From Every Angle: Expense Management

Managing expenses is critical for health system success, but focusing solely on workforce expenses isn’t financially sustainable. Healthcare leaders also must consider non-labor expenses.

According to the Vizient Operational Data Base, from 2019 to 2023 labor expenses increased 25.1% while non-labor expenses increased by a staggering 29.9%.

Those non-labor expenses include indirect spend and purchased services (like food services, facilities maintenance, contract labor and environmental services), pharmaceuticals (both branded and generic), physician preference items (PPI), capital management, and medical, surgical and lab expenses.

To effectively manage these expenses amidst challenges such as inflation, disruptions in the supply chain and the need to balance cost-effectiveness with quality patient care, it’s crucial that healthcare leaders systematically prioritize continuous assessment to ensure their organization is strategically meeting its financial goals.

Here’s a look at what our experts have to say about non-labor expense management, and what you can do to improve your financial sustainability and drive profitable growth.

Start small to see big savings in indirect spend and purchased services

Margaret Steele, Senior Principal, Indirect Spend

Why it matters: When it comes to a domain as big as indirect spend and purchased services (ISPS) — which, according to Vizient Supply Analytics data, comprises as much as 20-25% of a health system’s total spend — the best way to achieve cost savings is by starting small.

“Begin by focusing on the little wins,” said Margaret Steele, senior principal, indirect spend. That could mean standardizing laptop purchases across your organization, implementing locked-down order guides for food procurement or reducing the number of laundry vendors.

They might be small steps, but the payoff can be huge.

“Starting with manageable cost-savings strategies allows healthcare organizations to create momentum, build trust and capture quick savings with minimal operational disruption,” Steele said.

The potential for cost savings in indirect spend is significant: Hospitals often see as much as 10-15% in savings across all ISPS categories by optimizing contract agreements and drawing on expertise, automation and analytics.

Determining where to start and how to build on incremental wins in ISPS can be a challenge — but there are tactics that can guide you to success.

Strategies to consider:

• Start with an in-depth spend analysis. Many organizations struggle to categorize their spend, which makes it difficult to identify opportunities for cost reduction (but tools like Purchased Services Analytics can help). However, categorizing spend is just one data point — a deeper analysis is needed to account for regional factors, staffing availability, patient population and facility characteristics. For instance, effective spend analysis should consider factors such as the age of a building, flooring type, geographic location and specific operational constraints. Without this detailed and contextualized approach, organizations risk missing critical cost-savings opportunities.
• Establish a framework for cross-system collaboration. Too often, sourcing decisions in health systems are made in siloes, meaning it’s crucial to engage stakeholders across the organization to align procurement strategies and uncover hidden savings. To achieve this goal, establish clear oversight through governance structures — typically led by the system CFO — that ensure procurement decisions are made within a clear framework to encourage accountability and transparency across your organization. Also, while supply chain teams should lead the contracting process, engage subject matter experts from IT, HR and other departments to provide insights. This ensures that contracts are well negotiated, avoid unnecessary fees (e.g., fuel surcharges) and secure favorable terms.
• Focus on standardization. Most indirect spend is not standardized across an organization, whether it has one facility or multiple. The fastest path to savings is to reduce supplier fragmentation — for example, instead of using several different suppliers for a category, consolidate to one or two. The key is to view standardization as a process rather than focusing on specific categories.
• Adopt a total cost of ownership (TCO) mindset. Evaluate broader factors in spend analysis — such as staffing availability, facility conditions and service quality — to align with a TCO mindset, ensuring that procurement decisions account for hidden costs like maintenance, contract terms and operational efficiencies rather than just initial price savings. Consider, for example, medical equipment and technology. For organizations facing staffing challenges or capital constraints, outsourcing to a contracted supplier could provide additional benefits beyond just immediate cost savings. These suppliers not only manage staffing and operations but also bring lifecycle cost analysis, standardization, and lease vs buy options.
• Build stronger supplier relationships. Develop collaborative partnerships with key suppliers to drive innovation, cost reduction and overall value. Many suppliers bring innovative solutions that benefit organizations, such as grab-and-go food stations in hospitals. This enhances employee satisfaction while also reducing operational burden, demonstrating the value of working with strategic partners who can provide value beyond cost savings.

Learn more about Vizient Indirect Spend and Purchased Services.

Expand pharmacy’s role in ambulatory care

Steven Lucio, Senior Principal, Spend Management Insights and Intelligence

Why it matters: As healthcare continues to move into ambulatory settings — enabling more cost-effective and patient-centered care — so are pharmacy services. Outpatient pharmacy costs are surging, growing 52% faster than total outpatient spend, led by cancer and neurosciences. And with one in eight Americans using GLP-1s to date, it’s no wonder that the increase in pharmacy spend in ambulatory settings is 3.96%, exceeding the growth rate projected for acute care at 3%.

