Hospital Intelligence Brief
How Supply Costs Can Affect Hospital Performance
Supplies and drugs are the second-largest cost pressure after labor. Price, utilization, mix and supply disruption each move the number in different ways.
Short answer
Supply and drug costs affect hospital performance through price, utilization, product mix and disruption. Kaufman Hall reported supply expense up 5 percent and drug expense up 6 percent year to date through August 2026, and the American Hospital Association warns of tariff and shortage risks. Investigate by separating price from quantity and mix, then comparing variation across physicians and sites.[1][2]
How large are supply costs, and how fast are they rising?
Labor dominates hospital costs, but supplies and drugs are the next major category and have been growing quickly. Kaufman Hall’s National Hospital Flash Report for August 2026 said non-labor expense per adjusted discharge rose 6 percent year to date compared with 2025, with supply expense up 5 percent and drug expense up 6 percent, compounded by inflation in food and energy costs.[1] That growth outpaces typical revenue growth per case, which means supply cost pressure alone can erode margin.
The American Hospital Association adds a risk dimension. It reports that, as of March 2025, there were 270 active drug shortages in the United States, that nearly 70 percent of medical devices marketed in the U.S. are manufactured exclusively overseas, and that the U.S. imported over $75 billion in medical devices and supplies in 2024.[2] It also cites survey findings that 82 percent of health care experts expected tariff-related expenses to raise hospital costs by at least 15 percent over six months. These are projections from surveys cited by a trade association, not measured outcomes, and should be treated with caution.[2]
What drives the change in supply spend?
A change in supply cost can be decomposed into three parts. Price: what the hospital pays per unit, which depends on contracts, group purchasing and market conditions. Utilization: how many units per case or per patient day are used, which depends on clinical practice and waste. Mix: which products are used, such as a premium implant instead of a standard one. A 5 percent rise in supply cost per case could come from a 3 percent price increase and a 2 percent increase in utilization, or from a shift to costlier products with stable price and use. Each cause calls for a different response.
Volume and case mix also matter. More surgical cases will use more supplies, and a shift toward more complex cases will increase supply per case. Normalizing by adjusted discharges or by case-mix-adjusted volume avoids confusing growth with inflation.
Where are controllable costs?
Typical places include physician preference items such as orthopedic and cardiac implants, where cost can vary widely across surgeons for similar procedures; pharmacy, including high-cost drugs and waste; operating room supplies and custom packs; and non-clinical supplies. Contract compliance matters too: buying off-contract can raise price without clinical benefit.
Variation analysis is the tool. Compare supply cost per case for the same procedure across surgeons, sites and time. Large variation not explained by patient complexity is a place to look. Engage clinicians; they must lead standardization for it to hold, and quality must be monitored alongside cost.
How should hospitals manage supply chain risk?
Risk has a financial side. Shortages force substitution at higher prices, expedited shipping and, at worst, canceled procedures. Tariffs and trade policy can affect device and supply prices. Diversifying suppliers, holding strategic safety stock for critical items, using alternate products, and monitoring the supply base for concentration are common steps. The AHA notes that many low-margin, high-use essentials such as syringes, needles and IV bags rely on imports, which illustrates the exposure.[2]
Include supply risk in scenario planning for the budget: what would a 5 percent and a 10 percent increase in supply cost do to margin?
What should leaders do first?
Decompose the last two years of supply cost into price, utilization and mix. Rank categories by dollars and growth. Compare cost per case across physicians for the five highest-cost procedures. Check contract compliance. Review the top 20 drugs by spend for waste and alternatives. And add supply risk to the budget scenarios. The interactive example below uses invented figures to illustrate a price, utilization and mix breakdown.
Frequently asked questions
How fast are hospital supply costs rising?
Kaufman Hall reported, on a per-adjusted-discharge basis, supply expense up 5 percent and drug expense up 6 percent year to date through August 2026.[1]
What are physician preference items?
Items such as implants where surgeons choose among products, and where cost can vary widely for similar procedures.
How do tariffs affect hospital costs?
The AHA says tariffs on medical imports could raise costs and cites survey expectations of increases of at least 15 percent; these are projections.[2]
How do you analyze supply cost changes?
Separate price, utilization and mix, and normalize by adjusted discharges.
What supply risks should hospitals plan for?
Shortages, supplier concentration, import dependence and price volatility.[2]
What to do next
- Decompose supply cost change into price, utilization and mix.
- Compare cost per case by surgeon for top procedures.
- Audit contract compliance.
- Add supply cost scenarios to the budget.
Optional · interactive example
See it in an interactive example.
Hospital Financial Investigator: a working dashboard, scenario simulator, evidence-linked answers from APIS, and a sample executive brief, all on synthetic data.
The experience below is built on a synthetic hospital, “Demo Community Hospital,” with two fiscal years of data. Nothing in it is real, so you can explore freely.
- In the Scenario tab, raise supply cost per discharge by 5% and note the effect on operating income.
- Compare it with a 5% rise in the labor cost rate.
- On the Dashboard, select the Supplies row in the expense table and see its share of the increase.
Explore Your Hospital’s Opportunities
Two Pillars can help hospital leadership investigate market, financial, operational and strategic questions using relevant organizational data, public information and a structured assessment process. A good first step is a revenue cycle and operations review that measures leakage, denials and bottlenecks against standard indicators and traces each to its cause.
Sources
- Kaufman Hall (Vizient), National Hospital Flash Report: August 2026 Data (October 13, 2026). Accessed October 2026.
- American Hospital Association, The Cost of Caring: Challenges Facing America’s Hospitals in 2025. Accessed October 2026.
Sources checked October 2026. This guide is general information for healthcare leaders and is not legal, financial, clinical or compliance advice. Figures and rules are cited to the sources below and may have changed since they were accessed, so confirm anything you rely on against the current source. Two Pillars & Co is independent of the organizations cited. See our editorial policy.