Introduction
U.S. national health expenditures reached $5.3 trillion in 2024 — 18% of GDP, or $15,474 per person, according to CMS. For the organizations delivering and financing that care, the numbers compound fast: hospital expenses grew 7.5% in 2025, more than twice the rate of hospital price growth, while supply costs rose 9.9% and drug expenses climbed 13.6% in the same period.
Operating margins at most hospitals sit around 5.2%, leaving little room for unchecked cost growth. When expenses outpace revenue this persistently, the downstream effects are predictable — deferred capital investment, workforce trade-offs, and compressed budgets for the programs that matter most to patients.
Excessive costs trace back to structural inefficiencies, fragmented procurement, reactive decision-making, and limited spending visibility. This article breaks down cost containment across three dimensions: the systemic factors driving costs up, how organizations manage spending in practice, and the decision-making frameworks that determine whether those efforts actually hold.
TL;DR
- Healthcare costs accumulate across labor, supplies, pharmaceuticals, and administration — often growing undetected until they reach critical scale
- The biggest drivers are fee-for-service payment models, opaque vendor contracts, administrative complexity, and reactive care delivery
- Effective containment targets cost origins, not just symptoms, through smarter procurement, real-time visibility, and process redesign
- Organizations using benchmark data and spend analytics consistently outperform those managing costs reactively
- No single strategy works alone; durable savings require a layered, continuous approach
How Healthcare Costs Typically Build Up
Healthcare cost problems rarely announce themselves. They accumulate gradually across dozens of cost centers — clinical supplies, pharmaceuticals, staffing, IT, and administrative overhead — until the aggregate becomes difficult to reverse.
The build-up tends to accelerate around specific pressure points: a contract renewal, a staffing gap, a supply disruption, or a new regulatory requirement. The AHA's 2025 Cost of Caring report illustrates this clearly — total expenses, supply costs, drug costs, and workforce costs all spiked simultaneously, not sequentially.
The Hidden Cost Problem
Many cost categories stay invisible until scale or external stress forces them into view. A few examples:
- Inventory waste — GHX identified nearly $9 million in expired products across healthcare organizations in 2024 inventory counts, averaging roughly $90,000 per facility
- Drug shortages — hospitals faced an average of 301 drugs in shortage per quarter in 2023, with shortages adding up to 20% to hospital drug budgets
- Administrative rework — billing errors, denied claims, and redundant prior authorization workflows generate costs that rarely appear in any single budget line
When spending visibility is fragmented across departments, organizations can't act on what they can't see — and that gap has a real dollar cost.
Key Cost Drivers in Healthcare
Labor and Staffing
Labor represents the single largest cost category for most healthcare organizations — close to 60% of average hospital expenses, according to AHA. The issue isn't labor cost alone; it's misalignment between staffing levels, skill mix, and actual patient demand.
When that misalignment tips toward understaffing, the costs compound: quality failures, extended stays, and increased reliance on expensive contract labor. Hospital contract labor expenses surged 258% between 2019 and 2022, with median wage rates paid to staffing firms rising 57% over the same period. Turnover adds another layer — the NSI 2026 RN Staffing Report puts the average cost of replacing a single bedside RN at $60,090, with total annual RN turnover costs averaging $5.19 million per hospital.
Supply Chain and Procurement
Supplies account for roughly 13% of hospital expenses, but the controllable share is larger than most organizations realize. McKinsey estimates that supplies and pharmacy together represent 30% to 40% of a typical health system's cost base, with identified optimization opportunities producing 5% to 15% savings on external spend.
Common inefficiencies include:
- Fragmented vendor contracts across facilities
- Duplicate SKUs with no standardization across departments
- Missed group purchasing opportunities
- No price benchmarking before contract renewals
HFMA reports hospitals often pay 7% to 12% more for nonclinical goods than companies in other industries — a gap that persists primarily because procurement teams lack comparative pricing data.
