Administrative costs outpace direct patient care at US hospitals

A measure of hospital efficiency — differences in the share of spending on direct patient care and administrative costs — has worsened in recent years, according to a recent analysis.

Hospitals’ administrative costs were 186% of direct patient care costs in 2011 and increased to 199% by 2023, according to the latest trends report by Trilliant Health, which advises health systems, payers and drug companies. The difference between the two widened during the pandemic years.

The data comes from Medicare costs reports, which hospitals have criticized as providing misleading impressions. But they can provide broad indicators for the sector, said Allison Oakes, PhD, the lead author of the report.

“Unfortunately, looking at this data altogether, we just know that there is a lot of bloat in our system and a lot of things that work inefficiently,” Oakes said.

The report also examined the ratio between costs for administration and direct patient care for 6,764 individual U.S. hospitals and found some were able to spend more on direct patient care than they did on administration.

“Some of that shows up in the administrative costs in the very traditional ways that we think about but [there are] some other wasteful activities in the system that contribute to this,” she said.

Driving administrative spend

Administrative spend encompasses a vast array of hospitals spending but the largest spending category within it was “other operating expenditures,” which increased 98.5%, from $219 billion to $435 billion. That component of administrative spend comprised 42% of all hospital spending by 2023 and included supplies, rent, pharmacy, social services, maintenance, housekeeping, cafeteria and laundry.

The administrative spending category with the fastest growth in that period was home office and affiliate expenditures, which increased 212.2%, from $19.1 billion to $59.8 billion. That category encompasses central office functions.

A specific area where hospital administrative costs have increased in recent years is the time and labor needed to respond to proliferating government reporting requirements. The cost for one hospital reporting healthcare quality metrics in just one year was $5 million in personnel costs and $600,000 in vendor fees, according to one study.

“We might need to take a really hard look at all of the quality reporting we do,” Oakes said. “How much manpower and time and effort goes into doing all of that and what do we get out of that exercise?”

Thinking efficiency

Any major shift to efficiency starts with a mindset shift, Oakes said.

“We started doing a lot of things because we think more is more but with the way we spend on healthcare in our country and the limited results we get from it as it relates to the health of the American population, I think we need to start thinking about potentially how to do more with less,” Oakes said.

Hospital leaders that embrace that mindset can use price transparency data to compare their prices and see how competitive their organization is, she said.

External drivers

Recent developments also could spur increased hospital efficiency.

The first is the maturing of the health plan price transparency reporting, which has been rolling out in phases since mid-2022. As that data has matured, it is providing employers with better insights in price variation across local healthcare markets.

“It’s no surprise, when people don’t know what they’re going to pay for something, that’s a recipe for prices to become inflated and not reflect true market value,” Oakes said.

Trilliant’s past examinations of negotiated rates found they typically don’t correlate with quality measures, she said.

Another external factor that could push hospital efficiency is that employers may feel pressured to use the available price data to reduce their workers’ healthcare costs in order to meet requirements around fiduciary duty. A growing number of legal challenges have intensified scrutiny on how employers control healthcare costs. Some courts are examining whether they are sufficiently managing expenses.

“The way that the health plan price transparency data makes them responsible for starting to care is something that may actually begin to change the tide,” Oakes said. “The availability of health plan price transparency data, we think, really changes the equation.”

Active fiduciary management of company health plans would mark a sharp departure from the common practice of passively accepting whatever annual increases are sought by their carrier or third-party administrator.

Another external trend that could impact hospital efficiency is the spread of state-level price controls. Earlier this year, Indiana enacted a law that hospitals will face both a tax penalty and the loss of their tax-exempt status if their prices exceed designated limits.

In California, the Office of Health Care Affordability Board voted in April to impose strict limits on increases in charges to payers and patients — starting in 2026 — at seven hospitals it identified as excessively expensive.

“Unless we as a healthcare industry start to rein in some of this wasteful spending and start providing value for money to customers, unless we figure out how to do that internally, it’s very likely that—whether it’s state or federal intervention — they will step in to do it for us,” she said. “It’s a question of how will that happen, or will it be efficient or effective.”

Such state initiatives pressuring hospital finances come on top of a growing number of federal and Trump administration initiatives to target revenue, including:

• $1.1 trillion in 10-year healthcare cuts under the One Big Beautiful Bill Act
• CMS move to eliminate the inpatient-only list
• CMS plans to cut Medicare payments through the 340B discount drug program

Senators recently expressed impatience for long-planned legislation to overhaul the 340B program, at a hearing where the program faced criticism for its opacity.

“If that’s something where [there] is potentially legislative action that could definitely impact hospitals in one of their main revenue streams,” Oakes said.