Crafting a Resilient Healthcare Budget: Strategies for Uncertain Times

The last five years in the healthcare industry have been an era marked by extreme uncertainty. 

There is plenty of evidence that the health care sector was already heading into difficult territory before the coronavirus pandemic began in early 2020 — hospital operating margins have been gradually decreasing since 2014 — but it’s clear that COVID-19 accelerated things. In 2020, American hospitals lost more than $200 billion from March 1 to June 30. 

Then came years of inflation, during which health care businesses have felt continued strain. Prices rose an average of 22% from March 2020 to December 2024, a fact that has had widespread implications for hospital operating costs. 

That’s not to mention the vast changes in how patients interact with health care providers. In the past few years, health care has seen a tech boom — everything from telemedicine and AI to predictive analytics and the use of patient wearables to track data. 

The big takeaway: The industry is entering a period of unique challenges, marked by new financial pressures, the fear of another pandemic and rapidly changing patient expectations. 

But health care businesses can successfully navigate the strife to own benefit — if they’re willing to adapt quickly, embrace flexibility and maintain a focus on delivering quality care. Below are some critical tips for maintaining a health care budget that can survive shocks and thrive in the years to come.  

Spending in the right places

Resilience is a key factor to any smartly crafted budget, particularly in uncertain times. In health care, managers can receive this by investing heavily in resources that are essential to providing quality care — and those that will lead to greater returns in the long run.

Take staffing, for example. By some estimates, labor takes up an average of 60% of a hospital’s budget. Simultaneously, employee burnout costs the health care industry a staggering $4.6 billion or more a year. 

The lessons here are twofold: First, staffing and labor will take up a huge portion of any annual budget, and second, the cost of failing to return these employees is extremely high. It may sound like a cliché, but investing in people — through training, talent acquisition and burnout-reducing worker benefits — is a major key to building a strong financial foundation. 

Managers can apply a similar data-driven approach all the way down the line — by identifying the most expensive parts of their business and weighing the costs of optimization. In doing so, they’ll likely discover the areas where more attention is needed, and those where the investment is not being returned. 

Knowing when to be conservative

The flip side of this coin is knowing when to pull back on spending. Creating a budget is a zero-sum game — spending more in one area means investing less in another. So, managers looking to invest in critical, savings-focused parts of the business will have to find some cuts. 

In this exercise, the first question to ask is: “Are we doing this because it’s the right choice, or because it’s what we’ve always done?” Acting on the latter is how the health care industry ended up where it found itself just before the pandemic, when it was estimated that 25% of total spending went to waste. 

The subsequent years have put even more pressure on providers who may be spending needlessly in certain areas. That’s why it’s essential to bring a data-driven approach to the prior year’s budget, identifying any areas where money is going to waste.

Administration is a likely target area, as the rapid progress of AI and workflow automation have made even some shrewdly crafted budgets look out of date. Research shows that administration can account for an estimated 30% of a provider’s budget, and automation alone could remove about a quarter of those costs. 

The same thinking applies to various vendor contracts. A hospital may work with one vendor due to a longstanding relationship, despite the possibility that there could be much better — and cheaper — options out there. 

Overall, a conservative approach to spending doesn’t mean slicing line items right and left, but taking a hard, skeptical look at any major cost areas.  

Building in flexibility 

The goal of both exercises above — finding areas that deserve heavy investment and others that may not — is not to create a budget where the cards have simply been shuffled in a different order. Instead, the ideal outcome is creating a budget that features plenty of wiggle room.

Doing this requires going back to basics and separating fixed costs from variable ones. Fixed costs — like staffing, equipment and facilities will likely not change throughout the year — while variable ones like supplies, medication and some contracted staff members may ebb and flow based on the number of patients. 

For calculating variable costs, managers can create different budget options based on the best- and worst-case scenarios, then pick a balance between safety and risk that works best for them. 

It sounds elementary, but it’s how a healthy business can withstand unexpected shocks. In today’s unpredictable landscape, safety is the key to stability, but in order to turn a profit, it’s undeniable that some level of risk will be required. Assessing that balance is what it truly means to be flexible.

Keeping an eye on the future

In any industry, the horizon holds both opportunity and risk. And in health care, where progress and uncertainty are both undeniable, it pays to have one eye fixed on the future. 

This forward-looking approach can help identify industry trends, patient preferences and so many other things that can shift an annual budget, and it’s why any sizeable organization should invest in high-quality risk management tactics as they prepare for the years to come. Whether it’s top-of-the-line software, an internal department or working with an outside consultant, the cost of knowing future risk factors will more than pay for itself down the line. 

Perhaps even more importantly, this mentality is the best way to stay focused on patient care. For health care organizations to keep up with new demands and expectations, it’s not enough to understand the now — managers should also understand where things are going. 

Practically, this could mean embracing any number of new technologies and care models — whether it’s AI-powered administration tools, AI diagnostic programs, connected wearable devices or predictive analytics. At their best, these concepts can both cut costs and align care options more closely with patient needs. 

Take hospital-at-home programs, where care is provided at home using a variety of telehealth options and remote patient monitoring systems, as an example. Not only have these care offerings grown in popularity since the pandemic, but they can also save providers money compared to in-hospital care. It’s a classic case of how savvy managers can leverage this changing landscape to find new opportunities.