Pharmaceutical Spend
Hospital drug expenses hit $115 billion in 2023 and grew another 13.6% in 2025. Formulary complexity, limited PBM transparency, and low adoption of generics and biosimilars all contribute. Generic and biosimilar medicines saved the U.S. healthcare system $467 billion in 2024 alone, according to the Association for Accessible Medicines.
Administrative Complexity
Health Affairs estimates that administrative spending accounts for 15% to 30% of total U.S. healthcare spending — and that at least half of it may be wasteful or redundant.
Prior authorization alone drives significant waste. AHA estimates hospital compliance costs run roughly $10 billion annually, with another $20 billion spent appealing denials — more than half of which covers claims that should have cleared on first submission.
Fee-for-Service Payment Models
The payment model itself shapes cost behavior. Fee-for-service reimburses volume, not outcomes — creating financial incentives that work directly against efficiency. A 2019 Health Affairs analysis found that FFS-dominated markets showed consistently higher per-capita spending with no corresponding improvement in care quality. Cost containment efforts are harder to sustain when the reimbursement system rewards more procedures, not better results.
Cost-Reduction Strategies for Healthcare
No single intervention contains healthcare costs sustainably. The most effective approaches target where cost originates — whether in how decisions get made upfront, how spending is managed in real time, or how the broader system is structured.
Strategies That Change Decisions
Standardize supply and formulary choices across facilities. Consolidating medical/surgical supply SKUs and pharmaceutical formularies reduces unit costs through volume leverage, eliminates redundant vendor relationships, and simplifies inventory management. One HFMA case study documented $1 million in annual savings from narrowing an orthopedic implant vendor pool alone — a decision made at the procurement stage that prevented cost fragmentation across departments.
Use benchmark data before entering contract negotiations. Healthcare organizations that benchmark spend before signing supplier contracts consistently uncover overpayment — often in categories they assumed were competitive. Tools like Business Solutions Group's spend intelligence platform give procurement teams objective pricing data across multiple expense categories, replacing vendor-presented figures with market reality.
Join group purchasing organizations (GPOs) early. More than 95% of U.S. hospitals already use GPOs for medications, devices, and supplies. A 2025 study found that a one-standard-deviation increase in GPO scale reduced hospital supply expenses by 2.7% — roughly $0.72 million annually, or $48 per discharge — with no evidence of decreased quality. GPO participation must be a proactive decision; waiting until contract renewal limits leverage considerably.
Invest in preventive and chronic disease management programs. Preventive screenings, chronic disease programs, and structured wellness initiatives reduce downstream clinical spend by lowering the frequency and severity of high-cost interventions. One study found that every $1 spent on low-value PSA screening generated $6 in downstream care costs — redirecting that spend toward prevention alters the cost trajectory before it starts.
Strategies That Change How Costs Are Managed
Implement real-time spend monitoring. Without visibility into where money is going across departments, facilities, and vendors, cost containment is always reactive. eProcurement platforms that consolidate purchasing data into a unified view allow finance and supply chain teams to spot anomalies, flag contract non-compliance, and track savings as they occur. BSG's platform emphasizes centralized dashboards with drill-down capability — the same architecture that proves valuable for identifying cost shifts before they become budget problems.
Apply utilization management protocols. Utilization management works on two tracks simultaneously:
- Clinically — pre-authorization workflows and clinical care pathways prevent unnecessary tests, procedures, and readmissions
- Operationally — spending approval thresholds and preferred vendor enforcement reduce off-contract purchasing
A 2025 Medicare claims study estimated $4.4 billion in annual savings from reducing just 47 low-value services — evidence that even modest utilization discipline produces meaningful financial impact at scale.
Optimize inventory management. Healthcare facilities routinely over-order supplies due to siloed purchasing and poor demand forecasting — resulting in expiration waste, storage costs, and emergency restocking fees. Just-in-time and demand-driven replenishment models address this directly. BSG's Demand & Inventory Planning Software uses 280+ forecasting algorithms and integrates with existing ERP systems to maintain optimal safety stock while eliminating deadstock.
