Ethan Rhodes
Hospitals incur a wide range of expenses, from personnel costs to supplies and equipment. According to sources, the largest expense in most hospitals is personnel costs, which include salaries and benefits for employees, pension, and other post-employment costs. These wage expenses can represent about 55% to 65% of a hospital's total expenses. The second-largest expense is supplies and services, followed by depreciation. Prescription drug costs can also be a significant expense, especially for medications treating rare diseases. Other notable expenses include the cost of leasing medical equipment and administrative costs for running healthcare facilities.
| Characteristics | Values |
|---|---|
| Largest expense category | Salaries and benefits for employees |
| % of expense dedicated to wages | 55% - 65% |
| Second-largest expense category | Supplies and services |
| Third-largest expense category | Depreciation |
| Prescription drug spending in 2023 | $449.7 billion |
| Largest shares of total health spending in 2023 | Federal government (32%) and households (27%) |
| Per capita personal health care spending in 2020 | New England ($12,728), Mideast ($12,577), New York ($14,007), Utah ($7,522) |
| Largest healthcare system by expenses | HCA Healthcare ($36,403,674,734) |
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What You'll Learn
Employee salaries and benefits
In addition to salaries, employee benefits also contribute significantly to hospital expenses. Benefits can include paid vacation, holiday, sick leave, other paid time off, severance pay, and bonus pay, and pension plans. When combined with salaries, these benefits can account for up to 65% of a hospital's total operating expenses. As a result, hospitals with a high bed count and larger physical size tend to have higher operating expenses.
The high cost of employee salaries and benefits in hospitals can be attributed to several factors. Firstly, the demand for healthcare workers has increased, leading to higher salaries and benefits packages to attract and retain talent. Secondly, the complexity of healthcare roles has grown, requiring more specialized training and education, which commands a higher salary. Finally, healthcare facilities, especially in regions with a high cost of living, may need to offer competitive salaries and benefits to remain attractive employers.
While employee salaries and benefits are the largest expense for hospitals, it's important to note that other factors also contribute to the overall financial picture. Medical supply costs, prescription drug prices, and depreciation of equipment can also impact a hospital's bottom line. Additionally, effective financial management is crucial to optimizing expenses. Hospitals with efficient accounting practices can ensure that funds are allocated appropriately and that unnecessary costs are minimized.
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Medical supplies
Medical supply costs are a significant expense for hospitals, second only to labour costs and administrative expenses. These costs have been increasing in recent years due to rising prices, advancements in medical technology, and other factors. In 2023, US hospitals reported over $57 billion in combined medical and surgical supply costs, averaging $15.4 million per hospital. This figure includes the costs of medical devices, implantable devices, and pharmaceuticals billed to patients, excluding overhead costs. Medical and surgical supply costs have been steadily increasing, rising from $30.2 billion in 2017 to $57 billion in 2023, reflecting an average annual increase of approximately 6.5%.
Supply chain costs account for a large portion of hospital expenses, averaging about 14% of total hospital operating expenses. Medical supply expenses are impacted by external factors such as rising pharmaceutical prices and internal factors like physician preference items (PPIs). While PPI spending and medical supply expenses are more discretionary than other hospital expenses, supply chain spending has been trending upwards since at least 2014. According to Definitive Healthcare's HospitalView product, total supply expenses at US hospitals increase by about 6% each year.
The average total supply expense per hospital is $38 million, with medical and surgical supplies representing more than one-third of these costs, approximately 35% in 2023. This includes not only the costs of supplies but also overhead expenses such as buildings, fixtures, maintenance, and plant operations. There is significant variation in average medical and surgical supply costs across different types of hospitals. For example, children's hospitals average around $44.14 million, while short-term acute care hospitals are around $29.85 million. In contrast, critical access hospitals, long-term acute care hospitals, and rehabilitation hospitals report much lower costs due to less acute or specialised cases requiring fewer or less expensive supplies.
Medical supply expenses form the second-largest expense category after payroll, ranging from 15% to as high as 30-40% in hospitals with a high case-mix index, such as surgery-intensive hospitals. While personnel costs are the largest expense, including salaries, benefits, and payroll taxes, medical supplies are a close second. As technology and medical practices evolve, hospitals must continually update their supplies to meet clinical care standards, incurring substantial upfront costs for critical equipment and ongoing expenses for maintenance, upgrades, and staff training. For instance, cardiac magnetic resonance imaging machines, essential for diagnosing heart conditions, can cost hospitals millions.
