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Data and Trends
Hospital Supply Expenses:
An Important Ingredient in
Health Services Research
Yousef Abdulsalam1 and Eugene Schneller2
The purpose of this article is to shed light on hospital supply expenses, which form the
second largest expense category after payroll and hold more promise for improving
cost-efficiency compared to payroll. However, limited research has rigorously
scrutinized this cost category, and it is rarely given specific consideration across
cost-focused studies in health services publications. After reviewing previously cited
estimates, we examine and independently validate supply expense data (collected by
the American Hospital Association) for over 3,500 U.S. hospitals. We find supply
expenses to make up 15% of total hospital expenses, on average, but as high as 30%
or 40% in hospitals with a high case-mix index, such as surgery-intensive hospitals.
Future research can use supply expense data to better understand hospital strategies
that aim to manage costs, such as systemization, physician–hospital arrangements,
and value-based purchasing.
supply expense, supply chain management, hospital costs
Supply expenses form the second largest cost category in a hospital after labor
expenses and have been rising faster than labor expenses in the past several years
(Goodbaum, 2015). With regulatory and competitive pressures to reduce the cost of
This article, submitted to Medical Care Research and Review on February 5, 2017, was revised and
accepted for publication on June 20, 2017.
1Kuwait University, Shukwaikh, Kuwait
2Arizona State University, Tempe, AZ, USA
Yousef Abdulsalam, College of Business, Kuwait University, P.O. Box 5486, Safat, 13005, Kuwait.
MCRXXX10.1177/1077558717719928Medical Care Research and ReviewAbdulsalam and Schneller
2 Medical Care Research and Review 00(0)
health care, many health systems are seeking cost-saving opportunities from their sup-
ply chain operations. Yet, almost half of the health care organizations in the United
States indicate that their “organization’s supply chain is at a low level of maturity”
(Nachtmann & Pohl, 2009, p. 4). Furthermore, a search in the health care services
journals provided very little empirical research that has specifically focused on this
important cost category.
Compared to other industries that find a strategic advantage through supply chain
integration, health care supply chains have been described as highly fragmented and
complex, with limited improvements in cost and quality over the years (Ballard, 2005;
Landry, Beaulieu, & Roy, 2016; McKone-Sweet, Hamilton, & Willis, 2005; Schneller
& Smeltzer, 2006). Hospital supply chains are inherently complex for multiple reasons.
First, health care systems interact intensely with numerous medical and nonmedical
stakeholders, including manufacturers, distributors, group purchasing organizations
(GPOs), and insurers (Begun, Zimmerman, & Dooley, 2003, p. 271). Health care sup-
ply chain activities are often outsourced to distributors or third-party logistics service
providers who coordinate many health care providers and suppliers, gaining negotia-
tion leverage and economies of scale. Consider that the average hospital may “own” up
to 35,000 stock-keeping units worth of products, but only 6,000 to 8,000 stock-keeping
units are available at the hospital with the rest being held by distributors or suppliers
(Darling & Wise, 2010). This creates challenges for hospital inventory management
and logistics. On the purchasing front, hospitals often outsource contract management
to GPOs, regional purchasing coalitions, or consolidated service centers.
The perceived cost-saving potential in health care through supply management has
motivated academics, industry practitioners, and management consultants to conduct
research in this area to identify specific improvement opportunities and factors (Dominy
& O’Daffer, 2011; McKone-Sweet et al., 2005; Nachtmann & Pohl, 2009). In this arti-
cle, we consider the term supply chain expense to encompass the cost of supplies in
addition to the labor and services related to procurement, logistics, and inventory man-
agement. However, this term is used flexibly with different inclusions and exclusions as
we show in the literature review. Consequently, it has been operationalized in different
ways, making any direct comparisons between studies difficult. Some studies estimate
that supply chain expenses account for approximately one-third of total expenses.
While this may be true in some cases, the accuracy of this estimate is dependent on
what cost items are included in this measure. For example, the estimates become sig-
nificantly different when labor cost related to supply chain operations is included.
