What Hospital Executives Should Investigate Before Cutting Costs

By Two Pillars & Co Advisory Group · Sources checked October 2026

Why do cuts need an investigation first?

When margin falls, pressure to cut grows quickly. A target is set, departments are asked for savings, and the cuts that are easiest to make tend to be the ones that get made, which are not always the ones that fix the problem. An across-the-board percentage cut treats every department alike, although some protect revenue, some are required for safety and some could be run differently at lower cost.

Harvard Business School professors Robert Kaplan and Michael Porter argue in the Harvard Business Review that the biggest problem in health care is that organizations measure the wrong things the wrong way, and in particular that costs are not measured at the level of the patient care that generates them.^[1] The practical implication for an executive is that a cost cut based on departmental budgets rather than on the cost of delivering care can miss where the money goes.

Which checks reduce the risk of saving the wrong dollars?

Four questions do most of the work. First, which categories drove the cost increase, and are the proposed cuts aimed at them? If labor drove the increase but the cut targets supplies, the problem will remain. Second, how variable is the cost: will it fall if volume does, or is it fixed? Cutting a fixed cost may save little without a change in capacity. Third, what contribution does the affected service or department make? A service that loses money on a fully allocated basis may still cover its direct costs and contribute to overhead. Fourth, what are the knock-on effects on other services, access, quality and staff retention?

These are straightforward questions, but they require data from different places: finance, operations and clinical leadership. The investigation is largely about putting them in one room.

What are the risks of getting it wrong?

The evidence on service reductions in rural areas is instructive. The U.S. Government Accountability Office examined 64 rural hospitals that closed between 2013 and 2017 and found that, after closure, the median distance to general inpatient services rose from 3.4 miles in 2012 to 23.9 miles in 2018, and for alcohol or drug abuse treatment from 5.5 to 44.6 miles.^[2] It also found that counties with closures had fewer health professionals per 100,000 residents, and that the gap widened: physician availability in closure counties fell from a median of 71.2 to 59.7 per 100,000, while in counties without closures it fell from 87.5 to 86.3.^[2]

Not every service reduction is a hospital closure, but the pattern shows how losing a service can reduce a community’s access and, indirectly, the hospital’s own referral base. A cut that makes patients travel elsewhere for one service may also lose them for others.

How can cost reduction be done well?

Start with the drivers. If the analysis shows that purchased services grew fastest, negotiate or rebid. If overtime and contract labor are high because of vacancies, invest in recruitment and scheduling. If a particular service line consumes disproportionate resources, examine its workflows before its existence. Look for process cost, such as avoidable denials, rework and delays, which does not reduce access or quality when removed.

Set targets by category and test them against the contribution and knock-on questions above. Track outcomes and be ready to reverse a cut that hurts volume or quality. The interactive example at the end of this page uses invented figures to show how a cut aimed at the wrong category barely moves margin.

Frequently asked questions

What to do next

1. Identify the categories that drove the cost increase.
2. Classify each target cost as fixed, variable or step-fixed.
3. Estimate each affected service’s contribution margin.
4. List knock-on effects on access, quality and staff retention before deciding.