Hailey Tran
Hospitals are facing a challenging financial situation due to rising costs and inadequate reimbursement. The biggest expense for hospitals is employee salaries and benefits, accounting for 56% of total hospital costs. Other significant expenses include medical and surgical supplies, professional fees, and IT solutions. Hospitals also face pressure from supply chain disruptions, with many essential medical goods and protective equipment being imported from international sources. The COVID-19 pandemic has further impacted hospital finances, with elective procedures cancelled and revenue losses. State and local governments spent $377 billion on health and hospitals in 2021, a significant increase from previous years. Hospitals need to carefully manage expenses and revenues to maintain operational efficiency.
| Characteristics | Values |
|---|---|
| Employee salaries and wages | The biggest expense for hospitals, accounting for nearly one-fourth of total hospital operating expenses. |
| Medical/surgical supplies | The second-highest expense for hospitals. |
| Employee benefits | The third-highest expense for hospitals. |
| Professional fees | The next largest expense, accounting for 11.9% of total expenses on average. |
| Technology | An emerging cost area, with hospitals needing to invest in newer digital health technology, especially with the new norm of virtual checkups and increased demand for telehealth. |
| Supply chain costs | Hospitals spend on average an excess of $12.1 million on supply-chain costs. |
| PPE kits | Hospitals spent more than $3 billion on PPE kits during the pandemic. |
| Capital improvements | Delayed capital improvements in critical physical assets, such as medical equipment, operating rooms, and facility upgrades, can jeopardize care quality and hinder hospitals' ability to keep up with evolving healthcare standards and technology. |
| Government spending | In 2021, state and local governments spent $377 billion on health and hospitals, accounting for 10% of direct general spending. |
| Patient out-of-pocket spending | Accounts for a relatively small share of spending on hospital care (3% in 2023). |
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What You'll Learn
Employee salaries and benefits
Hospitals are facing financial pressures due to persistent cost growth and workforce shortages, which have resulted in competitive wage offerings to attract and retain staff. For example, advertised salaries for registered nurses have grown 26.6% faster than the rate of inflation over the past four years. Hospitals with more than 250 beds have experienced the highest average annual increase in salary expenses since 2018, at over 5%.
In addition to salaries, hospitals also provide employee benefits such as short-term and long-term disability insurance, paid vacation, holiday pay, sick leave, other paid time off, severance pay, and bonus pay. Hospitals are also encouraged to provide more comprehensive benefits packages, including enhanced short-term and long-term disability benefits, increased paid vacation days, and student loan assistance, to attract and retain staff.
The competition for qualified and competent employees in the hospital industry is high, and hospitals must consider the impact of staffing approaches on benefits and structure. For instance, the higher rate of females of childbearing age in the workforce influences the demand for quality short-term disability benefits and maternity and paternity leave benefits. Hospitals that offer robust benefits packages aligned with the national standard are better positioned to attract and retain employees.
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Medical/surgical supplies
Medical and surgical supplies are the second-highest expense for hospitals, after employee salaries. The average total supply expense is $38 million per hospital, with medical and surgical supplies representing more than one-third of these costs (approximately 35% in 2023). This amounts to an average of over $43 million in total hospital supply expenses. There is significant variation in the average medical and surgical supply costs across different types of hospitals, with children's hospitals and short-term acute care hospitals incurring higher costs due to the higher complexity of care and advanced medical technologies used in these settings. On the other hand, critical access hospitals, long-term acute care hospitals, and rehabilitation hospitals report much lower costs, reflecting less acute or specialized cases requiring fewer or less expensive supplies.
The costs of medical and surgical supplies have been steadily increasing in recent years, with an average annual increase of approximately 6.5%. From 2017 to 2023, these costs rose from $30.2 billion to $57 billion. This increase is driven by factors such as rising pharmaceutical costs, physician preference item spending, and ongoing challenges in the medical supply chain. The complexity and unpredictability of global supply chains for items like artificial joints, robotic surgery systems, and advanced imaging technology contribute to the rising costs. As technology and medical practices evolve, hospitals face the ongoing need to acquire and update their supplies to meet clinical care standards, incurring substantial upfront costs and ongoing expenses for maintenance, upgrades, and staff training.
The impact of external factors, such as rising pharmaceutical prices, and internal factors, such as physician preference items (PPIs), influences supply costs. While PPI spending and medical supply expenses are more discretionary, supply chain spending has been on an upward trend since at least 2014. The total supply expenses at U.S. hospitals increase by about 6% each year. University Hospital in Ann Arbor, Michigan, and Stanford Hospital are among the top hospitals with the highest total medical supply costs, with expenses exceeding $1 billion.
