The Hidden Budget of a Hospital: Where Every Dollar Goes and How It’s Changing

Every year, billions of dollars pour into our hospitals and healthcare, and while headlines focus on record-breaking research grants and rising healthcare costs, few talk about what happens in between. The way money moves through the hospital dictates the quality and efficiency of patient care throughout the U.S. medical system [1]. 

According to America's Health Insurance Plans (AHIP), the U.S. spends 40.7 cents out of each dollar in healthcare on hospital costs. Outpatient care costs cover physician and facility payments for treatments outside the emergency room, which uses 19.9 cents. Inpatient Care, which includes the cost of administering drugs during hospital stays and payments to doctors and facilities, accounts for 17.6 cents. Emergency Room costs, which include ambulance services plus physician and facility payments for ER visits, use 3.2 cents [3].

An effective healthcare budget is vital to achieving efficient patient care. The process hospitals use to create their budgets is called a rolling forecast, which uses historical data of the hospital to update near- and long-term financial projections. The hospital budget is split into two main types of costs: operational and capital. Operational costs include facility operating costs and personnel costs, including staffing and training. Staffing accounts for salaries, overtime hours, potential overstaffing, and other variables. Capital costs include beds, equipment (updated and increasing amount), and possible renovations. New facilities or technology can impact future staffing or operating costs [2], and the operating budget and the capital budget heavily influence one another. 

The typical financial pressures of a hospital are due to the tight margins it must work within. The majority of hospital revenue comes from high-cost, billable procedures, especially those involving operating rooms, imaging suites, or specialty care [1]. Most hospitals barely break even because their margins hover around 2 to 4 percent. For every $100 they make, only a few dollars are left after covering costs. And those few dollars? That’s what keeps things moving forward, funding new technology, better spaces, and the people who make it all work [1]. When hospitals don’t have much financial wiggle room, their leaders tend to play it safe with money and decisions. Instead of taking big risks or investing in bold new ideas, they focus on small, gradual improvements that feel safer. This means they avoid getting rid of old systems or technology, even if those are outdated or inefficient, because replacing them costs money and carries risk. When money is tight, innovation slows down and efficiency often takes a backseat to financial caution [1].

Hospitals today are facing new financial dilemmas: rising costs and insufficient reimbursement driven by policy changes. Labor remains the single largest category of hospital spending, costing roughly 890 billion dollars. In spite of the workforce, hospitals are still offering competitive wages to recruit and retain staff. While this labor expense is essential to maintain staffing levels, it contributes to the overall financial burden on the hospitals. Additionally, issues arise due to Medicare reimbursement lagging behind inflation. From 2022 to 2024, general inflation rose by 14.1%, while Medicare net inpatient payment rates increased by only 5.1% [4]. With Medicare only covering 83 cents of every dollar spent by hospitals in 2023, hospitals absorbed $130 billion in underpayments from Medicare and Medicaid [4]. Furthermore, total hospital expenses grew 5.1%, significantly outpacing the overall inflation rate of 2.9% in 2024 [4]. With rapid hospital expense growth and inadequate reimbursement, hospitals are increasingly unable to reinvest in critical physical assets, such as medical equipment, operating rooms, and facility upgrades [4].

Recent changes in U.S. trade policy are creating even greater uncertainty, with the current Administration implementing new tariffs that affect medical devices and supplies, and considering new tariffs on pharmaceuticals. According to the AHA analysis of Census Bureau data, the U.S. imported over $75 billion in medical devices and supplies in 2024 alone. Tariffs on these critical goods could exacerbate shortages, disrupt patient care, and continue to raise costs for hospitals. A recent survey found that 82% of health care experts expect tariff-related expenses to raise hospital costs by at least 15% over the next six months, and 94% of health care administrators expect to delay equipment upgrades to manage financial strain. [4] Additionally, the recently signed budget law known as the One Big Beautiful Bill Act (OBBBA) has caused hospitals around the country to lay off thousands of healthcare workers, working primarily in research, administrative, and other support areas [5].

With the recent factors, such as Medicaid changes, shrinking research funds, and rising labor and supply costs, hospitals are bracing for even more financial tightening. These cuts hit patient care, staffing, and hospitals’ ability to innovate. As hospitals face growing financial strain, the focus shifts from improving care quality to simply maintaining operational stability. Ultimately, the way money moves through hospitals will continue to define not only the quality of care but also the future of American healthcare itself.

Reviewed by: Emma Zhang

Designed by: Selena Xiao

References:

[1] Matt, S. (2025, June 3). Newsletter #22: The Hidden Ledger - Where Hospital Dollars Go, and What That Means for Innovation. Linkedin.com. https://www.linkedin.com/pulse/newsletter-22-hidden-ledger-where-hospital-dollars-go-matt-md-mba-vjeje/.

