Nearly 60% of hospitals report rise in non-labor expenses
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Non-labor expense increases of 6% to 10% over the past year were driven in part by tariffs, says Kaufman Hall report.
Operations By Nathan Eddy | December 15, 2025 | 10:35 AM Photo: Ryan Mcvay/Getty Images Hospitals and health systems are heading into 2026 with rising non-labor expenses, workforce pressures, capacity constraints and payer reimbursement issues shaping their financial outlook, according to a Kaufman Hall report.Nearly 60% of surveyed organizations reported non-labor expense increases of 6% to 10% over the past year, driven in part by tariffs – an issue that 83% of respondents are now actively quantifying through internal workgroups.“Respondents repeatedly cited reimbursement challenges as a leading challenge facing their organizations,” said Lance Robinson, managing director and leader of Kaufman Hall’s Operations Improvement Practice, in an interview with Healthcare Finance News.He said denials, Medicaid pressures and legislative uncertainty were causes for concern.“In addition, labor still represents the largest share of operating costs for health systems,” he said.He points out that 70% of respondents said they are pursuing ways to optimize their workforce, including raising starting salaries, offering signing bonuses and looking for opportunities to increase remote or hybrid schedules where sensible.Clinical Staff Costs RiseMeanwhile, competition for clinical staff is pushing costs higher, with 83% of respondents reporting raising salaries, and 81% offered signing bonuses to retain or recruit employees.Health systems are also turning to advanced practice providers, though 42% said the effectiveness of APP deployment varies widely across their organizations.An additional hurdle is widespread capacity challenges, with 91% of health systems admitting they cannot accommodate patients in a timely manner.Emergency department bottlenecks are a major driver: 77% identified ED holds as the top capacity constraint, followed by delays tied to insurance referrals and approvals (57%).These constraints are limiting patient access and hindering operational performance at a time when demand for services remains high.“Health systems can strengthen care coordination with outpatient and primary care settings, implement zones to quickly sort and care patients and conduct regular reviews of data on ED holds,” Robinson said.He added that on the inpatient side, discharge planning must start upon admission, given the potential for patient back-ups that can lead to ED delays.“Teams should also hold multidisciplinary rounds and follow up on action items, while leveraging key data – such as discharge rates – to identify opportunities to improve processes,” Robinson said.Reimbursement, Admin Burdens GrowReimbursement challenges are also growing. Forty-four percent of hospitals cited high denial rates and administrative burden as their top issues with managed care organizations.At the hospital level, 26% said front-end breakdowns – such as authorization, eligibility and benefits verification – are the leading contributors to denials. Another 19% pointed to delays in payer response times, while 15% cited insufficient denial tracking.On the physician side, incomplete documentation was the most common cause of denials (26%), followed by prior authorization gaps (15%) and issues with bundled or separately billed services (15%).However, investments in clinical documentation integrity systems have produced mixed outcomes: 30% of organizations reported a measurable return on investment, while 26% said the value remains unclear.“Denials can be reduced through leading-practice prevention and management strategies,” said Bart Richards, managing director in Kaufman Hall’s Revenue and Operations Improvement Practice.For outpatient and professional fees, improved authorization workflows and a dedicated denial prevention unit with strong analytics and accountability reduce rework.“Real-time EHR edits, predictive analytics and rapid response teams address issues within 24-48 hours,” Richards said.From his perspective, sustained improvement depends on alignment across clinical and revenue cycle teams.“Joint operating committees, standardized documentation tools, payer-specific playbooks, and centralized dashboards shift organizations from reactive denial management to proactive prevention and measurable performance improvement,” Richards explained. Topic: Accounting & Financial Management, Operations, Reimbursement, Workforce