Five levers to tackle rising inpatient costs

Inpatient care is one of the fastest-growing drivers of medical spend, and health plans are feeling the pressure. For many CMOs, they may be asking: How do you control rising inpatient spending without disrupting care or overhauling existing programs? 

The path forward lies in focusing on five key cost levers where precision and consistency yield outsized returns. By targeting these drivers, health plans can capture significant medical savings while maintaining or even improving high-quality care.

The five inpatient cost levers

1. Admit status

Few decisions have a bigger financial impact than determining whether a case should be billed as inpatient vs. observation.  While some short stays (hospitalizations under two midnights) are appropriately billed as observation, they remain a reliable signal of inconsistent medical policy application. According to the CDC, the average cost of an inpatient stay was $14,101 in 2019, which has likely risen significantly since. Getting this decision right is essential to managing medical spend.

The issue has been compounded by the 2023 re-clarification of the Two-Midnight Rule, which led to an increase in short-stay inpatient submissions by many providers. CMS continues to allow criteria-based utilization review of the medical record to determine the most appropriate admission status. Recent 2026 payment rules prevent overturning UM approvals during the payment process, making getting the admission decision right upfront even more important.

Impact: Because of the scale and frequency of these cases, even modest improvements in addressing inappropriate short stays can drive immediate and significant medical savings.

2. Level of care

For commercial health plans, once an inpatient admission is approved, the next question is the appropriate care setting–ICU, intermediate, or telemetry. While health plans only manage this for select populations (e.g., NICU or behavioral health), opportunities are frequently missed in adult medical and surgical admissions.

Getting this decision wrong has consequences on both cost and care quality. Patients in unnecessarily high-intensity settings may be exposed to additional risks, including infection and reduced mobility, while lower-acuity patients tie up scarce ICU or telemetry resources.

Part of the challenge is that providers may not always be aware of the plan’s policies or alternative setting options, leading to automatic admission to higher-intensity care. This creates an opportunity for plans to support providers with nudges and reminders at the point of decision, helping to align the care setting with clinical needs.

Impact: Ensuring patients are placed in the right setting at the right time prevents overuse of high-cost resources while maintaining quality of care.

3. Length of stay

For commercial health plans with per-diem hospital contracts, each additional day in the hospital also represents an incremental cost. Managing length of stay is less relevant for Medicare and Medicaid (which primarily use DRG-based bundled payments) but highly material for commercial lines of business.

The stakes aren’t just financial. Unnecessary inpatient days can place patients at higher risk of hospital-acquired conditions (HACs) such as infections, pressure injuries, or complications related to immobility. Prolonged hospitalizations may also delay recovery and strain bed availability for other patients.

A key part of LOS management is ongoing stay reviews. These reviews require careful evaluation of new clinical information versus existing data to determine whether the patient still requires inpatient care. Without consistent, accurate reviews, extended stays can easily go unnoticed or persist longer than clinically necessary.

Impact: By reducing avoidable inpatient days, health plans can lower medical spend while improving patient safety and care flow.

4. Readmissions

Readmissions (patients returning to the hospital within 30 days of discharge) often indicate insufficient initial hospitalization, discharge planning, or follow-up care. While readmissions don’t result in a duplicate payment, they often signal scenarios where a second inpatient stay could have been avoided–or where the plan may be reimbursing for care outside its payment policy. With the right visibility, health plans can identify these potentially avoidable readmissions earlier and support reviewers in applying policy consistently to prevent unnecessary spend.

They also represent a significant cost and burden for patients. Avoidable readmissions can disrupt recovery, increase the risk of complications, and place emotional and physical strain on patients and their families. Across the U.S., avoidable readmissions are estimated to cost between $25 and $45 billion annually, highlighting the scale of the issue.

For health plans, the challenge lies in identifying patients at risk of readmission and implementing interventions early. This could include enhanced discharge planning, follow-up support, and better coordination across care teams. Regulatory changes, including CMS rules limiting the ability to overturn admissions retrospectively, have made upstream readmission management increasingly important.

Impact: Proactively managing readmissions helps plans reduce unnecessary hospitalizations, improve patient outcomes, and support safer, more effective transitions from hospital to home.

5. Outliers

Outlier cases are admissions that far exceed the typical length of stay for a given condition. While relatively rare, these cases can generate disproportionately high costs and pose significant challenges for patients and health plans. Extended stays can increase the risk of hospital-acquired conditions (HACs), disrupt recovery, and create stress for patients and their families.

These cases are complex to anticipate before they occur, and there is a lack of tools to flag potential high-risk admissions early. Without timely insights, plans may struggle to intervene in ways that could safely reduce length of stay or transition patients to appropriate care settings.

Impact: By identifying and tracking potential outlier cases, health plans can limit avoidable costs, reduce patient risk, and improve overall care management.

Why these levers matter

Short stays, readmissions, outliers, and care-setting misalignments often go unnoticed until after payment, limiting the ability to act quickly and effectively. Without insight into these high-impact areas, plans risk excess spend, missed opportunities for improved care, and operational inefficiencies.

The takeaway for CMOs and clinical leaders is clear: understanding and monitoring these five levers is critical to controlling inpatient costs and ensuring high-quality care before considering specific solutions or technology investments.

Curious how your plan could tackle inpatient cost challenges? Contact Cohere Health to learn how we’re helping health plans gain insight and take action on these high-impact levers.