[2] Strata. (2021, August 13). Healthcare and Hospital Budgeting: A Complete Guide | Syntellis. Strata Decision Technology. https://www.stratadecision.com/guide-to-healthcare-and-hospital-budgeting. 

[3] RazorMetrics. (2024, December 6). Healthcare Dollar Breakdown. RazorMetricsTM. https://razormetrics.com/2024/12/06/healthcare-dollar-breakdown/.

[4] American Hospital Association. (2025, April). America’s hospitals and health systems continue to face escalating operational costs and economic pressures as they care for patients and communities. Www.aha.org; American Hospital Association. https://www.aha.org/costsofcaring.

[5] Hospitals make painful choices as federal cutbacks add to economic headwinds. (2025). AAMC.https://www.aamc.org/news/hospitals-make-painful-choices-federal-cutbacks-add-economic-headwinds.

Behind the Scenes - the Truth Behind our GDP

The United States is historically well-known for many things, one being our rapid advancement. We have been a dominating power in economics, politics, and of course, healthcare. The United States has very technologically advanced healthcare resources that remain nearly unparalleled. While one may assume that this would cause the United States to have a similarly amazing healthcare system, this is not entirely true. In fact, a huge portion of the USA’s GDP goes towards the healthcare system. What factors contribute to America’s expensive healthcare? That’s exactly what we’re going to discuss here.

The United States continues to have many scientific advancements that further promote medicine, but this unfortunately doesn’t have all positive consequences. Firstly, medical technology advancement is attractive to both doctors and hospitals. The more technological advancements a practice has to have, the more resources the physicians have at their disposal and, as such, is part of why certain doctors are attracted to certain job locations over others. However, this medical equipment serves as an investment, and doctors and hospitals alike want to make the most of them. As such, this leads to an increase in equipment usage, possibly even unnecessarily, contributing to the cost of the high GDP expenditure on healthcare. Furthermore, many doctors practice the concept of defensive medicine. Defensive medicine is where a doctor orders a surplus of tests, oftentimes that are unnecessary, utilizing these medical technologies in an effort to protect them from any medical malpractice suits. Not only is this unethical (focusing on the self-interest of the physician rather than the health of the patient, violating their oaths), but it also serves to further drive the portion of GDP used on healthcare up due to the costs. 

In addition, another cause that increases healthcare expenses is medical entrepreneurship - a concept that turns medicine into a for-profit business. Medical entrepreneurship consists of many different factors - corporate profits, administrative costs, high CEO salaries, and medical fraud. There are many things to unpack here, but the most important and expensive factor is the administrative costs of healthcare (mainly including patient billing). The fact that administrative costs contribute to the inefficiency of the healthcare system is astounding but the harsh truth. Not only does billing take up the physicians’ time, but it also takes up a large chunk of resources that can be better distributed throughout the healthcare system. Many people argue that this money could be used to fund Medicaid whilst others argue that it can be used to form a universal insurance and flow back into the economy. 

Regardless of either side or opinion, it is clear that many people in America remain unsatisfied with the American healthcare system - even after the healthcare reform that occurred following the Affordable Care Act. There are many other factors that play a role in the high cost of American healthcare, but these are some that remain outstanding to many sociologists due to the lack of medical necessity. While we have had many reforms regarding our healthcare system in recent decades, it is clear that our work is not done and much needs to be reformed - one of which being the high cost yet low efficiency of the system.

Reviewed By: Abby Winslow

Designed By: Lexi Field

References:

[1] LONNQUIST, Lynne E., and Gregory L. WEISS. (2006). The Sociology of Health, Healing, and Illness Gregory L. Weiss, Lynne E. Lonnquist. Pearson Prentice Hall, 2006.

From Grants to Bills: The Hidden Economy of Medicine

The Insurance Paradox: Why does the U.S. Pay More for Less

Whenever people talk about health care in the United States, “insurance” shows up right away. You’d think insurance would be the safety net that keeps someone from choosing between medical care and groceries, but in practice it too often acts like a maze. The U.S. spends more on health care than almost any peer nation (well over 10% higher than comparable countries) and yet outcomes like life expectancy and maternal mortality lag behind many of them [1]. So how do we end up paying so much and getting so little?

One big problem is that the U.S. simply does not have universal coverage. Countries such as Canada, the U.K., and Germany pool risk across whole populations; in the U.S. we rely on a patchwork of employer plans, private insurers, and separate public programs like Medicare and Medicaid. That patchwork leaves large sections of the population vulnerable: recent polling shows that more than a third of adults report skipping or delaying needed care because of cost in the past year [2]. That isn’t a technicality; it’s the lived experience that drives people to the ER or to worse outcomes down the line.

