was below 1%. But in April, according to a separate report, the YTD margin ticked up to 1.1%.

A drag on hospital budgets

Amid rising patient volumes, revenue has been strong. Thus, costs are the apparent culprit in the struggling margins.

“The expenses — labor and mostly supply and drug — continue to chip away at that revenue line,” Wasson said.

Even without the new set of tariffs in place, supply expenses as a share of total expense rose from 7.1% in Q1 2024 to 8% this past quarter. Those expenses also jumped by nearly $13 per adjusted patient day.

Hospital departments where surging supply expenses have the biggest impact include anatomic and clinical labs, invasive cardiology/catheterization labs, and operating rooms, according to Strata’s analysis.

“If tariffs hold on drugs and supplies, it’s just going to add to the already expanding cost of that line item,” Wasson said.

The Trump administration has paused tariffs on most countries, and the latest set of tariffs on China were reduced from 145% to 30% for 90 days as the two countries explore the possibility of a trade deal. Most recently, the U.S. Court of International Trade ruled that the tariffs on individual countries were illegal, but the administration has appealed the decision and was granted a stay of the ruling.

If tariffs on China and other countries are fully implemented, supplies ranging from pharmaceuticals, medical devices and personal protective equipment to low-margin, high-use items such as syringes, needles and blood pressure cuffs would be vulnerable to cost spikes and potential shortages, according to information from the American Hospital Association.

Reimbursement to take a hit

Another discouraging policy for hospitals and health systems in the current climate is the proposed Medicaid spending cut in the budget reconciliation bill.

At nearly $800 billion over 10 years, the cut is projected to add 7.8 million people to the ranks of the uninsured between passage of the bill and 2034. Provisions in the bill related to the Affordable Care Act, along with the lack of an extension for enhanced ACA insurance subsidies, are projected to raise the number of uninsured by more than 8 million.

“Most of our customers are keeping seriously strong ties to what’s going on [with Medicaid] because it’s a substantial part of their revenue,” Wasson said.

Medicaid accounts for 12% of revenue at hospitals nationwide, including more than 30% in service lines such as neonatology and behavioral health.

If that revenue declines, hospitals would be looking at a further jump in bad debt. Already, Strata’s quarterly report noted that for health systems, median deductions for bad debt have increased by 16.9% between 2023 and 2025, while median deductions for charity care have risen by 21.4%.

“Cuts in Medicaid will have a ripple effect to most every organization in terms of revenue shift,” Wasson said. “The expenses aren’t going anywhere. The patient population will likely still be seen, but it will shift to bad debt.”

That would have implications for strategic planning.

“Last year, the balance sheets started shoring up a little bit, which told me that people were building up some reserves to make some investments, or their capital spend might improve,” Wasson said. “Now I’m seeing this bad-debt increase, which is just going to erode people’s reserves and give them pause [about] whether they can make the investments that they need to.”

Some bright spots

One thing hospitals likely can count on for the foreseeable future is a high volume of patients. For April, Strata reported that inpatient admissions had risen by 10.2% and outpatient visits by 19.2%, relative to the same period two years earlier. Year-over-year, the increases were 2% and 4.9%, respectively, although emergency visits fell by 1.9%.

Data on specific procedures show year-over-year increases in 11 of 15 procedure types, led by outpatient PET imaging (17.7%) and outpatient upper GI endoscopy (14.8%). Inpatient primary knee replacement (20.9%) was among the four procedures that declined.

The overall volume trend gives hospitals a strong revenue cushion, as seen in year-over-year revenue increases of 9.7% for outpatient visits and 5.5% in the inpatient setting. Revenues are improving even when adjusting for patient volume, as suggested by increases of 4.1% per adjusted patient day and 0.6% per adjusted discharge.

In its latest monthly National Hospital Flash Report, which uses Strata’s data, Kaufman Hall reported improved year-over-year hospital performance based on both demand and operational efficiency.

Regarding efficiency, Kaufman Hall pointed to a 1% year-over-year decrease in average length of stay and a 5% increase in adjusted discharges per day. Such metrics indicate that “hospitals are triaging, treating and discharging patients efficiently and appropriately,” Erik Swanson, managing director with Kaufman Hall, said in a news release.

Hiring trends are another indicator of demand for hospital services. On a seasonally adjusted basis, hospitals added 201,000 jobs year-over-year through May, according to the latest Bureau of Labor Statistics data. The sector added 29,900 jobs in May, easily exceeding the monthly average of 16,750 for the year-long period.

It remains to be seen how much the increased staffing causes labor expenses to rise after a 6.1% year-over-year jump through April, per Strata’s data.