Hospital drug and supply expenses push finance teams to rethink cost strategy

With drug and supply costs continuing to strain margins, hospitals are searching for strategic approaches to mitigate the impact.

Drug costs are surging, driven by specialty drugs ranging from GLP-1 products to cell and gene therapies. Citing industry data, Emad Rizk, MD, who recently moved into the top position with Premier Inc., pointed to pharmaceutical cost increases of 13% to 14% year over year in 2025.

Medical supply cost growth may have moderated relative to recent years but remains above pre-pandemic norms, increasing by 9.9% year over year.

“You have really a perfect storm with costs coming up and reimbursement coming down, and the promise of AI and the promise of technology integration — we’re right on the verge, but we haven’t realized the fruits of that yet,” said Rizk, who came aboard as president, CEO and chair of Premier on May 5.

Similar cost trends are apparent in hospital financial data (registration required) compiled by Strata Decision Technology, which reported year-over-year growth of 8.9% for drugs and 6.4% for supplies in April. Some relief was seen from March to April, with medical supply costs dropping by 1%.

In conversations with health system CFOs, “[There’s] a lot of focus on obviously drugs in the oncology space, but really across the service lines — continued focus on drugs and supplies,” said Alina Henderson, vice president for healthcare solutions and partnerships with Strata.

Drivers of the cost increases include higher acuity, which could stem from an uptick in patients who present in later stages of an illness or other health condition as a result of being uninsured or underinsured, Henderson said.

“Year-over-year climbs in bad debt and charity care reflect broader shifts in payer mix, shifts in coverage, and growth in uninsured populations,” Kaufman Hall wrote in its latest National Hospital Flash Report.

Making supply chain a systemwide margin strategy

Accounting for anywhere from 13% to 48% of a hospital’s cost structure, the supply chain should be treated not merely as a purchasing function, but as a major cost lever, Rizk said.

The supply chain represents a good starting point to address waste, which accounts for nearly 25% of all healthcare spending, according to one oft-cited estimate.

“You can’t fix all of this waste without fixing supply chain,” Rizk said.

Better integration of a health system’s data is one step toward eliminating some of the supply variation that leads to wasteful spending, he added. Health systems should be looking not only to consolidate frameworks and technology platforms among their sites of care, but also to integrate electronic health records (EHRs) with supply contracting data and clinical outcome metrics.

“Here’s your supply chain, and then here’s your clinical drivers and utilization, and then here’s your margin and quality,” Rizk said.

The resulting insights can set the stage for paring the number of contracted suppliers based on outcomes. A further step is to examine cost per case to pinpoint high-cost outlier physicians and products for which clinical outcomes are not correspondingly better.

“If you do best-in-class supply chain management, you might save 1% to 2% of total cost,” Rizk said. “If you’re able to reduce variation, that increases the savings even more, because you’re having better contracts, you’re having better contract compliance. And then it’s got an impact on the entire health system across clinical performance improvement [and] quality improvement.”

In assessing efforts to bridge disparate data systems within large organizations, Rizk said he would have been more pessimistic five years ago. These days, agentic AI brings greater potential to seamlessly merge data.

Standardizing care to curb unnecessary variation

Achieving consistency in clinical approaches, where possible, is one way to reduce needless costs, Henderson said.

 “The reason Southwest [Airlines] can maintain their affordability is because they only use one plane type, so they only have to buy one set of replacement parts, and they only have to hire one type of mechanic to fix those,” she said.

In healthcare, she added, “CFOs can look at their business and understand: Are we going to support lots of different clinical cases, and understand that that drives variation in our cost and drug spend, or where can we get more scale, where can we get more efficiency?”

Henderson cited examples such as the decision of Endeavor Health to transform Chicago-area Skokie Hospital into an orthopedic hospital, and Ascension’s sharpened focus on investing in ambulatory care over acute services.

“That allows them to be more precise around the types of care they’re delivering, and have more control over that,” Henderson said.

Formulating such an approach requires drilling down into patient demand and demographics, along with undertaking a comprehensive assessment of the hospital’s resources.

“Where is going to be their area of eminence from a brand standpoint, and then where is their financial and strategic strength or opportunity?” Henderson said.

Some cost growth is driven by clinical need and acuity, she said, but there is room to act if leaders understand factors such as service line utilization, case mix and the degree of variation that is accidental as opposed to strategic.