Why are our inpatient surgery margins shrinking despite high volume?

High surgical volume with shrinking margins almost always points to case mix degradation, supply cost inflation outpacing reimbursement increases, or OR utilization below 75% creating fixed cost absorption problems. The question isn't whether you're doing enough cases. It's whether you're doing the right cases at the right cost.

Surgical volume growth that accompanies margin compression is one of the most counterintuitive patterns in hospital finance. The instinct is to increase volume further to spread fixed costs—but if the additional volume is in lower-margin procedures, this strategy accelerates margin erosion rather than arresting it. Diagnosing the right driver requires procedure-level and surgeon-level data.

Case mix degradation is the first driver. When a hospital adds OR capacity or recruits new surgeons, the new volume often comes from lower-acuity, lower-complexity cases that were previously sent to ambulatory surgery centers. These cases have lower per-case reimbursement and consume the same fixed overhead (OR time, nursing staff, sterile processing) as complex cases. The case mix index (CMI) declines as a result, and Medicare DRG payments fall proportionally—because DRG weights are calibrated to case complexity. A CMI decline from 2.1 to 1.84 in a service line represents approximately 12% lower reimbursement per case without any change in case volume.

Supply cost inflation is the second driver, and it is structural. Implant costs for orthopedic, spine, and cardiovascular procedures have increased 6–12% annually for the past three years. CMS MS-DRG reimbursement updates average 2–3% annually. The 4–9 percentage point differential compounds year over year: a procedure that had a 12% margin in 2022 may have a 6% margin in 2025 purely due to this inflation differential, with no change in surgical practice or payer mix. Every idle OR hour costs $2,000–$3,500 in fixed overhead (staffing, equipment, facility), making OR utilization a critical margin lever.

Service-line-level margin reports hide surgeon-level variance. When the orthopedics service line shows a 6.2% average margin, it may be averaging a 14% margin from high-volume, implant- standardized surgeons with a 2% margin from surgeons who use premium-cost implants, run longer case times, and have higher complication rates. The same procedure, the same payer, the same DRG— with 40% cost variance based on implant preference and case duration.

OR utilization reports typically show block utilization rates—the percentage of scheduled block time that was used. This hides two distinct problems: blocks that were not used at all (the surgeon cancelled or did fewer cases than scheduled), and blocks that were used but with cases that ran over into unscheduled overtime. Both patterns increase cost per case significantly. Overtime OR staffing runs at 1.5x base rate, and excess overhead from empty blocks is absorbed by the cases that do run.

Aggregate supply cost per case hides the implant selection pattern. A service line average of $4,840 in supply cost per case may reflect $3,200 average with a few outlier cases at $12,000+ for premium implants. Without case-level supply cost reporting, the outliers that are driving average cost up are invisible in standard reporting.

Implement procedure-level margin analysis for your top 20 highest-volume surgical CPT codes. For each procedure, calculate: average reimbursement (by payer), average supply cost, average OR time cost, average nursing/anesthesia cost, and net margin. This typically takes 1–2 weeks of data work but creates a decision-support tool that drives multiple strategic decisions: which procedures to prioritize, which to shift to ambulatory settings, and where implant cost reduction has the largest margin impact.

Launch a surgeon preference card review program with supply cost transparency. Show each surgeon their individual supply cost per case compared to anonymous peer benchmarks for the same procedure. Premier Healthcare Alliance data shows that supply cost transparency programs achieve 8–15% supply cost reduction within 90 days, primarily through voluntary implant standardization and substitution of functionally equivalent lower-cost alternatives.

Audit OR block utilization at the surgeon level and identify blocks with less than 65% utilization. Surgeons consistently below 65% block utilization should either have their block size reduced or have scheduled cases shifted to fill unused time. Every 1 percentage point improvement in OR utilization from 70% to 75% typically saves $180,000–$240,000 annually in fixed cost absorption for a medium-volume surgical program. The OR cost per minute benchmark nationally is $60–$80, making utilization optimization the highest-yield margin improvement lever available.