Align labor scheduling with actual demand. Scheduling tools that match staff skill levels and hours to patient volume and acuity data reduce overtime, agency labor costs, and the quality failures that accompany understaffing. Given that replacing 20 travel nurses with permanent staff can save $1.32 million in the first year (NSI, 2026), workforce scheduling is one of the highest-leverage management levers available.
Strategies That Change the Context Around Costs
Automate administrative workflows. CAQH reports that electronic transactions helped U.S. healthcare avoid approximately $258 billion in administrative costs in 2024, while a remaining $21 billion savings opportunity persists from fuller automation of manual transactions. The same report documented a 9% reduction in medical administrative spend from automated processes. Automating prior authorizations, claims processing, and eligibility verification removes rework, reduces denial rates, and frees clinical staff from non-clinical tasks.
Expand telehealth for genuine substitution. Telehealth only produces net cost savings when it substitutes for higher-cost care settings rather than adding utilization volume. A RAND study found that 88% of direct-to-consumer telehealth visits represented new utilization rather than substitution — meaning the savings opportunity depends heavily on how telehealth programs are structured and what patient populations they target.
Pursue value-based payment arrangements. Moving from fee-for-service toward bundled payments, shared savings agreements, or capitated arrangements rewires the incentive structure around cost. Health Affairs reports ACO savings ranging from 0.4% to 6.1% of per-beneficiary spending depending on model type and maturity. This is a contextual change — it alters what the system rewards, not just how individual decisions are made within it.
Conclusion
Healthcare costs become excessive not because they're unmanageable, but because most organizations lack the visibility, procurement discipline, and structural design to manage them before they compound. Blanket cuts — reducing headcount, eliminating services — address symptoms without touching the underlying drivers.
Durable cost containment requires identifying where cost originates across three layers: pre-spend decision-making, active spend management, and the systemic structures that make costs hard to control in the first place.
Organizations that invest in spend transparency, benchmark analysis, and process discipline — the approach Business Solutions Group applies across its healthcare and supply chain advisory work — achieve savings that hold over time rather than rebounding within a budget cycle.
The organizations managing costs most effectively share one trait: they treat cost containment as an ongoing discipline, not a periodic project. That distinction is what separates sustained savings from short-term reductions that quietly reverse.
Frequently Asked Questions
What is a way that healthcare costs can be contained?
Costs can be contained through a combination of approaches — standardizing procurement, applying spend analytics, improving utilization management, and redesigning care delivery. The most effective starting point depends on where your organization's greatest cost exposure lies, so a diagnostic assessment of current spend and utilization typically comes first.
What are the main drivers of rising healthcare costs?
The primary drivers are labor and staffing imbalances, fragmented supply chain and vendor contracts, pharmaceutical price growth, administrative complexity, and fee-for-service payment models that reward volume over efficiency. Most organizations face several of these simultaneously.
What is the difference between cost containment and cost cutting in healthcare?
Cost cutting typically means reducing spend indiscriminately — eliminating staff or services regardless of impact. Cost containment focuses on eliminating waste and inefficiency without sacrificing care quality or operational capability. The distinction matters because cuts that reduce capacity often generate higher downstream costs.
How does supply chain management reduce healthcare costs?
Supply chain optimization — through GPO participation, vendor contract consolidation, inventory management, and benchmark-driven negotiations — addresses one of the largest controllable cost categories in healthcare operations, with McKinsey estimating 5% to 15% savings on external spend for health systems that apply structured optimization.
What role does data analytics play in healthcare cost containment?
Spend analytics and benchmark data allow organizations to move from reactive to proactive cost management. In practice, this means comparing contract pricing against market rates, flagging off-contract purchasing, and spotting utilization patterns that signal waste — before they become entrenched budget problems.
How do healthcare organizations measure whether their cost containment efforts are working?
Key metrics include cost per patient or procedure, supply spend per adjusted patient day, administrative cost ratio, and year-over-year per-employee healthcare spend. Tracking these against industry benchmarks, not just internal year-over-year trends, is what distinguishes real savings from accounting shifts that look like progress on paper.