Our study examines a measure of hospital supply expense: a more focused metric
that only considers the cost of tangible supplies, making it a subset of supply chain
expense. Supply expense includes only the tangible supplies, without including any of
the labor or services required to manage the supply chain. First, we review previous
studies that provide an estimate for average supply expense (or supply chain expense)
as a percentage of total expense. Second, we examine and independently validate the
American Hospital Association’s (AHA) hospital supply expense data. After the reli-
ability of the data is validated, the data are analyzed to provide insights about the sup-
ply expense of hospitals with different characteristics. Finally, the results of the
Abdulsalam and Schneller 3
analysis are discussed along with the potential for future research that can make use of
This article contributes to the health services research and management literature by con-
sidering the importance of assessing the current state of supply expenses as a percentage
of total hospital expense at U.S. hospitals. We encourage the use of a precisely defined
and reliable measure for hospital supply expenses. Previous studies that have measured
hospital supply expenses have done so using different definitions and inclusion/exclusion
criteria (as shown in Table 1). This has resulted in a large variance in claims about the
average supply expense as a percentage of total expense. We attempt to add precision
regarding the average and distribution of supply expenses in U.S. hospitals and highlight
differences across hospitals of different types, their geographic location, and their operat-
ing status. The goal is to get managers and researchers to consider this easily accessible
measure and use it (with consistency) to study hospital characteristics or design hospital
practices that correlate with higher levels supply chain performance. We demonstrate that
performance metrics derived from consistent measurements collected annually from over
3,500 hospitals by the AHA also serve as benchmarks for industry practitioners and trend
reports. Thoroughly understanding the value of the measure is critical to understanding
the possibilities and limits of research grounded in the measure.
Supply Expense Estimates in the Literature
Many studies have cited estimates of the average supply chain expense as a percentage
of total expense to emphasize the importance of supply chain management in health
care. In some cases, the estimate is based on primary data collected as part of the
research project, whereas others cite estimates from other studies. Table 1 provides
examples of supply chain expense (or supply expense) percentages provided by peer-
reviewed studies or white papers from a variety of academic journals or associations.
The table is not meant to be a comprehensive list of citations, but merely to demon-
strate the variations in definitions and estimates used to describe hospital supply
expenses. In the citations we found, estimates of supply expense per total expense
ranged from 17% to 45%. Importantly, it was unclear what items are included in “sup-
ply expenses” or “supply chain expenses” in most cases. In a few cases, labor cost
related to supply chain activities is explicitly mentioned in the definition (e.g.,
Kowalski, 2009), while in other estimates explicitly exclude it (e.g., Nyaga et al.’s,
2015, study of California hospitals).
We examine financial data reported in the AHA Annual Survey from the fiscal year
2013. The AHA Annual Survey Database is a reliable resource and used widely in
4 Medical Care Research and Review 00(0)
Table 1. Estimates of Supply Chain Expenses as a Percentage of Total Hospital Expenses.
Citation Reference to supply chain expenses Publication
Nyaga, Young, and
Zepeda (2015, p.
“With supply chain costs estimated to account for
more than 25% of hospitals’ operating budgets
(McKone-Sweet etal., 2005).”
Journal of Business
In the article, supply expense per total expense is estimated
to be 29%, on average, based on data from acute-care
hospitals in California (2005-2009).
Young, Nyaga, and
“It has been estimated that total supplies account
for approximately 30% of a hospital’s operating
budget and thus potentially represent an area for
substantial cost savings (Burns & Lee, 2008; Montgomery
& Schneller, 2007)”
Chen, Preston, and
Xia (2013, p. 391)
“Historically, expenses for hospital supplies and
materials have constituted up to 45% of a
hospital’s operating budget (Kowalski, 2009).”
Journal of Operations
(2005, p. 4)
“With the supply chain costing as much as 40 percent
of the typical hospital’s operating budget, the
strategic importance of hospital supply chain management
Journal of Supply
Nachtmann and Pohl
(2009, p. 5)
“The average health care provider organization in our
survey is spending more than $100 million each year on
supply chain functions, nearly one-third of their
annual operating budget.” (The authors conducted a
survey with 1,381 respondents.)
