With operating margins at 4.9% and 40% of hospitals losing money, health system leaders are understandably laser-focused on labor costs, which consume nearly 60% of budgets. But this focus often comes at the expense of the second-largest cost category: the supply chain.
Supply chain represents 30-40% of total hospital operating costs. U.S. hospitals collectively waste $25.4 billion annually through supply chain inefficiency—an average of $12.1 million per hospital. For a typical 300-bed hospital spending $50 million annually on supplies, industry analyses suggest a 17.7% reduction opportunity. That's nearly $9 million in potential savings.
Larger health systems can capture even more through systemwide standardization initiatives and enterprise-wide contract negotiation. Shared services models reduce per-unit costs further while improving quality and outcomes. So why do these savings remain unrealized at most hospitals?
96% of CFOs cite labor as their top source of margin pressure, and the emphasis is understandable. Labor costs change quickly and visibly, driven by events like nursing strike threats or competitive wage increases. Supply chain waste, by contrast, accumulates slowly in the background.
In many health systems, supply chain is still managed primarily as an operational function rather than a financial one. While ensuring product availability is essential, this narrow framing often keeps supply chain performance out of core financial reporting and strategic planning discussions.
Compounding the challenge, clinical decisions that drive utilization are frequently managed separately from the supply chain processes responsible for cost and sourcing. Physicians drive 40–60% of supply spend through preference items, yet they often operate without visibility into costs. A McKinsey survey of 150 physicians found that while 80% believe they can reduce supply costs without affecting quality, nearly two-thirds are only "somewhat aware" of the prices for products they use. Fewer than half receive cost-per-case reports. Less than 30% engage with supply chain teams more than once per quarter.
The gap is not driven by a lack of interest. In fact, 69% say they want supply chain teams to involve them more frequently in decisions and 67% want cost data and price transparency. The issue is structural: relevant data often exists in silos, and many organizations lack the systems needed to translate utilization, pricing, and contract data into information clinicians and executives can act on.
The result is predictable. Pricing inconsistencies persist across hospitals within the same system, sometimes varying as much as 100% for identical products from the same manufacturer. For example, a cardiac stent could cost one hospital $1,200 and another $2,400—same manufacturer, same product. Clinicians may select between clinically equivalent items with significantly different prices without seeing the cost implications, while procurement teams lack real-time visibility into contract terms, utilization patterns, or inventory levels.
To compensate for uncertainty, teams over-order, inventory swells, and millions of dollars in potential savings remain unrealized—not because the opportunity is unclear, but because it is structurally difficult to surface and govern at scale.
While much of the industry remains preoccupied with labor costs, high-performing health systems are capturing millions in savings through strategic supply chain work.
One large, integrated health system Clarium has worked with illustrates the potential savings of preference card optimization at scale.
The challenge: Surgical preference cards, the lists of supplies opened for each procedure, tend to become bloated over time as items are added but rarely removed. When supplies are opened and unused, they are often discarded, creating significant waste. Excess items can also slow operating room workflows, contributing to delays that carry both clinical and financial consequences. Delayed cases can extend patient sedation time, reduce operating room throughput, or cascade into schedule disruptions that affect care delivery and revenue.
This health system had more than 1.1 million items across their preference cards that required review. Physician engagement was essential to optimization, but manual review methods made it difficult to support that collaboration efficiently at scale.
The solution: In place of manual review, the organization deployed AI-powered automation to recommend adjustments to item quantities based on historical usage data. Clinical decision-making remained fully intact. No essential items were removed or substituted, and surgeons retained full discretion over what products were used in each case. By making the data behind each recommendation accessible, the approach built trust and enabled physicians to participate in inventory optimization decisions.
The results: Annual savings surpassed $1.78 million within weeks of activation and the program is on track to exceed its $2 million savings target with only half of the sites deployed. Clinician-led savings increased by 224% as physicians began identifying new optimization opportunities after engaging with the data and recommendations.
Why it matters: Physician preference items represent one of the most fragmented areas of hospital spending. When health systems partner with clinicians to evaluate supply utilization alongside clinical outcomes, rather than imposing mandates, they can reduce costs while strengthening physician engagement and building a coalition of trust.
External spend optimization programs can recover up to 15% in savings by ensuring hospitals pay contracted rates rather than list prices. Most health systems lack real-time insight into whether they're receiving contracted pricing, volume discounts, or rebates they've earned.
Invoice discrepancies, missed contract terms, and billing errors add up over time. High-performing organizations invest in spend analytics platforms and contract management systems that automatically flag pricing variances and ensure compliance with negotiated terms.
Recovering negotiated savings addresses one side of the margin equation: ensuring health systems pay what they’ve already secured through contracts. But pricing leakage is only part of the problem. Even when hospitals pay the right price, limited visibility into how supplies are stored, consumed, and replenished can quietly erode those gains through inventory waste.
Hospital supply expenses per patient increased 18.5% between 2019 and 2022, far outpacing inflation. While some of this reflects market dynamics, a meaningful portion stems from inventory inefficiencies that remain largely invisible to finance teams, including expired products, overstocking, and inconsistent replenishment practices.
In many organizations, inventory management still relies on manual counts, spreadsheet-based tracking, and department-level stockpiling with limited to no system-wide visibility. Finance and supply chain leaders often lack a clear, real-time view of what is on hand, what is approaching expiration, or where excess inventory is accumulating.
As a result, health systems frequently carry more inventory than needed to manage risk, tying up working capital and discarding millions of dollars in expired supplies each year. These losses are rarely captured in a single line item, but they compound over time, quietly eroding margins.
Technologies proven in other industries, such as RFID for real-time tracking, usage-based replenishment, and automated alerts, are increasingly being applied to healthcare to bring the same level of discipline to inventory management that organizations expect from pricing and contract oversight.
Reframing supply chain from a logistics function to a strategic margin lever is increasingly an executive imperative. The financial opportunity is material—often representing 10 to 15% of supply spend—and measurable across health systems of all sizes.
Executive sponsorship is essential not only to engage physicians in procurement decisions, but also to prioritize investment and drive alignment across departments and facilities. When supply chain is positioned as a strategic finance function rather than just an operational necessity, initiatives are more likely to move beyond isolated pilot programs and scale systemwide.
That said, executive buy-in alone is not sufficient. Health systems that capture sustained supply chain value have invested in technology platforms that provide real-time visibility into spend, automate contract compliance, and translate utilization data into insights clinicians can act on. Without this infrastructure, supply chain optimization efforts remain manual and relationship-dependent, which is difficult to scale across complex organizations and vulnerable to leadership changes.
With operating margins hovering around 5% and roughly 40% of hospitals operating at a loss, health systems can no longer afford to treat their second-largest cost category as an operational afterthought.