What separates high- and low-performing hospitals in 2025
By Alan Condon / August 13, 2025
Hospital finances showed signs of improvement at the end of the second quarter, though notable performance gaps remain between higher- and lower-performing facilities, according to Kaufman Hall’s latest “National Hospital Flash Report,” published Aug. 11.
The median monthly operating margin index rose to 3.7% in June, up from 1.9% in May, though the pace of improvement remains uneven and somewhat unexpected amid recent market turbulence.
Hospitals in the Northeast and Mid-Atlantic reported the largest year-over-year increases in operating margins at 38%, followed by the South and Midwest at 29%. The West and Great Plains saw declines of 13% and 27%, respectively. Smaller and mid-size hospitals generally fared better than large facilities: hospitals with 26 to 299 beds saw margin gains between 17% and 30%, while those with more than 500 beds experienced a 29% decline.
“Higher performing hospitals are nimbler on both the revenue and expense sides,” Erik Swanson, managing director and data and analytics group leader at Kaufman Hall, said in a news release. “They may be expanding their outpatient footprint, diversifying services or managing expenses like purchased services by centralizing some functions. They are also more likely to have value-based care or bundled care arrangements in place.”
In 2025, top-performing hospitals are setting themselves apart from lower-performing facilities through a combination of strategic, operational and financial factors. According to Kaufman Hall and Fitch Ratings, the key differentiators include:
1. Strong market presence in growth regions: Hospitals located in expanding markets — especially in the South, Midwest and Northeast — are benefiting from rising demand, better payer mixes and stronger revenue potential. These organizations are leveraging local demographics and economic growth to drive performance.
2. Workforce recruitment and retention. Talent remains a key differentiator. High performers are more successful in hiring and retaining clinical and nonclinical staff amid national shortages, allowing them to maintain service capacity and quality care while controlling labor costs.
3. Aggressive payer strategy: Top-tier hospitals are skilled at negotiating favorable payer contracts, often using a “mind the gap” approach to keep reimbursement rates at the upper end of the scale. These hospitals maximize market leverage to drive revenue growth.
4. Operational agility: High-performing hospitals are nimble and can adjust quickly to changing conditions. They centralize purchased services, optimize supply chains and adapt care models to improve efficiency.
5. Investment in technology and infrastructure: Successful systems are proactively investing in AI, health IT and data analytics. These investments support care delivery and administrative efficiency and prepare hospitals for value-based care and alternative payment models.
6. Outpatient expansion and service diversification: Expanding outpatient footprints and diversifying service lines allow top hospitals to meet evolving patient demand and offset pressures on inpatient care, particularly in high-cost settings.
7. Proactive real estate and capital management. Strong performers are strategically managing real estate assets to bolster balance sheets and fund growth initiatives, such as facility modernization and digital transformation.
In contrast, lower-performing hospitals, often in rural or underserved regions, struggle with:
Limited access to capital
Declining patient volumes or poor payer mixes
Severe staffing shortages
High dependency on public reimbursement
Little room for investment in innovation or infrastructure
Fitch warns that this divergence is becoming a “trifurcation” of hospital performance, with institutions separating into top-tier, middle-tier and lower-tier segments. Without strategic shifts, the financial gap may widen in the years ahead.
Top-performing hospitals will “have a predisposition to maximize that market essentially with annual payer negotiations, in a ‘mind the gap’ mentality that keeps them at the upper end of the payment scale,” Fitch said in a recent report.
Meanwhile, most hospitals are expected to remain in a middle band: operating sustainably but with limited margin growth and persistent staffing challenges. Those at the bottom of the scale face declining volume and payer mix issues and will likely need to rely heavily on outside cash to stabilize, according to Fitch.
The latest hospital financial reports indicate that 2025 performance gains are unevenly distributed, with the gap between top and bottom performers potentially widening as financial pressures persist.