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Drugs and medication
The cost of drugs and medication can be a significant expense for hospitals, as they often have to pay high prices to drug manufacturers. In the United States, the federal 340B Drug Pricing Program was designed to help hospitals and outpatient clinics serving low-income patients to afford expensive drugs. However, eligible organizations can also obtain acquisition-price discounts on drugs infused in patients covered by private insurers or Medicare. This has led to hospitals receiving a substantial share of insurer pharmaceutical expenditures.
A study by the New England Journal of Medicine found that hospitals retained a significant percentage of Blue Cross Blue Shield drug spending, while the drug manufacturers received a smaller percentage. The study focused on 57 drugs, including those used for oncologic, inflammatory, and blood-cell deficiency disorders, which are among the most expensive physician-administered drugs. These drugs are often targeted for cost-reduction strategies due to their high unit prices and prescription volume.
The cost of drugs and medication can be a significant financial burden for hospitals, and it is important for them to manage these expenses effectively. Hospitals may also face challenges due to supply chain disruptions, which can impact their ability to acquire the necessary medications and equipment.
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Administrative costs
One of the critical components of administrative costs is personnel expenses, including salaries and benefits for administrative staff and other non-clinical employees. This category can account for a substantial proportion of overall administrative costs, as skilled professionals are essential for the smooth functioning of hospitals. For example, registered nurses constitute approximately 28% of the hospital workforce, underscoring the importance of personnel expenses in healthcare budgeting. Higher-qualified and specialised staff also command higher salaries and benefits, further increasing these costs.
Another factor influencing administrative costs is the management and maintenance of healthcare facilities. These expenses cover essential aspects such as office support, building upkeep, and utilities. While these costs may not be as high as personnel expenses, they are nonetheless significant and necessary to ensure a safe and functional environment for patients and staff.
In recent years, hospitals have faced challenges due to rising inflation and supply chain disruptions, which have impacted the cost of supplies, services, and equipment. These external factors have contributed to the overall increase in administrative costs. Additionally, healthcare facilities must also manage the expenses associated with outsourcing certain services, such as cleaning or specialised medical services, which can vary depending on market rates and the availability of resources.
To optimise their financial management, hospitals are advised to engage the services of specialised medical accounting professionals. This proactive approach can help identify areas where expenses can be streamlined without compromising the quality of patient care, ensuring that healthcare facilities operate efficiently and effectively within their budgetary constraints.
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Equipment lease
While personnel costs are the largest expense in most healthcare facilities, equipment leasing is also a significant expense. Medical equipment is essential for diagnosis, treatment, and patient care, but it can be extremely expensive to purchase. Leasing medical equipment allows healthcare facilities to rent equipment rather than buying it outright. This can be particularly advantageous for managing cash flow and staying up-to-date with technology.
Leasing medical equipment offers several benefits. Firstly, it provides lower upfront costs compared to purchasing, which often requires a significant down payment. Leasing typically involves minimal initial investment, helping facilities conserve cash for other critical needs. Secondly, leasing offers predictable monthly payments, making budgeting easier and reducing the risk of unexpected expenses. This financial consistency aids in long-term financial planning. Thirdly, leasing enables access to advanced equipment that might otherwise be unaffordable. With leasing, healthcare providers can acquire the latest technology to improve patient outcomes without the burden of large capital expenditures.
Another advantage of leasing is the inclusion of maintenance and repair services in the lease agreement. Most lease agreements provide two- to three-year warranties, covering equipment upkeep and repairs by qualified professionals. This reduces the risk of equipment failure and extends the lifespan of devices, and relieves the facility's budget from maintenance costs. Leasing also offers flexibility in equipment upgrades. Facilities can regularly upgrade equipment without the ownership burden, ensuring they adapt to industry advancements.
However, there are also considerations to keep in mind when leasing equipment. While leasing provides short-term financial flexibility, the cumulative cost over the lease period may exceed the equipment's actual value. Additionally, leasing does not provide ownership benefits like asset appreciation or equity buildup. Healthcare managers need to carefully assess their financial situation, long-term goals, equipment lifespan, and usage patterns to determine if leasing is the right choice for their facility.
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Frequently asked questions
Personnel costs are the largest expense for hospitals. They include salaries and benefits for employees, pension, and other post-employment costs.
Supplies and services are the second-largest expense for hospitals.
Drug costs, depreciation, and lease costs for medical equipment are other large expenses for hospitals.