White paper: Center
“Historically, total supply expenses (cost of supplies plus
all the labor costs related to operating the supply chain,
including all the supply inventories in the laboratory,
pharmacy, surgery, etc.) have consumed up to 45
percent of operating budget.”
“Supply costs now represent as much as 31 percent
of a hospital’s total cost per case (Schneller &
The Milbank Quarterly
Landry and Beaulieu
(2013, p. 469)
“In fact, North American studies have found that more than
40% of a hospital’s expenses are related to supply
chain activities (AHRMM, 2010; Chow & Heaver, 1994;
Nachtmann & Pohl, 2009).”
Conway (2011, p. 2) “40-45%: Total hospital operating expenses
represented by supply chain.”
White paper: Global
HFMA (2005, p. 7) [Data are presented as a bar graph] White paper:
“Supplies as a Percent of Operating Budget”
Small Hospitals (<$35M-125M): 13%
Mid-Sized Hospitals ($125-315): 15%
Large Hospitals (>$314M): 17%
Note. AHRMM = Association for Healthcare Resource & Materials Management; HFMA = Healthcare Financial
Abdulsalam and Schneller 5
health care management research. More than 1,000 data fields are collected from over
5,000 health care providers in the United States. In 2010, a line item was added in the
financial section of the survey for supply expense, which is the focal variable of this
study. We limited the results to hospitals in the 50 United States (and the District of
Columbia) and only hospitals that report both total expense and supply expense.
Finally, we eliminated hospitals with less than 100 admissions during the fiscal year,
to eliminate the impact of outliers, especially when measuring the ratio of total sup-
ply expense per patient admissions. This resulted in a sample size of 3,806 hospitals
out of a total of 6,230 records in the database. We checked for differences in hospital
size between hospitals that reported their supply expenses versus ones that did not.
The results of a two-sample t test showed that hospitals that reported their supply
expense tend to be larger (in terms of the number of beds) than hospitals that did not
report (t = −8.463, df = 5.747, p < .001). This is not surprising, as larger hospitals tend
to have more resources and information systems able to obtain financial measures
requested by the AHA with ease. The average Case-Mix Index (CMI) data were
obtained from the Center for Medicare & Medicaid Services. The average CMI of a
hospital is a measure of the clinical complexity and diversity of patients served.
Intensive care hospitals, such as Orthopedics, Heart, Cancer, and Surgical demon-
strate a relatively high CMI.
Measuring Supply Expense
In the AHA survey, the supply expense data item is defined as follows:
The net cost of all tangible items that are expensed including freight, standard distribution
cost, and sales and use tax minus rebates. This would exclude labor, labor-related
expenses, and services as well as some tangible items that are frequently provided as part
of labor costs. (Health Forum LLC, 2013, p. 22)
It is important to emphasize that this measure encompasses all supplies (i.e., physician
preference items, medical supplies, pharmaceuticals, nonclinical supplies, etc.)
Medical supplies make up about 60% of total supply expense, and they correlate with
nonmedical supplies by 0.80 (Nyaga et al., 2015).
Supply expense as a percentage of total hospital expense is the most common
ratio that is used for benchmarking and monitoring industry-wide trends. This is
illustrated in the references cited in Table 1. Another commonly measured supply
chain metric is supply expense per patient admission. The hospital’s CMI is some-
times used to adjust for the average severity of patients at the hospital in a given
year (Gapenski, 2011). This measure is commonly used to internally assess the
performance of supply chain management year-over-year (after adjusting for infla-
tion and other exogenous factors). A lower value indicates higher productivity,
either via lower purchasing prices or less supply consumption per patient (control-
ling for patient severity).
6 Medical Care Research and Review 00(0)
The AHA is widely accepted as a high quality and reliable data source for health care
management research and used in many peer-reviewed journal articles. Nonetheless,
supply expense is a relatively new data field in the AHA survey, raising concerns that
supply expense data may not be reflected with high accuracy for several reasons: (1)
the individual responding to the AHA survey may not have access to accurate and
complete supply information, (2) the AHA-provided definition may be interpreted dif-
ferently by the respondent than an executive-level supply chain manager, (3) supply
expense data are a metric that are hard to measure consistently, largely due to data
standardization issues and involvement of multiple third parties in the supply chain
function (Darling & Wise, 2010; Nachtmann & Pohl, 2009). To alleviate some of these
concerns, we sought to independently validate the supply expense data of hospitals.