“With the rising acuity of patients only to grow, there will be continued trends to move pharmacy services — including specialty and cell and gene therapy — to outpatient environments such as ambulatory surgery centers and care at home,” said Steven Lucio, senior principal, spend management insights and intelligence. “What does this mean for healthcare leaders? It’s crucial that they capitalize on the role of pharmacy in this growing market when thinking through implications from specific storage needs and staffing resources to navigating high-drug costs, payer strategies and creating equitable access for patients.”

Strategies to consider:

• Prepare for therapy shifts. Proactively plan for how medications are administered in outpatient settings. For example, Darzalex, which is used to treat multiple myeloma, was an IV infused product administered over several hours. But with the approval of a subcutaneous injection in 2020, the therapy can now be administered over a matter of minutes. “We're going to see further shifts toward the subcutaneous infusion market allowing organizations to direct treatment to the lower acuity sites of care and recognize other efficiencies that will reduce expense, increase convenience for patients and improve organization net margins,” Lucio said.
• Leverage technology. Using technology such as AI to automate operational tasks like inventory tracking, billing, prior authorizations and drug utilization monitoring not only improves efficiency but can lessen workforce demands. Utilization management has become increasingly important for specialty pharmacy. There’s a lot of procedural administrative work that can be simplified and augmented with these less-expensive resources thus enabling pharmacists to identify and address clinically significant issues and needs that affect patient outcomes.
• Integrate throughout continuum of care. Embedding a pharmacist in ambulatory care not only aids physicians and nurses as a workforce solution but can help with optimizing drug regimens and patient drug adherence. By helping patients understand and navigate ambulatory specialty care, pharmacists can mitigate emergency department visits and inpatient stays and, in turn, reduce unnecessary readmissions. And by aligning with finance and other C-suite teams, they can assist with quality, cost and reimbursement. It’s important to document the superiority of pharmacy services in terms of timeliness and adherence levels.
• Understand therapy spend segments. Pharmacy services in ambulatory care include in the management and oversight of provider-administered therapies (e.g., intravenous infusions, subcutaneous infusions and intramuscular injections) delivered in hospital outpatient departments, physician offices, pharmacy infusion suites and ambulatory surgery centers, as well as self-administered therapies dispensed directly to the patient through retail and retail specialty pharmacies. Leaders should remember that therapies may be analyzed in more than one spend segment. In general, provider-administered medications are covered under the medical benefit, self-administered medications are covered under the pharmacy benefit and specialty medications encompass products within limited distribution and high-touch medications in either group that require additional clinical and financial pharmacy support. It is critical for organizations to understand the dynamics and growth rates of these segments in total and individually.
• Create an advanced therapy committee. The current 25 approved cellular immunotherapies and gene therapies targeting rare diseases and cancers are expected to double by the end of 2026 along with the potential for more outpatient administration. More than ever, leaders need to invest in interdisciplinary collaborations — such as an advanced therapy committee — that includes managed care, revenue cycle, contracting and legal teams to monitor cost, reimbursement and outcomes. “For example, managed care teams may not be fully aware of the unique contractual requirements related to the emerging market of cell and gene therapy,” Lucio said. “Unlike the specialty pharmacy market, which is fairly mature, the cell and gene therapy landscape is still continuing to evolve. There is a lot of variation in contractual, operational, and coverage determinations, which makes it essential for pharmacy to be closely aligned and engaged with these other areas for every patient that is receiving these advanced therapies.”

Learn more about the annual Vizient Cell, Gene and Specialty Symposium, set for April 2025, that brings together healthcare providers, manufacturers and payers of high-cost cell and gene therapies to discuss the unique challenges of the rapidly expanding market.

Keep assurance top of mind

Vincent Aguilera, Program Services Director, Assurance and Continuity

Why it matters: With the potential for more tariffs and the inevitability of future natural disasters, it’s vital for healthcare organizations to prioritize supply assurance.

“For hospitals to deliver exceptional patient care, they need affordable supplies available when and where they’re required,” said Vincent Aguilera, program services director, assurance and continuity. “Without assurance, their operations, finances — everything downstream — are negatively impacted.”

Strategies to consider:

• Understand where your products are from. Engage with your supplier partners to learn about their sourcing methods and better assess potential risks.
• Embrace resiliency measures. Establish a list of critical supplies, gain clarity on inventory, ensure you understand current utilization and ensure cross-references are identified.
• Diversify your portfolio. Assess existing contracts and determine where you can be more flexible should the need arise. Strategically select a mix of reliable and capable partners to mitigate risks.
• Urge transparency. The clearer communication is, the better the relationship between stakeholders. Beyond simply improving supply chain visibility, transparency allows for more informed decision making and increased trust and collaboration. “Providers are looking for transparency, so it’s incredibly important for suppliers to be as transparent as possible in the marketplace,” Aguilera said.

“We can't control everything that's going on in this world,” he added. “There are a million different things that are going to impact providers getting products. Understanding where supplies are coming from and diversifying their portfolio are safeguards health systems can put in place to protect their supply and ultimately their patients.”

Learn more about Vizient’s supply assurance programs and resources and read our recent article, “Demanding more assurance strategies? They’re not in short supply.”

