The Washington Post reports on the most profitable hospitals in the country based on their operational margins.
Seven of the top 10 most profitable hospitals in the United States are nonprofit facilities that each netted more than $150 million from caring for patients in 2013, according to a study published Monday….
The authors analyzed Medicare data for about 3,000 acute care hospitals, of which 59 percent were nonprofit, 25 percent were for-profit and 16 percent were public. After adjusting for cost of living and the types of patients served, they found that more than half of all facilities lost money on patient care services. Rural hospitals, small hospitals, and major teaching hospitals tended to lose more money than urban hospitals and larger ones….
The study’s main purpose was to determine the characteristics of the nation’s most profitable hospitals. They found that facilities that were part of a system were more profitable because they were able to dominate their local market, which gives them greater clout in negotiating higher prices from private insurers.
Some hospitals (and insurers) are effectively hedge funds with a sideline business in healthcare so those financial operations are excluded from this analysis.
From the study ** itself, market power and market concentration is a major indicator of hospital profitability:
We also examined the hospitals that were extremely profitable—those in the top 2.5 percent in terms of profit per adjusted discharge (over $2,475), after we excluded hospitals with fifty or fewer beds. These extremely profitable hospitals had an average charge-to-cost ratio of 5.8. Seventy-eight percent of them were for-profit, 88 percent were in a system, and 47 percent had regional power
System hospitals tend to be geographically clustered and they can arrange services so that there is little leakage out of the system. Furthermore, systems that are geographically clustered tend to have a high proportion of the regional hospital beds which means those hospitals have a high local HHI compared to the payer HHI. That allows them to charge more for more services.
What are the big take-aways?
We pay too much for hospital services. That is a given. Additionally, some of the most profitable hospitals are non-profits. I have long believed that tax organization does not have too much impact when the non-profit is large as the incentives to capture surplus and distribute it to internal stakeholders instead of external shareholders is strong when there is a firehose of money to sip from. Finally, market power matters. This is an area where federal administrative and executive action can bend the cost curve by having the FTC aggressively crackdown on any activity that looks to increase regional market concentration of critical providers. At the state level, state legislatures can remove barriers to entry and allow for new hospital construction that decreases regional concentrations.
***Bai, G., & Anderson, G. F. (2016). A More Detailed Understanding Of Factors Associated With Hospital Profitability. Health Affairs, 35(5), 889-897. doi:10.1377/hlthaff.2015.1193