Factors of U.S. Hospitals Associated with Improved Profit Margins: An Observational Study

Abstract

Background: Hospitals face financial pressure from decreased margins from Medicare and Medicaid and lower reimbursement from consolidating insurers.

Objectives: The objectives of this study are to determine whether hospitals that became more profitable increased revenues or decreased costs more and to examine characteristics associated with improved financial performance over time.

Design: The design of this study is retrospective analyses of U.S. non-federal acute care hospitals between 2003 and 2013.

Subjects: There are 2824 hospitals as subjects of this study.

Main measures: The main measures of this study are the change in clinical operating margin, change in revenues per bed, and change in expenses per bed between 2003 and 2013.

Key results: Hospitals that became more profitable had a larger magnitude of increases in revenue per bed (about $113,000 per year [95% confidence interval: $93,132 to $133,401]) than of decreases in costs per bed (about - $10,000 per year [95% confidence interval: - $28,956 to $9617]), largely driven by higher non-Medicare reimbursement. Hospitals that improved their margins were larger or joined a hospital system. Not-for-profit status was associated with increases in operating margin, while rural status and having a larger share of Medicare patients were associated with decreases in operating margin. There was no association between improved hospital profitability and changes in diagnosis related group weight, in number of profitable services, or in payer mix. Hospitals that became more profitable were more likely to increase their admissions per bed per year.

Conclusions: Differential price increases have led to improved margins for some hospitals over time. Where significant price increases are not possible, hospitals will have to become more efficient to maintain profitability.

Keywords: market power; prestige; profitability.

Fig. 1

Distribution of operating margin in 2003 and in 2013. Source: Authors’ analysis of Healthcare Cost Report Information System data

Fig. 2

Changes in revenues and expenses per bed for hospitals with increases in operating margin between 2003 and 2013. Source: Authors’ analyses of Healthcare Cost Report Information System data, American Hospital Association (AHA) annual surveys, and Center for Medicare and Medicaid Services (CMS) Impact Files. Notes: Each bar represents a separate multivariate linear regression in which “Change in Operating Margin Category” is the main independent variable. “Change in Operating Margin Category” is an indicator variable that takes the value of 1 for hospitals with a change in operating margin in the highest quartile, −1 for hospitals with a change in operating margin in the lowest quartile, and 0 for hospitals in the middle quartiles. Models adjust for hospital size (a binary variable for hospitals with greater than 300 beds) in 2003, profit and ownership status in 2003, location (urban versus rural), teaching status (member of Council of Teaching Hospitals) in 2003, percent admissions from Medicare in 2003, percent admissions from Medicaid in 2003, specialty (cancer, cardiac, or orthopedic) hospital in 2003, case-mix index in 2003, and state. Values were normalized to 2013 dollars using the consumer price index. Error bars represent standard errors