We contacted the supply chain leaders (e.g., Vice President of Supply Chain or
equivalent) of three large health systems (covering 115 hospitals) and requested from
them their 2013 supply expense data for the individual hospitals they manage, based
on the definition provided by the AHA. Our informants provided data for 92 of these
hospitals. Changes in hospital ownership between 2013 and the time we requested this
data from our informants prevented them from accessing data for all 115 hospitals.
The correlation between the AHA’s supply expense data and our primary data was
0.985, providing a strong indication that the data provided by the AHA Annual Survey
are reliable. The few significant inconsistencies between AHA’s data and our primary
data were scrutinized further and found mainly to be a result of whether the expenses
of subsidiary clinics were rolled into the hospital’s financial statements or not.
The statistics regarding average hospital supply expense are presented in Table 2. The
average supply expense at U.S. hospitals is $3.76 million, with a median of $9.12 mil-
lion. The ratio of supply expense to total hospital expense was 15%, with the middle
50% of hospitals having a ratio between 9.24% and 18.94%. The difference between
the mean and median is indicative of a positive skew in the distribution of the sample.
On average, supply expense per patient admission was estimated to be $4,470. The
distribution of supply expense per patient admission demonstrated a noticeably long
right tail, indicating that some hospitals demonstrate much higher values for average
supply expense per admission. These were generally surgery-intensive hospitals,
where orthopedic, spine, cardiology, and neurosurgery frequently often use expensive
medical devices and instruments.
The frequency distributions of supply expense per total expense and supply expense
per admission are presented in Figures 1 and 2. Both distributions resemble a normal
distribution with a positive skew. Supply expense per admission demonstrates a thick
left tail, largely influenced by hospitals of low supply intensity, such as psychiatric and
rehabilitation hospitals. The right tail of that distribution is long, especially when con-
sidering that the mean approximately coincides with the 75th percentile of the range
(in a symmetric normal distribution the mean coincides with the 50th percentile).
Abdulsalam and Schneller 7
Table 3 presents supply expense statistics broken down by hospitals of different
specialties. First, it is important to note that the overall hospital statistics (Table 2) are
largely driven by the statistics of General Medical & Surgical (acute care) hospitals,
which account for about 80% of our sample’s observations. Of the entire population of
U.S. hospitals (including those that didn’t report supply expense), 75% are classified
as General Medical & Surgical. Also included in the table is the average CMI of the
hospitals in those specialties.1 Overall, a strong positive correlation is evident between
CMI and supply expense. We caution the interpretation of supply expense per
Table 2. Descriptive Statistics (N = 3,806).
Mean (SD) 25th Percentile 50th Percentile 75th Percentile
3.76 (63.27) 2.06 9.12 34.73
169.41 (293.9) 21.26 63.25 198.08
15.02 (7.9) 9.24 13.98 18.94
Supply expense per
patient admission ($)
4,470 (6,171) 2,341 3,480 4,914
2,810 (3,425) 1,795 2,295 2,974
Note. CMI = Case-mix index.
Figure 1. Distribution of supply expense per total expense (N = 3,806).
8 Medical Care Research and Review 00(0)
Figure 2. Distribution of supply expense per patient admission (N = 3,806).
admission for hospital specialties where the sample size is small, as outliers heavily
influence the statistics.
