A Snapshot Analysis of The Profitability of America’s Most Successful Hospitals

By W. C. Benton, PhD, Thomas E. Williams, Jr., MD, Ph D and Sarah Greenberger, MD

US News and World Report compiles an annual list of America’s great hospitals.1 We desired to evaluate the profitability of these institutions. The selection criteria included membership in the Council of Teaching Hospitals, reputation, mortality and other factors. To be included in a subset of the list, namely the 15 so-called Honor Roll hospitals, a hospital must demonstrate unusual competence in at least six of 16 clinical specialties. In 2005 there were 14 of the 15 original hospitals included on the 2000 Honor Roll Hospitals list.

The U.S. News & World Report articles do not consider the financial health of the hospitals in their selection criteria. Yet, it is essential to any on-going concern that economic goals must be met. Profitability is a necessity for doing business, even in not -for -profit organizations.

The List of America’s Best Hospitals was used to prepare a comprehensive financial and bed occupancy picture for each hospital on the list by downloading public information from the Web site of The American Hospital Directory, www.ahd.com. The American Hospital Directory provides on-line data for over 6,000 hospitals. The database of information is built from Medicare claims data, cost reports, and other public use files obtained from the federal Center for Medicare and Medicaid Services. Profitability was defined for testing as Profit Margin = (100 * Net Income / Total Revenue).

A complete data set could be obtained for 14 of the Honor Roll hospitals is given in Table 1. A summary of the data is given in Table 1. Table 2 is the same honor roll hospitals comparison between 2000 and 2005. The average beds capacity increased by 23. Occupancy rate rose from 74.0% to 82.7%. The case mix index was raised from 1.90% to 1.94%. At the same time, the net income increased almost four fold in the five years. The total revenues almost doubled. The net income per bed almost tripled. The profit margin for the same honor roll hospitals increased from 2.87 % to 3.87%.

Discussion

A closer investigation of the data reveals that during the five year data collection period, eight of the honor roll hospitals showed losses during the same five year period. Six honor roll hospitals accounted for the increased profitability levels. In order to show the true picture, the increased debt leverage must be accounted for by using the return on investment measure. The total asset turnover data is not reported by the hospitals. During the past five years the hospital industry has completed the most aggressive construction boom in 50 years, spending nearly $100 billion in inflation-adjusted dollars for new and expanded facilities. The cost of the $100 billion construction price tag must be factored into the profitability equation.

While economic theory suggests that hospital size demand, occupancy rate, and the level of sophistication - case mix and technology - should have positive effects on profitability, the data indicate that even without including the debt component, profitability is insensitive to both occupancy level and case mix index.

The Advisory Board has termed this as a “dilemma of profitless growth” 2 brought about by increased demand for services and limitations of capacity. The increased demand derives from an increase in our population, a shift in the population demographics to the leading edge of the “baby boomers”, and a change in the composition of the hospital patient population to patients requiring a larger amount of medical as opposed to surgical care. The supply side of this dilemma comes from limited bed capacity after the bed reductions of the 1990’s, and the inability to find sufficient personnel needed to staff those beds. The hospital’s share of the health care dollar is approximately 33% and is expected to go down given the newly revised Medicare reimbursement system.

Whether hospitals can continue to provide their services to their communities depends on their ability to identify the end of the financial line before they reach it. The low levels of profitability suggest that the current hospital business model is flawed. . The relationship of profitability to severity of disease is even more complex. The new economics of the health care industry cannot be managed under traditional health care systems approaches. The current hospital business model is simply not sustainable.

W. C. Benton, PhD, is professor of operations and systems management at The Max M. Fisher College of Business, The Ohio State University. He can be reached at 614-192-8868 or Benton.1@osu.edu

Thomas E. Williams, Jr., MD, PhD, is clinical associate professor of surgery, The College of Medicine and Public Health, The Ohio State University. He can be reached at 614-293-5629 or tom.wiliams@osumc.edu

Sarah Greenberger, MD, is a resident in emergency medicine in Orlando, Fla.

References

• U.S. News and World Report 2000 Best Hospitals, (July 6, 2000); U.S. News and World Report 2005 Best Hospitals, (July 18, 2005)
• Health Care Advisory Board. “A Delicate Balance: Managing the Inpatient Enterprise for Profitable Growth”. The Advisory Board Company; Washington, DC. (2001).