According to the Centers for Medicare & Medicaid Services (CMS), national health expenditures reached $4.46 trillion in 2022 and are projected to surpass $5 trillion in 2024 and hit $7.7 trillion by 2032. This growth rate is predicted to exceed the nominal gross domestic product (GDP) growth rate—and if the last two decades are any indication, annual growth in healthcare costs will outpace the rate of inflation as well.
High costs affect not only the healthcare industry but also the broader economy and individual consumers. Strategies to reduce the cost of care must therefore leave no stone unturned, from operational efficiency and technology adoption to waste reduction and care delivery improvements.
What Are Healthcare Costs?
The total cost of healthcare consists of care delivery, prescription drugs, and related activities, such as administration, research, and public health. Spending from several entities covers these expenses, whether it’s public or private insurers, employers who sponsor health plans, or consumers themselves. As of 2022, the most recent year for which CMS data is available, the breakdown of healthcare costs is as follows:
- Hospital care: 30.4%
- Government and private insurance administration, public health, and investment: 17.1%
- Personal healthcare spending: 16.5%
- Physician services: 14.5%
- Prescription drugs: 9.1%
- Clinical services: 5.3%
- Nursing home care: 4.3%
- Home healthcare: 3%
Key Takeaways
- Healthcare costs in the United States are increasing faster than the rate of inflation or GDP growth.
- A fragmented healthcare system and an aging population are the main factors that drive cost increases.
- Improving operational workflows presents one of the biggest opportunities for reducing costs in healthcare.
- Organizations can cut clinical costs by reducing unnecessary care and investing in preventive care.
- Technology adoption cuts costs by supporting process automation and data-driven decision-making.
Cost Challenges in Healthcare
Several trends explain why healthcare costs are rising faster than GDP growth and inflation, putting pressure on stakeholders across the industry. One is the fragmentation in care delivery, payment, and regulation. Many entities deliver care, from standalone urgent care clinics to academic medical centers to subsidized clinics. Multiple public and private insurers operate in each U.S. state, and both federal and state regulations govern providers and insurers. All told, this fragmentation contributes to significantly higher spending on overhead and administration compared to other nations.
Another factor is the aging U.S. population. A separate Kaiser Family Foundation analysis found that Americans over 65 accounted for 36% of healthcare spending in 2021, despite making up just 18% of the population. This isn’t surprising, as healthcare spending tends to increase with age due to more frequent doctor visits and higher use of prescription medications. Nevertheless, this is concerning when considering that Americans over 65 are projected to make up 21% of the population by the end of the decade, potentially driving further increases in healthcare costs.
There are also other factors outside the control of health systems and insurers. These include limited efforts by state and federal governments to negotiate lower prices for medical services or prescription drugs, the negative consequences of individual lifestyle choices, and the impact of non-clinical social determinants of health—such as education and income disparities, environmental quality, and neighborhood safety.
25 Actionable Strategies to Reduce Healthcare Costs
While the challenges impacting healthcare costs are numerous and complex, they also present many options for reducing expenses. Organizations can enhance administrative and clinical processes. They can reduce waste and unnecessary spending. They can invest in technology to refine operations and prioritize preventive care to cut downstream spending. They can engage employees and partners across the healthcare ecosystem to uncover innovative savings opportunities. This section explores 25 distinct strategies for reducing healthcare costs, split into eight categories.
Optimizing Operational Efficiency
In healthcare, there are many ways to improve operational efficiency. Some steps focus on improving key business processes, while others emphasize best practices for operations management. Organizations should also consider technology’s potential to identify savings opportunities and automate time-consuming manual processes.
- Implement efficient supply chain management: Unanticipated demand, overbuying, and preferences for high-priced supplies all lead to unnecessary costs in the healthcare supply chain. Taking a holistic look at spending helps identify saving opportunities, such as selecting lower-cost alternatives or the most affordable options for commonly used supplies. Analytics tools can help predict the optimal inventory levels to cut down on overbuying, while automation can replace manual tasks that slow down the buying process.
- Leverage data analytics: Data analytics provides clear opportunities to save money. Beyond reducing supply costs, there’s the potential to review and optimize contracts with external vendors, identify infrequently used high-cost or low-value clinical services, and pinpoint labor-intensive business processes suitable for automation. Analytics works best when supported by an enterprise resource planning (ERP) system that consolidates and unifies data from multiple sources.
- Adopt AI and automation: Automation and artificial intelligence (AI) in healthcare reduce the need for human intervention in back-office processes, such as data entry, reporting, claims processing, and data sharing. Automation can also be applied to stages of the patient care journey, such as appointment scheduling, sending previsit intake forms, and processing prescription refills. Whatever the use case, the value proposition is straightforward: Alleviate the burden of repetitive manual tasks so staff can do the specialized work they were hired to do.
