The Next Era of Margin Management: Four Strategies for Sustainable Health System Growth

For most health systems, navigating the last few years has meant operating in a constant state of tradeoffs: Find savings without compromising care. Improve performance without increasing costs. Do more ... with less. 

These challenges remain, and the pressure continues to build. As a result of supply chain volatility, labor shortages, shifting reimbursement models and more, many health systems are facing the prospect of “marginless growth,” where volumes may continue to rise even as profitability stalls. 

Meanwhile, inflation, policy reform and rising consumer expectations are rewriting the rules of engagement. And fragmented data, limited physician alignment and organizational fatigue are making every efficiency play harder to achieve.

In this environment, success requires more than historical cost reduction tactics. And the healthcare organizations that will survive — and thrive — aren’t simply eliminating waste. They’re reframing cost management as a systemwide margin growth engine encompassing:

• Supply chain optimization.
• Labor management.
• Quality improvement.
• Coordinated networks.

Therein lies an important theme of Premier's strategic guide to margin management in healthcare: With the right strategies, tools and alliances, savings are just the beginning. Premier is your ally in that transformation, equipping hospitals and health systems with the insights, data and scale to turn cost-cutting into a competitive advantage.

Strategy One: Addition by Subtraction: Control Supply Costs

Supply spend remains one of the few levers health systems can still quickly employ for meaningful impact. 

But the biggest gains no longer spring from price alone. Rather, the real opportunity lies in reimagining supply strategy and re-engineering the current model. Product variation across sites, fragmented purchasing decisions and siloed spend categories — such as pharmacy and purchased services — quietly balloon costs throughout the system.

Leading healthcare organizations are introducing greater discipline across these areas:

• Value analyses backed by clinical expertise, aligning clinical and financial decision-making.
• Committed purchasing programs and centralized procurement to reduce duplication and strengthen purchasing leverage.
• Managing areas such as pharmacy, now one of the most volatile domains in healthcare, more proactively and with a sharpened focus on standardization and access.

At the same time, the healthcare supply chain has assumed an expanded role. It is no longer just a logistics function. The supply chain is becoming a value engine — one that connects cost control, resiliency and clinical performance.

Systems that reduce variation, align stakeholders and manage supply strategically are not only lowering costs. They are improving consistency, protecting against supply disruption and creating a more sustainable foundation for margin improvement.

Strategy Two: Manage Labor Resources: Crack the Low Supply, High Demand Code 

Labor continues to drive margin pressure across healthcare. Workforce shortages, rising wage rates and turnover are increasing costs while creating bottlenecks that delay care, limit access and slow throughput.

Predicting and preparing for labor shortages before they occur is now critical for sustained success. Leading health systems are using workforce data and productivity benchmarking to identify gaps, anticipate shortages and adjust staffing models more proactively.

At the same time, operational changes — whether centered on workflow redesign, automation or better alignment across care teams — are helping ensure that available labor is used more efficiently across the enterprise.

Strategy Three: Avoid Payment Penalties and Maximize Reimbursement 

Under Centers for Medicare & Medicaid Services (CMS) value-based payment programs, even small missteps can trigger payment reductions that put nearly 6 percent of all Medicare payments at risk.

Consistency is central to protecting reimbursement. Standardized processes, stronger visibility into performance and coordination across care settings all play a role in reducing avoidable variation and closing care gaps.

As value-based models continue to expand, systems that deliver reliable outcomes and manage performance effectively are better positioned to capture available reimbursement and avoid unnecessary loss.

Strategy Four: Build Systemness: Optimize the Network to Grow Margins

Fragmentation — across service lines, sites of care and operational processes — severely limits financial performance as well as quality of care. When decisions are made locally and inconsistently, costs increase, and opportunities for growth are harder to realize.

Systemness introduces a more coordinated approach. It aligns strategy, operations and investment across the network, guiding where care is delivered, how resources are allocated and where to focus efforts for maximum growth.

Performance dashboards and external benchmarking help identify which service lines excel and where to concentrate efforts to create the most value.

The Path Forward

The margin pressures facing hospitals and health systems are not likely to ease in the foreseeable future.

What must change, then, is how organizations respond to the challenges at hand. Those that continue to rely on incremental cost reduction will find fewer and less promising paths to margin improvement. 

On the other hand, those systems that take a more coordinated, enterprise-level approach optimized to grow revenue will be better positioned to stabilize performance and achieve sustainable growth.

To explore these strategies in detail and learn how leading health systems are applying them in practice, get your copy of Premier’s strategic guide to margin management in healthcare.