That comment is from a recent conversation I had with the Chief Financial Officer of an independent community hospital, the only hospital in a large rural area and the major regional employer.
We talked about her constant efforts to balance margin and mission, to deliver the advanced care her community needs while not having the resources of a major system.
That complexity is something I hear from independent hospital executives across the country, committed leaders shepherding institutions that are the lifeblood of their communities. Without them, there is no healthcare. There are no jobs. But they face an existential threat.
As we enter the back half of 2026, margins are already squeezed by declining reimbursement and rapidly increasing operating costs. Many independent hospitals are struggling for survival and considering sales to larger systems. Even the ones that are managing for now face hard decisions about whether to invest in the capital projects they will need for the future. And as we prepare for 2027 the future keeps looking bleaker, with a number of OBBBA-driven policy changes poised to significantly impact hospital financials.
Often, I speak with leaders who are focused on “cost and containment”. But cost-cutting alone is like boarding the windows on a house that’s already flooded: too little, too late. Staying independent means finding new sources of meaningful, sustainable operating income.
There are about 110 independent community hospitals nationwide that I believe have a fighting chance to not only weather the storm but come out stronger on the other side. These hospitals have the scale (at least 50 employed physicians and $100MM+ in net patient revenue), strategic relationships, and primary care networks they will need to adapt to changing market conditions and build an infrastructure for the future.
The overwhelming majority of hospitals have been squeezed over the past few years (if not decades).
In their April 2026 National Hospital Flash Report, Kaufman Hall found that median hospital year-to-date operating margin (including allocations) was ~2.5 %, slightly more than a December 2025 low of 1.9%. Kaufman Hall cites concerning trends (year-over-year increases in bad debt and charity care) as signals that hospitals should, “proactively adapt and manage long-term revenue risks.” And that tracks with what I’m hearing from hospital leaders in the field.
For the cohort of 110 hospitals I mentioned, 76% had negative net operating profit margin in the last reporting period. (Source: Definitive Healthcare, HospitalView, accessed June 2026.) Hospitals in both rural and urban areas face the same pressure.
An aging population makes Medicare reimbursement an increasingly critical part of the payer mix, but Medicare paid only about 83 cents on the dollar in 2024, to the tune of more than $100B in underpayments. And with the continued shift toward Medicare Advantage, hospitals have to work harder to get that reimbursement.
A study in Health Affairs found that MA plans have initial denial rates of about 17% versus traditional Medicare denial rates of about 8%. More than 57% of denials are overturned on appeal, but that’s still a significant administrative burden and cost for hospitals (on top of the missed revenue). And don’t expect commercial revenue to plug the gap; those contracts may reimburse at even lower rates.
The American Hospital Association’s Cost of Caring report found that total hospital expenses grew 7.5% in 2025, more than twice the rate of price growth. Workforce spending remains the biggest operational expense, but hospitals are also grappling with rising drug and supply cost while caring for more and sicker patients.
Ongoing geopolitical conflicts continue to inflate the cost of goods, creating new headaches for hospital administrators.
Compensation represents about 60% of total hospital costs, with hospitals spending more than $1 trillion on workforce last year, per the AHA. Wages rose 5.6% in 2025 as organizations struggled to recruit and retain employees, especially clinical staff.
You’re probably not maximizing your workforce capacity, clinical and otherwise, and that’s impacting patient access. You need care models that extend clinical capacity as you think about your labor strategy. Some leaders are looking at Advanced Primary Care Management (APCM) to do that, because this program can take bottom-of-license work off the plates of your clinical staff. They can do more with less burden and less burnout, which is critical as you figure out how to serve a rapidly aging population with increased chronic disease burden.
All of these macroeconomic challenges affect independent physician organizations, too. Many physicians are responding to crushing margin pressure by selling their practices to hospitals.
For hospitals acquiring practices, as care shifts to outpatient settings strategic network design is critical. But while hospitals benefit from expanding their ambulatory networks to feed inpatient volume, there are costs to increasing their employed physician workforce.
Acquiring a practice requires significant financial investment. In their Q2 2025 Physician Flash Report, Kaufman Hall found the median net patient revenue generated by a provider FTE (both physicians and APPs) was $404,116 but the median direct expense per provider FTE was $659,025. And the AHA notes that the majority of acquisitions are in lower-margin specialities like pediatric or family medicine, that “hospitals absorbing ongoing practice-support costs to maintain access to services that are essential but less attractive on pure margin economics.” This is an especially important consideration for community hospitals.
A hospital has to make essential services available every day, at any time of day, regardless of whether they are being utilized. That means paying for an infrastructure of expensive specialized staff, space, and equipment with inconsistent or inadequate reimbursement.
