Hospital operating costs rose significantly in 2025, increasing 7.5%, more than double the growth in hospital prices, according to the annual Costs of Caring report from the American Hospital Association.
The report, based on industry benchmark data compiled by Strata Decision Technology, highlights growing financial pressure on hospitals. Rising labour costs, higher prices for drugs and medical supplies, increasing administrative burdens from insurers, and a growing number of sicker patients are all contributing to the widening gap between hospital expenses and reimbursements.
AHA President and CEO Rick Pollack warned that these pressures could threaten hospitals’ ability to maintain essential services for communities.
1. Drug and supply costs surged
Hospital drug spending increased 13.6% in 2025, while spending on medical supplies rose 9.9%. Academic medical centres experienced even sharper increases, with drug costs jumping 21.6%.
The report also noted that the average launch price for new drugs exceeded $370,000 in 2024, representing a 23% increase from 2023.
Workforce costs remain hospitals’ largest expense, accounting for roughly 60% of total spending. Overall labour expenses increased 5.6% in 2025, covering compensation for physicians, nurses, specialists, and other healthcare workers.
2. Administrative costs tied to insurance disputes climbed
Hospitals spent an estimated $43 billion in 2025 attempting to collect payments for services already delivered.
Nearly $18 billion of that amount was spent on efforts to overturn denied claims from insurers. The report also pointed to rising prior authorization requirements. In 2024, Medicare Advantage plans issued about 53 million prior authorization decisions, with providers appealing 11.5% of them, up from 7.5% in 2019.
These administrative hurdles often delay reimbursement and contribute to rising bad debt, which increased 10% in 2025.
3. Hospitals are treating more and sicker patients
Healthcare demand continues to rise. In 2025:
- Inpatient volumes increased 5.3%
- Outpatient visits rose 9.8%
At the same time, the hospital case-mix index, a measure of patient illness severity, increased about 5% between 2019 and 2024, indicating hospitals are caring for more clinically complex patients.
According to the report, just over half of hospital expense growth is tied to treating more and sicker patients, while the rest reflects higher costs for labour, medications, and medical supplies.
4. Medicare reimbursements continue to fall short
Reimbursement gaps remain a major financial challenge for hospitals.
In 2024, Medicare reimbursed hospitals only 83 cents for every dollar spent on care, resulting in more than $100 billion in underpayments.
Additionally, 56.1% of hospital costs are tied to service lines where reimbursement does not cover the cost of care. Behavioural health services face some of the steepest gaps, with an all-payer payment to cost ratio of 74.5%.
The growing financial imbalance
Despite increasing costs, hospitals have largely kept price increases below the rate of expense growth. However, this imbalance between rising input costs and slower reimbursement growth is creating mounting financial strain across the healthcare system.
If the gap continues to widen, hospitals may face increasing difficulty sustaining the full range of services that patients and communities rely on.
Source: Becker’s Hospital Review, Madeline Scheetz, Hospital expenses grew twice as fast as prices in 2025: 4 AHA findings (March 11, 2026).