The patchwork also creates insane administrative overhead. Hospitals and clinics spend huge sums negotiating with dozens of insurers, coding encounters, and fighting prior authorizations. A widely cited analysis comparing the U.S. and Canada found administrative spending in the U.S. amounted to roughly one-third of total health spending, far more than in single-payer systems, and that this gap largely reflects the inefficiency of a many-payer market [3]. Money spent on paperwork is money not spent on nurses, beds, community health, or prevention.

Another feature that locks this system in place is the fact that, in America, insurance is usually tied to employment. Employer-sponsored health insurance started as a labor policy experiment in the mid 1900s and eventually became the norm, but tying insurance to jobs makes coverage fragile; switch jobs and you might lose it or get a worse plan. Employer plans also vary widely in generosity, which makes health protection feel like an employee benefit rather than a social good, something other countries avoid through universal schemes [4].

Price is another big driver. Unlike most nations that negotiate national or regulated prices for procedures and facility fees, the U.S. lets hospitals, insurers, and drug companies set and bargain prices more freely. Comparative analyses show that U.S. prices for many common services are markedly higher than those in other countries [5]. Prescription drugs tell the same story. Recent analysis from the RAND Corporation, a nonprofit research corporation, shows U.S. manufacturer gross prices for many drugs were multiple times higher than prices in other high-income nations, even after common adjustments [6]. Those higher prices feed back into premiums, deductibles, and out-of-pocket spending.

And even when you have insurance, the protection can be thin. High-deductible health plans are widespread; by one common measure nearly a third of covered workers were enrolled in a high-deductible plan in 2023, meaning patients are on the hook for sizable costs before insurance really kicks in [4]. For people with chronic disease, these costs add up fast and can mean skipping medication or tests that prevent worse problems later.

The system’s worst effects fall on the most vulnerable. States that chose not to expand Medicaid under the Affordable Care Act leave millions in a “coverage gap,” with about 1.4 million people estimated to be stuck between state rules and federal subsidy thresholds [7]. Uninsured and underinsured people are far more likely to delay care, to present with advanced disease, and to end up in medical debt.

The U.S. system, with its mix of private insurance, employer coverage, and public programs, spends more on administration and charges higher prices, which trickle down to patients through premiums and out-of-pocket costs. By contrast, countries with universal coverage or stronger price regulation generally spend less and face fewer access barriers [1,8]. These differences help explain why Americans often encounter medical debt or skipped care at higher rates than people in other wealthy nations.

Understanding those contrasts doesn’t provide an easy solution, but it does give context. When people talk about U.S. health insurance feeling complicated, expensive, or unpredictable, those feelings connect directly to the way the system is organized. Looking at other models helps show that things could be arranged differently and may guide the U.S. towards an improved healthcare system. 

Reviewed By: Jack Ringel

Designed By: Grey Dugdale

References:

[1] Organisation for Economic Co-operation and Development (OECD). (2023). Health at a Glance 2023: OECD indicators. OECD Publishing. https://www.oecd.org/en/publications/2023/11/health-at-a-glance-2023_e04f8239/full-report.html.

[2] Kaiser Family Foundation. (2025). Americans’ challenges with health care costs. https://www.kff.org/health-costs/americans-challenges-with-health-care-costs/.

[3] Himmelstein, D. U., Campbell, T., & Woolhandler, S. (2020). Health care administrative costs in the United States and Canada, 2017. Annals of Internal Medicine, 172(2), 134–142. https://doi.org/10.7326/M19-2818.

[4] Kaiser Family Foundation. (2023). 2023 Employer Health Benefits Survey (Annual Survey). https://www.kff.org/health-costs/report/2023-employer-health-benefits-survey/.

[5] Health Care Cost Institute (HCCI) / International Federation of Health Plans (iFHP). (2017). International comparisons of health care prices from the 2017 iFHP survey. https://healthcostinstitute.org/hcci-originals-dropdown/all-hcci-reports/international-comparisons-of-health-care-prices-2017-ifhp-survey.

[6] Mulcahy, A. W., Schwam, D., & Lovejoy, S. L. (2024). International prescription drug price comparisons: Estimates using 2022 data (RAND RRA788-3). RAND Corporation. https://www.rand.org/pubs/research_reports/RRA788-3.html.

[7] Kaiser Family Foundation. (2025). How many uninsured are in the coverage gap and how many could be eligible if all states adopted the Medicaid expansion? https://www.kff.org/medicaid/how-many-uninsured-are-in-the-coverage-gap-and-how-many-could-be-eligible-if-all-states-adopted-the-medicaid-expansion/.

[8] Peterson-KFF Health System Tracker. (2025). How does cost affect access to healthcare? https://www.healthsystemtracker.org/chart-collection/cost-affect-access-care/.