In 2024, hospitals expended $890 billion in labor costs, representing 56 percent of all hospital expenses, according to the American Hospital Association (AHA)
Providing patient care is a heavy burden on hospitals’ budgets. In addition, supplies and drugs are increasing in cost.
Healthcare facilities are facing rising operational costs; therefore, they need strategies for cost containment without sacrificing excellent patient care.
What is cost containment in healthcare?
Healthcare cost containment refers to finding strategies or paths that allow facilities to save money and reduce spending without compromising patient care.
How to reduce healthcare costs without compromising quality
Implementing effective cost containment strategies ensures the facility’s financial stability, helping to avoid possible bankruptcy.
Cost containment improves utilization management, making procedures more streamlined and efficient.
Major costs in healthcare centers
According to the AHA, the increase in medical centers’ expenses in 2024 was almost double the inflation rate: Medical expenses grew by 5.1 percent, whereas the inflation rate rose by 2.9 percent.
Here is a breakdown of medical facilities’ expenses by percentage of total costs:
- Labor costs: 56%
- Other: 22%
- Supplies: 13%
- Drugs: 9%
Labor constitutes the largest cost category for healthcare facilities, often leading to this category becoming the primary target of cost reduction measures.
Labor costs
The nurse staffing shortage is forcing hospitals to rely on overtime, increasing expenses due to these premium rates.
Furthermore, the AHA study also found that salaries for registered nurses have grown 26.6 percent faster than the inflation rate over the past four years.
Costs for healthcare facilities due to chronic conditions
The rising hospital costs are also affected by the following:
- Increasing use of healthcare services
- Increasing patient acuity—especially in the case of chronic conditions
Based on data from the AHA study, visits to the emergency department due to heart failure were associated with an increase in spending of 177.2 percent between 2010 and 2019. A similar pattern was observed for type 2 diabetes and acute renal failure.
Longer stays equal higher costs
Longer stays represent higher costs for healthcare facilities, and—as is the case with Medicare Advantage (MA) patients—often result in lower reimbursement.
MA plans reduce costs by promoting extended observation stays as opposed to traditional inpatient admissions. Unfortunately, this practice doesn’t mean lower healthcare costs overall, it merely shifts the cost burden onto hospitals.
MA plans reimburse at a lower rate for observation stays. As these types of stays lengthen in time and frequency of use, the cost for hospitals increases without adequate reimbursement to offset it.
According to an article published in the National Library of Medicine in 2024, nurse understaffing is another factor directly related to longer patient stays. Additionally, being short-staffed could lead to other complications, resulting in extra costs for medical centers.
Who should be involved in cost containment measures?
Medical cost containment needs collaboration between different departments and staff. When looking for financial sustainability in healthcare, it is important to involve personnel at different levels.
Healthcare C-suite positions
Health system leaders and executives play a vital role in looking for administrative cost reduction. The involvement of CEOs in creating a cost-containment culture guarantees the accomplishment of the proposed objectives.
Healthcare executives’ opinions on various subjects, such as staffing or administration, determine the institution's guidelines. Therefore, the implementation of cost-containment strategies starts with them.
Financial team
The financial division oversees hospital cost management and analysis to ensure the healthcare facility's solvency.
The assessment of the budgetary outlook is necessary to align financial plans with the guidelines of the cost-containment objectives. Therefore, the insights of the financial division are key to identifying cost-reduction opportunities and defining cost-reduction strategies.
Medical supply chain operations
This team is in charge of the facility’s purchasing processes. Therefore, its involvement in creating cost-containment strategies is necessary to increase inventory management efficiency and develop relationships with key suppliers.
Operational team
The operation team has the “know-how” of a facility’s workflow and processes. This team can help identify inefficiencies and opportunities for streamlining operations.
Facility staff
Physicians, nurses, nurse aides, and all other healthcare workers involved in patient care have first-hand experience with clinical workflows and the resources needed.
Hence, including them in building the cost-containment culture ensures quality care and patient safety remain uncompromised.