- Optimize patient flow and scheduling: Standardizing how patients move through a hospital helps reduce bottlenecks that contribute to preventable delays in care. It also makes patient flow more predictable, allowing health systems to schedule the right number of clinical and support staff at any given time. This reduces the need to pay overtime to fill unexpected schedule openings.
- Improve environmental services: The Centers for Disease Control and Prevention estimates more than 3% of patients in the hospital at any given time have at least one healthcare-associated infection (HAI) (opens in new tab). These patients stay in the hospital longer, which increases healthcare expenses. Hospitals are also penalized financially if their rates of HAI exceed regulatory standards. Steps such as improving air quality and overall cleanliness reduce the risk of HAIs and contribute to cost savings—all while making for a better work environment.
- Outsource noncore functions: Using third parties for a range of functions can reduce overhead costs. Outsourcing options may include human resources, food services, IT, lab services, cleaning and housekeeping, call centers, pharmacy services, and staffing. This can be a delicate balancing act, though, as more third-party services mean more vendor contracts to manage. Organizations must also ensure the quality of services provided doesn’t decrease when third-party vendors are involved.
Enhancing Healthcare Delivery Models
Organizations can reduce the cost of care by rethinking the way it’s delivered. In some cases, this could mean offering alternatives to in-person care. In others, the right move may be to make ancillary services available onsite, so patients don’t have to go elsewhere.
- Adopt telehealth solutions: Remote monitoring services can cut down on the number of in-person appointments a patient needs to manage their health, which can free up time in the physician office’s schedule. Telehealth also provides patients with a convenient, less-costly alternative to emergency care for low-acuity health needs—especially when brick-and-mortar primary or urgent care providers are closed. In addition to virtual consults, telehealth can also include patient portal or chatbot messaging.
- Consider alternative care models: CMS promotes a range of value-based care models that offer financial incentives for improving health outcomes rather than providing reimbursements under the traditional fee-for-service model. In these programs, care teams are encouraged to coordinate both clinical and non-clinical support to address patient needs. Such models aim to reduce the use of low-value care, offer more options for managing chronic conditions, and tailor treatments to patients’ health goals.
- Consolidate services: When done responsibly, consolidating clinical services can lower costs by improving efficiency and access to care. Onsite lab and imaging services, for example, allow physician offices to provide a “warm handoff” for tests ordered during an appointment. Similarly, an oncology department offering cancer screenings and genetic tests onsite can make it easier for patients to get recommended care, reducing the risk of care gaps that can lead to missed diagnoses and downstream higher-acuity care needs.
Reducing Waste and Inefficiency
Some waste in the hospital is material. Supplies may expire before they can be used; old buildings leak heat and air conditioning; a patient only needs a half-dose of medication. Another common form of waste is the paper-based patient record, which for some patients can exceed hundreds of pages and is costly to both store and share with other entities.
- Improve energy efficiency: As 24/7 operations, hospitals are heavy users of thermal energy and electricity. Improving efficiency should start with an energy consumption audit, which establishes a benchmark for ideal energy use. Subsequent steps could include updating HVAC systems, installing heat pumps, and putting in sensors that adjust room heating and lighting based on occupancy. Education can also help, as simple steps, such as encouraging staff to turn off lights or devices when not in use, can cut energy bills.
- Reduce waste: Many tips here actually mirror actions people take at home, such as separating recyclables from trash, using washable linens and gowns instead of disposable paper options, and reducing reliance on single-use plastics. Regulated medical waste magnifies the challenge, as it must be disposed of separately and kept out of regular trash. Separate containers help, but they should be easily recognizable and small, so no one’s tempted to use them as regular trash bins.
- Digitize documents and records: Paper-based medical records are costly. They require significant physical storage space. They must be printed, faxed, copied, and shipped—and can be easily damaged at any point along the way. Digitization is largely paperless, which frees up space in the hospital or office for revenue-generating services, and reduces energy consumption from peripheral devices like printers or copiers. Transitioning storage of electronic records to offsite cloud-based services can further reduce direct energy costs for facilities.
Managing Healthcare Costs
It’s true that many aspects of healthcare costs are beyond the control of health systems or insurers. That said, stakeholders can take proactive steps to provide low-cost alternatives—as well as help patients and other stakeholders understand their options.
- Optimize prescription drug costs: Millions of Americans regularly take medications to manage chronic conditions. If patients can’t afford medications and stop taking them, health outcomes can worsen. Encouraging the use of lower-cost generic medications, as well as increasing competition in the market for such alternatives, can reduce prescription costs. Other options include mail-order prescriptions, which can cost less to process and can be ordered in bulk, and patient-facing apps for medication reminders, which can reduce the administrative burden of follow-ups while improving adherence.