That shortfall — and the other economic challenges described above — continue to drive hospital M&A. The share of hospitals operating independently fell from 90% in 1970 to 32% in 2019. Kaufman Hall reports that financial distress is an increasingly important driver.
In 2025, there were 46 hospital and health system transactions of which 20 involved a financially-distressed seller. This was a record high, and the third straight year of increase (15% in 2022, 30.6% in 2024, and 43.5% in 2025). While 2025 was a low-volume year for deals, and the numbers include mid-sized and large hospitals, this three year trend is still a concerning signal for the independent community hospital segment.
That cohort of 110 independent community hospitals averages 43 days cash on hand (but there’s a big range, from -36 to 563). (Source: Definitive Healthcare, HospitalView, accessed June 2026.) Anything less than about 100 days cash on hand signals significant financial vulnerability — worrisome for the 72 hospitals who do not hit this bar.
I’ve just painted a dire picture of the macroeconomic challenges hospitals have been grappling with over the last few years. I have bad news: it gets worse going into 2027.
Here are the challenges that should keep you up at night as you plan for 2027.
I’m not trying to give anyone nightmares, but 2027 is when we start to really see the convergence of ongoing macroeconomic challenges, policy impacts, and coverage loss — with longterm impacts for independent hospitals (if they survive long enough to have a “longterm”).
I believe they can pull through this, but the window of opportunity is closing.
I live in New Jersey, where we get periodic hurricanes off the Atlantic. Toward the end of every summer, storm preparation becomes a common news topic. (You may recall that one of our former governors infamously scolded citizens to “Get the hell off the beach!” in a press conference.)
And so as I think about emergency preparedness for this coming economic storm, I see a window of about 6-18 months where a cohort of about 110 strong independent hospitals can build a more resilient revenue base to ride it out. They have three core advantages.
Sure, independent hospitals may not have all the resources of large health systems. As one CFO told me:
But that’s not a bad thing. Without the institutional overhead of a larger system, independent hospitals can move quickly.
Typically, these hospitals have a comparatively flat organizational structure; the CFO, CMO, and CEO are often in the same building. They can evaluate, decide, and launch in months, not years. In the past few months I’ve seen truly major decisions happen in 30 days, using a structured evaluation process. That just doesn’t happen in a larger system.
Independent hospitals have built long term relationships with their patients. They connect across multiple generations, with major employers, and are woven into the fabric of the community. Their patients trust them.
When we work with them to launch care transformation programs, their patients will pick up the call, consent to participate, and engage. With the right infrastructure, they can quickly drive meaningful, population-wide outcomes.
These hospitals (especially the cohort of about 120 that I think are the strongest) already have medical groups with an extensive primary care network. They already hold the longitudinal relationships and attributed lives that value-based models and proactive (and profitable) fee-for-service models like Advanced Primary Care Management (APCM) will reward.
They have deep population knowledge and mission-aligned cultures. They know the local chronic disease and SDOH landscape, ZIP code by ZIP code and street by street. Change management becomes a lot easier when you have a local workforce and local board of directors aligned around a mission of serving a local community.
And they are already doing a lot of the foundational work already, like care coordination. They just haven’t unlocked the funding they need to get reimbursement for it, do it consistently, and scale it across their populations. Luckily, that first advantage I mentioned — speed and agility — gives them the ability to quickly move on partnerships that can help.
These three core advantages are why I think this cohort of independent hospitals can move quickly, weather out the storm, and emerge stronger in their communities.
At Phamily, we are betting on independent community hospitals as enduring institutions worth supporting and sustaining. In concrete terms, that means two things.
First, as I continue to have these conversations with healthcare leaders around the country, I’ll be working to share lessons learned as broadly as possible. What’s working? What’s not? Where can knowledge sharing help? Over the summer, this will look like a series of Notes From The Field. And stay tuned for a podcast in the fall, where I host in-depth discussions with hospital leaders about how they are managing to win in their markets.
Secondly, we recognize that time is of the essence, that organizations are struggling to plan for 2027. Many are in boardrooms right now deciding whether they can stay independent, or whether they should seek acquisition. These hospitals need revenue, and they need it quickly.
Advanced Primary Care Management is not a silver bullet, and it will not solve every problem. But it builds the longterm foundation of care management required for the shift to value-based models, while delivering near-term, critical operating income: profitability within 90 days, $2.5MM in annual operating income per 10,000 patients.
We’ve created a rapid evaluation program to help leadership teams evaluate APCM within 45 days. And if they decide to move forward (most do), we’re holding monthly implementation slots specifically for independent hospitals.
The independent hospital is not a relic; it is a model that communities need now, in 2027, and long into the future.
If you’d like to be part of the conversation, please reach out. I’m here to support.
Darshan has 15+ years experience co-founding and building high growth healthcare technology businesses committed to improving access to care and quality of care. More about Darshan…