Table 4 provides a breakdown of hospital supply expenses based on hospital operat-
ing status. The top portion of the table considers hospital membership in the Council
Table 3. Supply Expense Based on Hospital Specialty.
expense per total
General medical and surgical 3,164 1.53 16.03% (7.2) 4,466
Psychiatric 186 0.99 6.28% (4.9) 3,081
Acute long-term care 167 1.19 9.87% (5.5) 4,719
Rehabilitation 145 1.31 5.96% (3.2) 1,240
Children’s general and surgery 47 — 12.15% (5.1) 6,793
Surgical 27 2.35 35.82% (11.7) 17,566
Children’s psychiatric 16 — 4.75% (72.5) 1,095
Orthopedic 11 2.33 34.00% (7.6) 10,511
Cancer 9 2.02 19.86% (10.2) 38,746
Heart 8 2.32 30.63% (5.5) 7,288
Obstetrics and gynecology 8 1.26 11.14% (4.8) 1,961
All other specialties 31
Overall average 1.55 15.02% (7.9) 4,470
Abdulsalam and Schneller 9
of Teaching Hospital of the Association of American Medical Colleges. Teaching hos-
pitals demonstrated higher relative supply expense. They also have a higher CMI on
average, which at least partially contributes to the higher supply expense. With respect
to hospital operating status (nonprofit, government, or for-profit), average supply
expense per total expense across the three categories appears to be relatively consis-
tent, especially when taking into consideration the standard deviations of these values
(in parentheses next to the mean values). Finally, hospitals classified as being in rural
locations (as defined by the U.S. Census Bureau) have a lower supply expense and a
lower average CMI.
Discussion and Conclusion
We investigated what previous researchers have observed regarding hospital supply
expense, then validated and analyzed hospital supply expense data to present an esti-
mate that is more precise and based on a much larger sample than previous attempts
we could find. Our resulting estimate of supply expense per total expense (Table 2)
was significantly different than what previous literature has cited (Table 1). Most
likely, the biggest source of divergence between estimates cited in the literature (which
generally ranged from 25% to 40%) and the estimate from the AHA Database (15%)
was the decision to include or exclude supply-related labor expenses. On one hand, the
human resources involved in procurement, logistics, storage, and materials handling
are important to consider. On the other, many hospitals outsource such functions to
GPOs and distributors. Including payroll costs makes it much more difficult to mea-
sure accurately and consistently. The inclusion of supply-related labor expenses leaves
much to the subjective judgment of the researchers regarding what to include or
exclude. For example, nurses frequently manage inventory, order supplies, and move
supply stocks around the hospital; so what portion of the nursing staff’s compensation
be factored into the supply chain cost? The measure that is captured by the AHA data-
base explicitly excludes all labor-related expenses. There is no denying that labor is an
important component in supply chain activities, but isolating labor-related expenses
Table 4. Supply Expense Based on Hospital Operating Status.
expense per total
Nonacademic 3,551 1.51 14.72% (7.85) 4,324
Academic 255 1.90 19.28% (7.32) 6,507
Nonprofit 2,321 1.55 15.64% (7.11) 4,506
For-profit 718 1.63 14.53% (10.39) 3,952
Government 767 1.44 13.62% (7.26) 4,847
Urban location 2,424 1.62 15.99% (8.36) 4,628
Rural location 1,382 1.32 13.33% (6.69) 4,191
10 Medical Care Research and Review 00(0)
provides a metric that can be more objectively measured and compared across hospi-
tals. Our data validation effort also confirmed that Supply Chain Executives at hospi-
tals can recreate this measure of supply expense when requested to do so with a high
degree of reliability.
As shown in Table 3, supply expenses per patient are highest in specialty hospitals
with a high CMI. However, there does not appear to be enough attention from clinicians
given to supply expenses in supply-intensive specialties (e.g., orthopedics and cardiol-
ogy). This sentiment is illustrated in a recent survey of 503 orthopedic surgeons reveal-
ing that a majority of them were unaware of the cost of the medical devices they
administered to their patients, even though they indicated that cost should be an impor-
tant device selection criterion (Okike et al., 2014). With regulation and pressure on hos-
pital leadership to reduce the cost of care, supply as an expense category is perhaps the
most actionable target for performance improvement, being the second largest after pay-
roll (Nachtmann & Pohl, 2009). Importantly, as reimbursement strategies such as bun-
dled payments are implemented in supply-intensive specialties, supply expenses become
a focal point for cost savings. Health services researchers will need to give greater atten-
tion to supply expenses as their utilization of medical supplies is recognized as a key
contribution to achieving financially sound outcomes along with high clinical quality.
