At current course and speed, hospitals and health systems are quickly approaching financial unsustainability. Rapidly growing operating expenses and threats to revenue growth are putting tremendous pressure on margins.

Providers already face threats to both volumes and prices, which will only intensify as a result of ongoing changes to payment policies, patient demographics, insurance benefits, and the competitive landscape. Combined, these trends reveal a long-term, revenue-driven margin challenge. As a result, hospitals and health systems need new strategies to effectively and sustainably slow operating expense growth to protect future margins.

This research report unpacks the drivers of the emerging margin management challenge and provides a road map of strategic solutions for hospital and health system leaders.

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Hospitals and health systems must rebase and bend the cost curve to ensure long-term margin sustainability. Organizations can contain operating expense growth through two primary ways: rebasing external spending and cultivating the cost-effective workforce.

Rebase external spending

Leaders should front-load strategies that rebase spending on supplies, pharmaceuticals, and purchased services to compound the savings over time. Unlike labor expenses, hospitals and health systems have a tangible opportunity to lower the unit cost of supplies and purchased services.

1. Strategic outsourcing of non-core functions (p. 28)

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2. System-level purchased services contracting (p. 34)

3. Hardwired escalation policy for local supply selections (p. 37)

4. Precise pharmaceutical utilization management (p. 40)

Cultivate the cost-effective workforce

Organizations should seek to slow the growth of labor expenses rather than rebase them through undesirable tactics such as mass reductions in force or benefit changes. Labor remains the largest operating expense category for hospitals and health systems, and slowing the growth of both administrative and clinical labor expenses will be central to an effective cost-containment strategy.

5. Scaled administrative roles and responsibilities (p. 53)
6. Top-of-license clinician role redesign (p. 60)
7. LOS-driven labor demand management (p. 68)
8. Selective service-line rationalization (p. 72)

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