As capital spending rises, health systems need a more durable operating model

What’s trending

Moody’s released its final fiscal 2025 medians for 201 not-for-profit and public hospitals and health systems earlier this month. The data show that the sector’s financial improvement slowed in 2025 after a stronger rebound the year before. Median operating margin declined slightly to 1.2% from 1.3%, while EBIDA margin fell to 5.9% from 6.2%.

Revenue growth remained strong at 8.9%, but expense growth jumped to 8.5%, narrowing the revenue-expense spread as wage, staffing, pharmaceutical, supply, and purchased-service costs remained elevated.

At the same time, health systems increased capital deployment and continued to benefit from stronger balance-sheet resources. Median unrestricted cash and investments rose 8.3%, supported by positive cash flow and investment gains, although days cash on hand declined to 188 from 193 as higher expenses absorbed part of that benefit.

Capital spending accelerated. The median capital spending ratio rose to 1.3 times depreciation, while additions to property, plant, and equipment increased 18.2% as systems resumed projects after several years of restraint.
Overall financial results held up better than core operations. Median excess margin, which includes nonoperating income, increased to 3.7% from 3.5% even as operating margin declined.
The underlying revenue model continued to shift. Medicare increased from 45.5% of gross revenue in 2021 to 48.7% in 2025 as the U.S. population continued to age. Within Medicare, the mix shifted substantially toward Medicare Advantage, which increased from 16.7% to 23.5% of gross revenue, while traditional Medicare declined from 29.3% to 24.8%. Over the same period, outpatient care increased from 52.9% to 57.0% of net patient revenue, while the median number of employed physicians rose from 479 to 623.

Why it matters

Hospital finances have recovered from the lows of 2022 and 2023, but performance remains below pre-pandemic levels, while a structurally higher cost base, rising capital requirements, and gradual payer-mix deterioration are expected to constrain further margin expansion.

At the same time, growth is increasingly favoring organizations with strong physician networks, extensive outpatient offerings, and differentiated specialty services. Larger, well-positioned systems are capturing a disproportionate share of volume growth and stronger commercial rate increases, while smaller and less competitive providers face greater reimbursement pressure.

Those conditions make strategic focus increasingly important to capital allocation. Health systems need to decide which markets, service lines, and access points they can support sustainably, then direct capital toward those priorities.

Health systems are increasingly using acquisitions, joint ventures, affiliations, and divestitures to help strengthen priority markets, expand ambulatory capabilities, and redirect resources from lower-priority assets. Partnerships may be especially important for smaller systems that lack the capital, technology, or specialty capabilities to build everything independently. Systems should also look for ways to diversify recurring revenue through ambulatory and physician-led growth, selective risk-based arrangements, and other services that reinforce their strategic position.

Technology and AI should be evaluated through the same strategic lens. Recent sector analysis identifies revenue-cycle performance and workforce productivity among the clearest near-term opportunities, but realizing those gains require continued investment in data, infrastructure, cybersecurity, integration, and workflow redesign.

True administrative cost reduction will come from redesigning revenue-cycle and other administrative functions around better outcomes, rather than adding automation to inefficient processes. Technology investments should therefore connect to measurable objectives such as reducing the cost to provide services, improving revenue capture, expanding capacity, or supporting a differentiated care model.

The financial headwinds ahead will put even more pressure on systems to make those choices deliberately. OBBBA will phase in Medicaid funding reductions, tighter eligibility requirements, and limits on provider taxes and state-directed payments, with work requirements and more frequent redeterminations beginning in 2027. Those changes come as elevated labor and supply costs and the expiration of enhanced ACA subsidies already pressure payer mix, uncompensated care, and margins.

Thriving in today’s environment requires clear prioritization on where to invest and compete effectively. By using today’s financial flexibility to build a more efficient, diversified, and durable operating model, leaders can stay ahead of market pressures.