Technology department
The technology department can help automate different processes, such as implementing electronic health records (EHRs) and data analysis systems to aid decision-making.
Best practices for healthcare cost containment
Medical centers that apply cost containment best practices ensure their financial stability, increase operational efficiency, and reduce costs without compromising patient safety.
Here are some cost containment practices that facilities can implement.
1. Give teams ownership over cost management
Build joint responsibility with different teams interested in meeting a common goal. Creating a cost containment culture to provide quality and reduce costs can help with smoother implementation.
Shared governance involves everyone from nursing to finance and also shares responsibility for finding solutions to reduce waste, streamline procedures, and implement realistic policies to ensure positive outcomes.
2. Adopt the payment model that suits your facility best
There are different healthcare payment models, such as fee-for-service, capitation, bundled payment, and value-based care.
Facilities should adopt the payment model that aligns better with their policies and procedures. Each has its differences, as follows:
- Fee-for-service: Healthcare centers receive a reimbursement for each service they provide.
- Bundled payments: Medical centers receive a fixed reimbursement for a medical episode.
- Capitation: Healthcare facilities receive an upfront fixed payment per patient, monthly or yearly.
- Value-based care: Facilities receive reimbursement based on quality of care and health outcomes.
3. Optimize staffing efficiency
Staffing shortages and high nurse turnover rates are making facilities look for solutions out of the box, including software to streamline healthcare recruitment. Higher costs due to overtime pay, hire-away-fees, and staffing mandates in some areas are a significant administrative burden for facilities.
Implementing flexible staffing options is a way to optimize healthcare staffing since facilities take a proactive approach to talent acquisition, avoid overworking their personnel, and are able to provide quality care at all times, regardless of census fluctuations.
4. Improve patient flow
Healthcare centers need to streamline operations to guarantee patients’ movement from admission to discharge without bottlenecks.
Investing in technologies, new work methods, and capabilities that are focused on a patient flow culture can improve efficiency in patient care at every care stage.
5. Technology implementation
Technology can reduce paperwork, help to streamline operations, and enable data-driven decision-making, increasing efficiency and identifying cost-reduction opportunities.
6. Telemedicine
Telemedicine is on the rise. It is an option that reduces costs due to decreased space utilization and patient absenteeism, and it improves access to care.
It also promotes prevention and early intervention before any health problem escalates, reducing the possibility of more complex interventions.
How Brookfield Health contained staffing costs
Labor costs represent the highest economic burden for healthcare facilities. Hence, looking for staffing optimization solutions, like flexible scheduling, can help reduce healthcare costs, nurse turnover, and burnout.
One example is Brookfield Health's experience with Nursa, a marketplace that connects facilities with PRN nurses. The facility had chronic problems finding contingent staff for last-minute call outs, fluctuating patient census, and weekends.
“Agency staffing doesn’t provide an easy-to-access platform where I can easily request and schedule shifts, which is why we turned to Nursa.”
— Josh Clark, CEO of Brookfield Health and Rehabilitation of Cascadia
Turning to PRN helped the facility find a solution to have the proper staff for every situation without the higher costs of premium overtime pay and overworking their personnel.
Cost containment isn’t the same as cutting costs
Implementing a cost containment culture in healthcare is an excellent way for facilities to reduce costs, avoid waste, streamline processes, and increase efficiency.
Cost containment means reducing costs without jeopardizing the highest standards of care.
Making everyone part of the development of a facility’s cost containment culture is key to gaining the insights and knowledge of every team in the institution.
In addition, sharing responsibilities in culture development ensures the commitment of every healthcare worker and that the cost containment strategies are adapted to the facility's reality.
Discover per diem staffing solutions with Nursa to reduce costs while maintaining quality care.
Sources:
- American Hospital Association: The Cost of Caring: Challenges Facing America’s Hospitals in 2025
- National Library of Medicine: Nurse understaffing associated with adverse outcomes for surgical admissions
- National Library of Medicine: Solutions for improved hospital-wide patient flows – a qualitative interview study of leading healthcare providers
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