Pharma costs squeeze hospital margins

The rising cost of medications is turning into a financial gut punch for hospitals, with pharmaceutical spending driving tens of millions of dollars in losses across health systems. 

In the first half of 2025, New York City-based Memorial Sloan Kettering Cancer Center reported an operating loss of $113.2 million. Along with costs related to its Epic EHR implementation, the cancer center attributed the shortfall to increased medical supply and pharmaceutical expenses.

During the second quarter of 2025, Cleveland Clinic’s operating expenses rose 10% year over year. The system said inflation contributed to higher pharmaceutical costs. 

Renton, Wash.-based Providence reported a 12% increase in pharmaceutical spending, which partly drove a $100 million rise in operating expenses from $7.8 billion in the second quarter of 2024 to $7.9 billion in the same period this year.

The trend is not unique to 2025. In its fiscal year ending Sept. 30, 2024, Somerville, Mass.-based Mass General Brigham spent $335 million on pharmaceuticals — a 22% increase — as part of $20.5 billion in total operating expenses. 

During the three months ending Dec. 31, Mass General Brigham saw an annual 11% increase in operating expenses, including a 17% rise in pharmaceutical and clinical supplies costs. In the most recent quarter, those expenses rose 21% year over year. 

While pharmaceuticals are not the only contributor to escalating hospital and health system operating expenses — with labor and medical supply costs also climbing — drug prices are increasing at a faster clip. 

Strata’s most recent “Monthly Healthcare Industry Financial Benchmarks” report found that between mid-2024 and mid-2025, pharmaceutical expenses increased nearly 10% across more than 1,850 U.S. hospitals. Purchased services grew nearly 7% and average labor expenses rose 3.8%. 

An aging population and increased use of specialty drugs are driving the surge as care shifts to complex, high-cost pharmacologic interventions, according to Kaufman Hall.

Future strain on pharmaceutical budgets

Additional headwinds may handcuff hospital pharmaceutical budgets in the near future, particularly with changes to the 340B Drug Pricing Program and potential tariffs on pharmaceuticals. 

Despite months of industry pushback and ongoing litigation, the Health Resources and Services Administration announced July 31 it would pilot a 340B rebate model beginning in 2026. The pilot will include the first 10 drugs with prices negotiated by CMS.

Such a model could significantly disrupt cash flow. Disproportionate share hospitals project an average annual impact of $72.2 million, while critical access hospitals anticipate a $1.7 million financial toll on average. 

Another potential pressure point may come from pharmaceutical tariffs; a policy President Donald Trump has floated to incentivize domestic drug manufacturing. The U.S. and European Union agreed to cap levies on pharmaceutical exports to 15%, but President Trump has indicated pharmaceutical tariffs with other countries could reach 200% to 250% within a year. 

This tariff threat is prompting health systems such as Providence and Louisville, Ky.-based Baptist Health System to fortify their shortage mitigation strategies. Providence COO Darryl Elmouchi, MD, told Becker’s the 51-hospital system has developed a tariff projection model to analyze and plan for various scenarios. 

As drug costs continue to climb, health systems may need to rethink drug procurement, supply chain management and budget forecasting. 

“We also continue holding firm on contract pricing through the terms of our agreements, maintaining frequent and open dialogue with key suppliers and actively prompting upstream efficiencies,” Dr. Elmouchi said. “We conduct weekly and even daily disruption assessments of our inventory to balance our safety stocks.”

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