- Negotiate with healthcare providers: Insurers and employers sponsoring health plans have the leverage to negotiate with hospitals and health systems to drive down costs. For example, they may contract with a center of excellence that consistently achieves quality outcomes or with an integrated practice that offers a range of services. These steps can make costs more predictable, as high-quality care comes with fewer unanticipated adverse events, and integrated practices reduce the reliance on out-of-network providers.
- Educate employees on healthcare costs: Many employer-sponsored health plans cover routine health screenings with no out-of-pocket costs. These screenings can identify potential problems at early stages, when they’re less complex and costly to treat, offering an easy opportunity to reduce downstream healthcare costs. It’s also helpful to steer employees to the appropriate site of care given their needs, such as telehealth or urgent care for non-emergency issues or in-network providers for emergency care or surgical procedures. Educational efforts might include running workshops, providing digital tools, or sending targeted communications to help employees make informed decisions.
Investing in Preventive Care
Across the healthcare ecosystem, stakeholders recognize the benefits of preventive care. The challenge lies in making it accessible to those who need it, as not everyone has easy access to a doctor’s office for the services they need.
- Implement preventive care programs: Offering preventive care, such as annual wellness visits, vaccinations, counseling services, and health screenings, either at a physician’s office or through affiliated community-based clinics helps people recognize health issues early, when treatment is less expensive and more effective. Under the Affordable Care Act, prevention programs for qualified patients may also include home- and community-based services that coordinate access to chronic condition management programs, as well as non-clinical support such as housing, transportation, nutrition, and employment assistance. Efficient back-office coordination that covers scheduling, reimbursement, and data sharing plays a role in reducing administrative costs while delivering these services.
- Partner with insurers and employers: Working with insurers and employers with “boots on the ground” in a community can expand access to preventive care services while helping to manage healthcare costs for both patients and organizations. Careful management of program logistics, outcome tracking, and partner communication can help maximize the financial impact of preventive care initiatives.
Fostering Employee Engagement
Some elements of employee engagement in cost-saving measures are straightforward, such as encouraging workers to turn off lights when leaving a room, as mentioned earlier. Others involve larger-scale efforts, such as engaging, training, and retaining employees to offset hiring costs or relying on staffing agencies.
- Encourage physician engagement: It’s critical to involve physicians in cost-cutting conversations. Doing so can reveal important information, such as why a surgeon prefers higher-cost supplies or why a specialist declines to use process automation tools. Conversations can also open up physicians to change. For example, presenting new evidence-based guidelines that recommend a more effective and less expensive procedure for diagnosis or treatment may help physicians understand why the hospital has adopted a new way of doing things.
- Retain current talent: Decreasing turnover helps reduce the cost of recruiting, hiring, and onboarding new staff. One critical step in this direction is surveying employees to determine what part of the work environment needs improvement. While higher pay, better benefits, and greater employee recognition are all bound to help, a survey can offer further insight into whether things such as flexible schedules, better use of break time, or training opportunities would appeal to employees.
- Optimize healthcare staff through training: Professional development that focuses on upskilling can incentivize employees to stay with a healthcare organization. This helps staff develop the skills they need to take on more responsibility and further contribute to the company’s success. A well-rounded training plan focuses on specific skill gaps within the organization, ensuring that professional development programs use resources wisely.
Staying Ahead with Technology and Trends
Regulatory changes and market forces can abruptly impact healthcare costs. Companies can soften the blow by making technology expenses more predictable and staying ahead of major industry trends. In addition, improving engagement with patients can build loyalty and reduce attrition, which reduces the cost associated with acquiring new customers.
- Use cloud-based solutions: Moving to the cloud lets organizations significantly reduce expenses associated with buying and managing on-premises infrastructure and licensing applications. Cloud solutions provide greater information accessibility (especially for remote users), scalability and customization to support growth, and faster system upgrades. Leading cloud vendors also support end-to-end security and business continuity, which are vital for health systems that must always remain operational, even during system outages.
- Monitor healthcare trends and regulations: Industry developments on the state and national level can catch healthcare companies off guard, increasing cost pressures. For example, supply chain issues can make supplies more expensive, and mandated technology updates (either from vendors or regulatory bodies) can force organizations to take on short-term operational costs. Additionally, changes in how public and private insurers cover procedures or medications may shift costs onto patients. Leaders need a bird’s-eye view of industry trends to anticipate and mitigate potential impacts on their bottom line.
- Encourage transparency and consumer engagement: Price transparency helps patients and their care teams understand the cost of procedures, medications, and medical services. This reduces the likelihood of unpaid medical bills, which can be costly for both providers and insurers to resolve. Meanwhile, using customer relationship management (CRM) software to automatically send educational materials or appointment reminders can encourage patients to choose low-cost services and close care gaps.