Hospital executives already recognize the criticality of supply costs in hospital
operations and economic sustainability. In 2016, the Cleveland Clinic’s total
expenses increased by 19% from the previous year, being attributed to an increase in
the cost of pharmaceuticals and supplies, which were up 23% and 13%, respectively
(Ellison, 2017). Researchers in both Healthcare Management and Supply Chain
Management recognize the significant improvement opportunities that exist in
health care supply chains, as a way to curtail the rising health care costs (Landry &
Beaulieu, 2013; McKone-Sweet et al., 2005). Chief executive officers and chief
operating officers should consider both internal processes as well as interorganiza-
tional structures and partnerships that affect supply expenses at hospitals. First,
research shows that physicians have a significant hand in supply chain performance,
being the selectors and users of much of the hospital’s supplies (Burns, Housman,
Booth, & Koenig, 2009; Montgomery & Schneller, 2007; Robinson, 2008). From an
interorganizational perspective, the health care management literature presents
many motivations for hospital systemization (Bazzoli, Dynan, Burns, & Yap, 2004;
Burns et al., 2015). Studying the behavior of supply expenses at hospitals of similar
characteristics but different system structures may provide an indication of the effi-
cacy of systemization on supply management (Abdulsalam, Gopalakrishnan, Maltz,
& Schneller, 2015; Burns et al., 2015). Furthermore, using the supply expense met-
ric, one can begin to assess the efficacy of external supply management organiza-
tions such as GPOs, third-party logistics, and distributors (Burns & Lee, 2008;
Nollet & Beaulieu, 2005). Does affiliation with large/small GPOs or multiple GPOs
lead to better supply expense performance? Is there an optimal sourcing portfolio
split between GPO, distributor, or direct supplier contracts?
With these questions in mind, it is important to recognize the “Total Cost of
Ownership” (TCO) related to medical supplies are more complex than just the price
Abdulsalam and Schneller 11
tag of the supplies. James Robinson (2008) makes this point in his study of value-
based purchasing for medical devices, indicating a lack of information about medical
supply costs to make decisions based on the TCO mentality. Supply chain “TCO” is
influenced by a hospital’s utilization of supply chain intermediaries, especially GPOs
and distributors, in securing their materials. For example, hospitals contracting with a
GPO appear to avoid approximately 44% of the cost associated with purchasing per
contract (Schneller & Smeltzer, 2006, p. 218). Hospitals with a substantial reliance on
such organizations generally incur lower supply chain-related labor costs but pay ser-
vice charges and administrative fees to their intermediaries. With a reliable and consis-
tent measure of supply expense, research can isolate this portion from the total supply
chain costs to understand the “transaction costs” associated with supply chain activi-
ties and delivery of care.
Already, some empirical research has been conducted to uncover the best practices
in health care supply management (Bhakoo, Singh, & Sohal, 2012; Chen et al., 2013;
Young et al., 2015). However, such research has been largely limited to case studies or
confined to a limited sample size. Furthermore, the lack of consistency as to what
“supply expense” means limits the generalizability and replicability of results. By
bringing awareness to supply expense data that are clearly defined, reliable (based on
our independent investigation), and readily available in the AHA database, we hope
that more research explores the best supply chain practices at hospitals.
Without a doubt, there is a need for more fine-tuned data on supply expenses to
understand the efficacy of cost-saving strategies. Until this is achieved, the examina-
tion of the available supply expense data provides an opportunity to better understand
the medical supplies environment of health care delivery, and it may even be devel-
oped to understand the role of supplies in clinical quality and outcomes.
We thank the members of the Health Sector Supply Chain Research Consortium for providing
their feedback and support throughout this project. We also thank the Kuwait Foundation for the
Advancement of Science for the financial support that was provided.
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship,
and/or publication of this article.
The author(s) disclosed receipt of the following financial support for the research, authorship,
and/or publication of this article: This work was supported by the Kuwait Foundation for the
Advancement of Science (KFAS) (Grant Number P115-67IM-01).
1. Not all hospitals from the AHA database had a corresponding CMI value from the Center
for Medicare & Medicaid Services database. The average CMI was calculated based on the
available data in each category.
12 Medical Care Research and Review 00(0)
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