Hospitals are losing money because their costs are rising faster than what they get paid. About 41% of rural hospitals operated at a loss in 2025, and the national median operating margin for rural facilities was just 2%. Even hospitals technically in the black are running on razor-thin margins that leave almost no room for unexpected costs. The financial squeeze comes from several directions at once: labor shortages, government underpayment, insurance company denials, rising drug prices, and new threats like cyberattacks.
Labor Costs Take 60% of Every Dollar
Labor is the single largest expense for any hospital, consuming nearly 60% of the average hospital’s operating budget. Between 2021 and 2023, hospital labor costs jumped by more than $42.5 billion, reaching a total of $839 billion nationally. That increase wasn’t driven by generous raises for bedside nurses. It was largely driven by the cost of filling gaps.
When hospitals can’t recruit or retain enough permanent staff, they turn to travel nurses hired through staffing agencies. At the peak in January 2022, travel nurses earned 148% more per week than permanent staff doing the same work. Even in 2023, after the worst of the pandemic staffing crisis had eased, travel nurses averaged $2,657 per week compared to $1,341 for staff nurses. A large portion of what hospitals pay doesn’t even reach the nurses themselves; staffing agencies pocket a significant cut. Hospitals that relied heavily on contract labor during and after the pandemic saw their expenses balloon while their revenue stayed flat or grew slowly.
The underlying problem hasn’t gone away. Nursing programs turn away tens of thousands of qualified applicants each year due to faculty shortages, and an aging workforce means more retirements. Hospitals stuck in a cycle of high turnover keep paying premium rates to fill shifts, and every dollar spent on agency staff is a dollar that doesn’t go toward equipment, facility upgrades, or better pay for permanent employees.
Medicare Pays 82 Cents on the Dollar
Government insurance programs cover a huge share of hospital patients, and neither Medicare nor Medicaid pays hospitals enough to cover the actual cost of care. In 2022, Medicare reimbursed just 82 cents for every dollar hospitals spent treating Medicare patients. That gap added up to $99.2 billion in underpayments in a single year, nearly two and a half times the shortfall from a decade earlier.
Hospitals can’t turn these patients away. Federal law requires emergency departments to stabilize anyone who walks in, regardless of insurance status, and Medicare patients make up a large and growing portion of the population as baby boomers age. Medicaid reimbursement rates are typically even lower than Medicare’s. For hospitals in states with large Medicaid populations or high numbers of uninsured patients, the math simply doesn’t work. They provide the care, absorb the loss, and hope to make up the difference elsewhere.
Historically, hospitals offset government underpayments by negotiating higher rates with private insurers. But that strategy has limits, especially as private insurers push back with their own cost-control tactics.
Insurance Denials Delay and Block Revenue
Private insurance is supposed to be the more profitable side of a hospital’s payer mix, but collecting that revenue has become its own expensive battle. Insurers denied 20% of all claims on HealthCare.gov marketplace plans in 2023. For in-network claims alone, the denial rate was 19%, totaling 73 million denied claims. Out-of-network claims fared even worse at a 37% denial rate.
The reasons behind these denials are often murky. The most common reason insurers cited for denying in-network claims was simply “other,” accounting for 34% of denials. Administrative reasons made up another 18%, and lack of prior authorization or referral accounted for 9%. Only 6% of denials were based on medical necessity, meaning the vast majority weren’t rejected because the care was inappropriate. They were rejected on paperwork grounds.
Each denied claim costs the hospital money twice. First, there’s the revenue that doesn’t arrive on time or at all. Second, there’s the cost of employing staff to review, appeal, and resubmit claims. Hospitals employ entire departments dedicated to fighting denials, and that labor adds to the 60% of expenses already consumed by staffing. The process can drag on for months, creating cash flow problems even when the hospital eventually gets paid.
Drug and Supply Costs Keep Climbing
National prescription drug spending hit $467 billion in 2024, a 7.9% increase over the prior year. That was actually a slowdown from 2023’s 10.8% growth, but it still far outpaced what most hospitals could recoup through reimbursement increases. Hospitals don’t just fill prescriptions; they use expensive specialty drugs in cancer treatment, surgery, and critical care, and the prices of those medications have risen steeply.
Medical supplies tell a similar story. The cost of devices, implants, surgical instruments, and even basics like gloves and IV tubing surged during pandemic-era supply chain disruptions and hasn’t fully corrected. When a hospital’s costs rise 8 to 10% per year but Medicare reimbursement rates increase by 2 to 3%, the gap widens every year.
Cyberattacks Create Sudden Financial Crises
A newer and increasingly severe financial threat comes from cyberattacks. The February 2024 ransomware attack on Change Healthcare, which processes a massive share of medical claims and payments nationwide, showed how a single breach can ripple across the entire industry. In the first quarter of 2024, hospital revenue fell 16.5% to 17.9% short of projections as claims processing ground to a halt. By June 2024, the smallest healthcare providers were still missing about 7% of expected Medicare revenue from that January-to-March period.
Hospitals that were already operating on 1 to 2% margins suddenly couldn’t process claims, couldn’t verify insurance, and couldn’t collect payments for weeks or months. Many had to take out emergency loans just to make payroll. Beyond the immediate revenue loss, hospitals now face growing pressure to invest in cybersecurity infrastructure, adding yet another cost that doesn’t directly generate patient revenue.
Small and Rural Hospitals Face the Worst of It
All of these pressures hit harder when a hospital is small. Rural hospitals have lower patient volumes, which means less bargaining power with insurers and suppliers. They often serve older, sicker populations covered disproportionately by Medicare and Medicaid. And they compete for staff against larger urban systems that can offer higher salaries and better career paths.
The numbers reflect this. Rural hospital operating margins averaged negative 0.1% as recently as 2023. They’ve since improved to around 2% in 2025, but that thin margin means a single bad quarter, an unexpected equipment failure, or one uncompensated patient surge can push a facility back into the red. With 41% of rural hospitals still operating at a loss, closures remain a real and ongoing risk for communities that depend on them.
The financial crisis in hospitals isn’t caused by any single factor. It’s the compounding effect of being paid less than the cost of care by government programs, spending more on labor than ever before, fighting insurers for every dollar of private revenue, absorbing rising drug and supply costs, and now defending against cyber threats. Each pressure alone would be manageable. Together, they explain why even hospitals that look busy from the outside are struggling to stay solvent.