Health System Margins Are Falling: What That Means for Innovation, Efficiency, and the Road Ahead

It’s a familiar paradox in healthcare: volumes are up, but margins are down. According to Strata Decision Technology, U.S. health systems saw outpatient visits increase by 5.6% and inpatient admissions by 4.6% year-over-year as of March 2025. Gross outpatient revenue rose by 10% in the same period, yet the median year-to-date operating margin has fallen to just 0.9%, the first drop below 1% in over a year.

This trend, outlined in the recent Health Management Academy report “Health System Margins Take a Fall” (May 2025), highlights a sobering truth: cost growth is outpacing revenue growth, and many systems are finding it harder than ever to maintain financial sustainability, even as demand for care continues to rise.

The Expense Squeeze: Non-Labor Costs Take Center Stage

Labor has long been a primary cost concern for health system CFOs, but now non-labor expenses are rising faster. Drug expenses rose by 11.5%, supply costs by 10.8%, and purchased services, which includes everything from cleaning contracts to revenue cycle support, jumped by 9.5% year-over-year.

These increases are difficult to offset through traditional productivity improvements or staffing cuts alone. As the report notes, these expenses “continue to outpace growth, compressing margins to increasingly unsustainable levels.”

The implication is clear: cost control efforts must expand beyond headcount. Leaders will need to examine the systems, contracts, and workflows that drive non-labor spend.

Outpatient Growth Brings Its Own Challenges

The shift toward outpatient care is continuing, and while it’s often been touted as a way to lower costs and improve access, it’s not a magic wand. Outpatient revenue may be rising, but these services often bring thinner margins than traditional inpatient care, meaning health systems must see more patients just to break even.

Operationally, outpatient settings mean more appointments, more communication, and more coordination. This higher-volume, lower-margin model demands precision and efficiency.

Managing capacity constraints smartly becomes essential in this setting, and health systems must focus on optimizing every slot, room, and provider schedule. That means reducing last-minute cancellations, improving schedule accuracy, and ensuring patients are ready to be seen.

Industry data underscores the urgency of this challenge. According to the Sg2 2024 Impact of Change report, outpatient volumes are projected to increase by 17% over the next decade, reaching 5.82 billion annual visits, driven by an aging population, increased incidence of chronic diseases, and a higher demand for mental health services. 

To address these capacity challenges, health systems are increasingly turning to technology solutions. For instance, AI-powered software can help optimize scheduling, reduce no-shows, and improve patient flow. A LeanTaaS report found over 90% of hospital leaders cited staffing limits and inefficient discharges as major barriers to patient flow. 

Investing in the right tools, systems can match capacity to demand without burning out staff or compromising patient care.

Executive Response: Strategic Alignment Over Shiny Objects

In this climate, health system leaders are rethinking their approach to innovation and investment. According to the report, CFOs and CSOs are prioritizing:

• Cost containment across both labor and non-labor categories
• Strategic initiatives with demonstrable margin improvement or ROI
• Technologies that support operational efficiency or revenue capture

New projects are under tighter scrutiny. The focus is shifting away from experimentation and toward execution. We hear a constant refrain from our Luma customers and partners: “we must automate since we’re being asked to do more with the same or less people resources.”

As The Health Management Academy notes, “Initiatives that clearly improve margin, reduce cost, or accelerate ROI will rise to the top of the executive agenda.”

Technology’s Role: From Nice-to-Have to Need-to-Have

While some health systems may slow their tech investment in response to budget pressures, innovators are doubling down on tools that demonstrate clear financial value. Platforms that automate manual workflows, reduce appointment leakage, or accelerate revenue cycle processes are becoming more essential, not less.

At Luma, we’ve seen this shift firsthand. Many of our health system partners are using our platform to:

• [lead with an Access bullet, something around capturing new /retaining existing patients]
• Reduce no-show rates with automated reminders and smart waitlists
• Streamline intake and referral workflows to reduce overhead and improve throughput
• Engage patients through cost-effective digital channels like text messaging instead of manual calls
• Get creative and think big when automating processes to reduce manual work across the access, revenue cycle management, and clinical spaces

In an environment where every hour and every dollar counts, these types of improvements are not just helpful. They’re critical.

Where Do Health Systems Go From Here?

There’s no one-size-fits-all solution to the margin challenge. But some strategies are emerging as consistent priorities:

• Be ruthless about ROI. Whether it’s a service line expansion or a new vendor contract, every initiative must show financial value.
• Target the cost centers you can control. Drug pricing and supply chain issues are often outside your immediate influence. Focus on workflows, communication, and staffing efficiency where you can make an impact.
• Consolidate where it makes sense. Strategic alignment and vendor consolidation can support tighter margins.
• Invest in patient access. Higher patient volume only drives margin if appointments are kept, follow-ups are timely, and throughput is optimized.

Final Thoughts: Focused Innovation Wins the Day

The data is clear: volumes are up, but costs are rising faster. For health system leaders, the challenge now is to drive financial performance in this new normal. That means focusing not just on cost cutting, but on optimizing and identifying where investment in people, process, and technology can yield the greatest margin impact.

Innovation isn’t off the table. It’s just under new constraints, and perhaps becoming even more vital. The most effective solutions will be those that prove their worth in real terms: time saved, revenue created/captured, and costs avoided.

That’s the future of operational strategy in healthcare. And it starts now.