Eliminating Unnecessary Expenses
Healthcare providers can benefit from limiting costly medical services that provide little value to patients. These services may be redundant, misaligned with symptoms, or unlikely to improve outcomes.
- Eliminate unnecessary tests and procedures: Sometimes, clinical staff order a blood test or X-ray even if a patient has recently undergone the same test, simply because the results are inaccessible. In other cases, tests are performed at the patient’s request, even if they aren’t medically necessary, due to concerns that refusing could lead to a poor review—or, worse, a lawsuit. A lack of evidence-based guidelines for a given service can also make it hard for clinical teams to determine when a procedure could be unnecessary.
- Avoid overuse of services: As noted above, overusing services can mean ordering additional tests without reviewing a patient’s record for prior test results. Providers can also overuse services that offer little benefit relative to their cost. In many cases, for instance, care teams default to ordering diagnostic tests, imaging studies, or screenings for all patients, even when updated evidence-based guidelines show these services have little value for those without clear risk factors.
Mistakes to Avoid When Cost-Cutting
As healthcare organizations look to reduce expenses, they must be mindful of cost-cutting measures that look good on paper but could backfire in the long run. For example, hospitals may justify moves such as eliminating administrative staff or delaying equipment investments on the grounds that those line items are easier to cut than clinical personnel. The fact of the matter is, those line items support clinical staff. Without them, doctors and nurses are forced to take on non-clinical tasks, such as administrative work. Similarly, delayed care due to unavailable equipment, such as X-ray machines, can significantly reduce efficiency.
Another mistake is overlooking the benefits of standardization. This issue commonly arises in large organizations, especially those formed through mergers and acquisitions where previously independent business units have their own best practices. This can lead to concerns over inconsistent spending on medical supplies or variations in clinical practices for common procedures or treatment plans. Effective standardization processes and supplies can reduce inefficiencies, but success hinges on engaging stakeholders directly affected by the changes. Their involvement can help minimize workflow disruptions while increasing the likelihood of adoption.
Discover NetSuite’s Cost-Reducing Capabilities
Given the many complexities and challenges of cost-reduction efforts in healthcare, companies must take a modern approach to strategic financial management. NetSuite Planning and Budgeting leverages automation to reduce the time it takes to gather data, create reports, and refine forecasts. In turn, organizations can improve the accuracy of financial projections, while also shortening planning cycle times.
Meanwhile, NetSuite for Healthcare and Life Sciences automates financial and administrative workflows, streamlines compliance reporting, and improves data transparency. This industry-tailored solution can help healthcare executives gain control over business operations, make data-driven decisions, and quickly adapt to regulatory changes or market trends that affect expenses.
Healthcare costs increase every year and show no signs of slowing down. While some factors that impact expenses are beyond the control of hospitals, health systems, and insurers, there are steps organizations can take to improve efficiency, eliminate waste, and reduce unnecessary spending. The key to success is the ability to take a longitudinal look across the organization to identify initiatives that will couple the greatest opportunities for savings with the minimal impact on operations and clinical care.
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Reduce Costs in Healthcare FAQs
What are avoidable costs in healthcare?
Avoidable costs in healthcare can range from unnecessary medical procedures to manual processes that can easily be automated. Another example is the expense associated with recruiting, hiring, and onboarding staff. By investing in employee engagement and training initiatives, organizations can improve staff retention for a much lower cost.
What are the barriers to reducing costs in healthcare?
The fragmented nature of healthcare costs in the United States creates significant administrative costs, such as those related to sharing information across disparate organizations. Some factors influencing healthcare costs are beyond the control of hospitals, health systems, and insurers, such as the price of medications and the lifestyle choices of individuals.
What are cost control measures in healthcare?
Cost control measures in healthcare look to reduce expenses without impacting the quality of care provided to patients. The goal is to limit unnecessary, avoidable, or wasteful spending without taking measures that involve cutting staff, reducing hours of operation, or making valuable services unavailable to a community.
How can healthcare costs be reduced?
Organizations can reduce waste, improve energy efficiency, and invest in modern technology. Finding opportunities to reduce clinical costs, such as avoiding high-cost or low-value services, will likely require collaboration with clinical staff to ensure that care quality and patient outcomes won’t be affected.
What are three actions that consumers can take to lower their healthcare costs?
Consumers can lower their healthcare costs by asking for generic drugs instead of name-brand medications, using the preventive care services covered by their insurance, and choosing in-network providers for specialty care or elective procedures.
How can employers reduce healthcare costs?
Employers can reduce healthcare costs by working with their insurers to negotiate with health systems. For example, they could choose to contract with a center of excellence that’s proven to deliver high-quality and affordable care. Or they could choose to contract with a health system that offers many services within its affiliated network, as this will decrease the use of high-cost, out-of-network services.