Support high-quality care by managing medical device spend

Bonnie Lai, SVP/GM, Clinical and Physician Preference, Spend Management

Why it matters: Physician preference items (PPI) — medical devices and items used in and around the operating room and procedural areas — make up 15% of a hospital’s non-labor spend, making it one of the largest expenses after indirect spend and pharmacy.

Strategies to consider:

• Ensure a structured governance process is in place. Successful management of PPI spend requires engagement with physicians and clinicians. A shift to greater integration with service lines and value-based decision making unlocks increased value. Establishing a governance structure that encourages physician engagement and allows for their input and feedback from the beginning is key to obtaining buy-in.
• Utilize price benchmarking. Because PPI pricing is often locally negotiated, many supply chain leaders start by comparing their prices with industry benchmarking data to ensure competitive pricing. With focused effort, supply chain leaders can meaningfully improve their pricing, yielding significant savings.
• Seek committed strategies. Commitments to suppliers are critical to creating shared value between suppliers and providers. Develop strategic partnerships with a narrower set of suppliers. Suppliers typically seek volume or share commitments, but there may be more creative ways to create additional win-win situations by looking at growth, service levels, operations or inventory.
• Reduce unwarranted clinical variation. Examine cost per case, identifying areas of unwarranted cost variation and create guidelines for appropriate resource utilization to reduce unnecessary costs. Analytical platforms that offer actionable insights into cost savings and variation reduction opportunities allow organizations to compare their performance against industry standards and make informed decisions with their internal stakeholders.
• Embrace clinical resource stewardship. Maximize the impact of every dollar spent on patient care by considering service lines holistically, not just as expenses but as revenue drivers. Read more about resource stewardship.

“Excellent clinical outcomes, at optimal costs, can be achieved through appropriate product use and reducing unwarranted variation. As healthcare organizations mature in their PPI expense management strategy, they unlock additional value,” said Bonnie Lai, SVP/GM, clinical and physician preference, spend management.

Learn more about PPI strategies and technology advancements.

Deploy innovative solutions for supply inventory and distribution

Patrick Marier, Consulting Director, Vizient

Why it matters: The management of hospital warehouses or consolidated service centers (CSC) have undergone remarkable transformations due to technological advances. With innovations such as leading-edge software and autonomous mobile robots, these once-static spaces have become dynamic, efficient hubs that transform the way medical supplies are handled, stored and delivered.

In the digital age, leveraging these new technologies and automation is not just a luxury but a necessity for healthcare organizations.

“One of the primary challenges in hospital warehouses is maintaining accurate and up-to-date inventories,” said Patrick Marier, consulting director. “Implementing integrated software solutions can enhance accuracy, reduce manual workload, and provide real-time visibility into inventory management and distribution while automation such as robotics streamlines processes and allows teams to focus on more strategic tasks.”

Strategies to consider:

• Software implementation. Software companies design supply chain platforms — project requirement planning, enterprise resource planning, materials management information systems and warehouse management systems — to serve multiple industries, including healthcare. That’s why the implementation process of these large-scale applications is critical to ensure that their optimum functionality is used. The implementation team needs key leaders, such as a director of operations who has an in-depth understanding of healthcare supply chain operations, to ensure the platform fully meets their real-world needs.
• Optimize equipment layout. Make sure your CSC equipment layout works efficiently with robots. Before installation, organizations can utilize order history data and collaborate with the robotics vendor consultants to develop a simulation model of the CSC to evaluate different equipment configurations, SKUs, people and robots for the best process and layout of the picking and sorting operation.
• Manage inventory and distribution efficiently. Using barcode scanning and RFID technology, robots can precisely track and monitor stock levels, ensuring that hospitals never run out of critical supplies. This automation not only reduces the risk of stockouts but also minimizes the amount of expired or wasted items, saving valuable resources and reducing costs. Additionally, robots equipped with advanced algorithms swiftly pick and pack items, ensuring that orders are prepared accurately and promptly. This expedites the supply chain and facilitates timely delivery to various hospital departments, improving overall patient care.
• Leverage real-time data analytics. EMR dashboards and automated systems continuously gather data on inventory levels, order processing times and supply patterns. This wealth of information enables hospital administrators to make informed decisions, optimize inventory levels and anticipate demand fluctuations. By leveraging data-driven insights, hospitals can achieve greater operational efficiency and cost-effectiveness.
• Reduce labor costs. Human labor constitutes a significant portion of operational expenses in hospital warehouses. By deploying robotics for repetitive and mundane tasks, hospitals can significantly reduce labor costs. While robots handle routine jobs like restocking shelves and transporting goods, human workers can focus on more complex and value-added tasks that require critical thinking and decision-making, ultimately enhancing productivity across the board.
• Focus on people first, then technology. Too often, healthcare supply chain departments invest in numerous software applications but lack the internal expertise to support them. “If a hospital purchases software without a clear plan for SME or superuser support, it raises the question — was the software truly necessary?” Marier said. “Don’t let minimally used applications become an 'out of sight, out of mind' expense.”