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Five reasons hospitals become profitable

A recent article in Forbes titled "America's Most Profitable Hospitals" listed the 25 most profitable hospitals in the country. Among the questions asked were whether the profitability was a result of "running a tight ship and providing good quality or using market leverage to achieve monopoly power?”

The median operating margin for hospitals in the same category (200 beds and over) is reported to be minus 0.7 percent. What then drives the profitability of 30 percent, 40 percent or even 50 percent operating margins in the top 25 hospitals? Depending on whom you ask, opinions will vary. But here are the top five influences that I believe contribute to profitability.

1. Payer mix. The more profitable hospitals will have a higher number of private insured patients than government sponsored or uninsured. The reasons for this may vary, but the correlation to higher profitability is clear. Location is important.

2. Market leverage. The higher the market share in a given market, the greater the negotiating strength in dealing with private health insurers. This is important since federal and state budgets determine the rates hospitals are paid. This competitive advantage can result from having the majority of hospitals in a market or being the sole hospital provider.

3. Product differentiation. The degree to which hospitals can provide unique services not generally available in other area hospitals – such as trauma centers or organ transplant services – the greater the ability to negotiate higher payments from private health insurers.

4. Highly disciplined and rigorous control of expenditures. Most often associated with the for-profit hospitals that account for 15 of the 25 most profitable referenced in the Forbes article.

5. True hospital/physician integration where there is a common incentive to drive clinical discipline and share financial risk.

If you apply these five factors to any hospital in the country, you will readily recognize why some are much more profitable than others. 

As for the question of whether quality drives profitability or profitability makes the focus on and support of quality initiatives possible, I'd like to see the following analysis. Go back 10 to 15 years when quality initiatives and performance improvement were not embraced to the extent they are today. I believe the five measures I listed above would define the extent of hospital profitability, just as they do today.


Mike Stephens blogs regularly at Action for Better Healthcare.

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