Hospitals in the United States rely on both domestic and international sourcing for essential medical goods, with a significant proportion of supplies being imported. In 2024, the U.S. imported over $75 billion in medical devices and supplies, including low-margin, high-use essentials such as syringes, needles, blood pressure cuffs, and IV saline bags. The reliance on imports extends to advanced surgical tools, critical technologies, and protective equipment for healthcare workers, highlighting the exposure to potential disruptions in the global supply chain.
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Technology
The global healthcare IT market is enormous, with costs estimated to reach half a trillion dollars in 2021. The average hospital spends about $2,000 per bed, per year, on IT service desk costs, with larger hospitals spending significantly more on IT solutions overall. Hospitals with 25 beds or fewer spend approximately $1 million, while those with more than 250 beds spend over $33 million on average. Hospitals in the northeastern United States have the highest IT expenses, with an average of $17 million reported for 2023.
Healthcare providers are increasingly focusing on streamlining their technology stacks and seeking new solutions from existing vendors before exploring new vendor offerings. This has led to a rise in competitive pressure in the health IT market, with startups, big tech companies, and leading EMR players vying for market share. Hospitals are investing in innovative technologies such as EHRs, telehealth platforms, and AI-driven tools, with a focus on improving patient safety, efficiency, and regulatory compliance.
The COVID-19 pandemic has also influenced hospital IT spending. The shift to virtual care and the need for faster resolution of device issues have resulted in increased IT help desk spending. Additionally, hospitals have accelerated investments in telehealth, clinical systems, and clinical decision support during the pandemic.
To optimise their technology investments, hospitals are adopting software like Mobile Device Management (MDM) solutions, which enable remote management and troubleshooting of healthcare devices. By leveraging MDM technology, hospitals can achieve better outcomes while reducing costs.
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Capital investments
The Design and Construction department plays a pivotal role in managing renovations, expansions, and new construction projects costing over $5 million. These capital investments aim to improve the enterprise's capabilities, increase patient capacity, and better respond to the needs of local communities.
Access to capital is essential for hospitals' sustainability and the evolution of the healthcare system. While capital costs represent a relatively small proportion of healthcare expenses, they often lead to higher operating costs. Hospitals may seek private financing or investor financing (debt or equity) to fund these capital investments. However, this reliance on investor financing can have economic and social implications, potentially resulting in more expensively equipped hospitals.
Additionally, government funding and grants also play a role in supporting capital projects, particularly in rural healthcare settings, where low-interest loan programs and community development initiatives are available to facilitate capital investment projects.
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Administrative costs
Labour costs are a critical factor within administrative expenses. Hospitals employ a highly educated and highly paid workforce, including doctors, nurses, and other healthcare professionals. The demand for these skilled workers has resulted in competitive wages and benefits, contributing to higher labour costs. According to AHA analysis, advertised salaries for registered nurses have increased by 26.6% faster than the rate of inflation over the past four years.
In addition to labour, hospitals incur substantial capital and operating costs. Capital expenditures include investments in medical equipment, operating rooms, and facility upgrades. Hospitals are under constant pressure to adopt new digital health technologies, such as EHRs (electronic health records), telehealth platforms, and AI-driven tools, to enhance patient care and maintain competitiveness. These investments can be extremely costly, with IT expenses ranging from hundreds of thousands to millions of dollars, depending on the size and location of the hospital.
Furthermore, hospitals face significant operating costs related to their day-to-day functions. These include expenses for supplies, energy, and other essential items. Supply chain disruptions, as experienced during the COVID-19 pandemic, can lead to price escalations and impact the availability of critical medical devices, protective equipment, and low-margin, high-use essentials like syringes and IV saline bags.
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Frequently asked questions
The biggest expense for hospitals is employee salaries and benefits, which account for 56% of total hospital costs.
Other major expenses include medical/surgical supply costs, professional fees, and IT expenses. Hospitals also spend a significant amount on capital, administrative, operating costs, nursing services, and contract labor.
Hospitals cover their expenses through revenue from patient charges, private insurance companies, and public insurance programs such as Medicare and Medicaid. Government funding and reimbursement also contribute to covering hospital expenses.
The pandemic has increased pressure on hospital costs, with additional expenses for PPE kits and other supplies. It has also impacted the supply chain, leading to price escalations. Hospitals have had to manage expenses and revenues to maintain operational efficiency.
