2017 Annual Hospital Survey

High net patient revenue doesn’t necessarily bring high margins

BY WILL FOLTZ, Definitive Healthcare

Looking at the table showing the top 25 Greater Houston hospitals by net patient revenues on page 14 and 15, it’s clear that just because a hospital ranks highly in the list, the facility may not have had a strong operating margin in 2016. In fact, a hospital’s margin appears more closely associated with several other factors besides revenues.

Generally, nonprofit and state-owned hospitals with unfavorable payor mixes and smaller inpatient revenue shares had lower operating margins than for-profit facilities with better corresponding characteristics in the Greater Houston area.

The first-ranked hospital on the list is a good example of how high net patient revenue doesn’t guarantee a positive margin. The case of University of Texas MD Anderson Cancer Center suggests that its exceptionally low inpatient revenue component of its total revenue depressed its margins. Its share, 33% is considerably lower than the top 25 median, 55%.

Past studies have shown that hospitals that profited from inpatient Medicare admissions had a much larger margin per case than those with profitable outpatient Medicare cases. A hospital with a large outpatient revenue component may face tighter cost constraints, limiting profit per case. Taken as a whole, the top 25 hospitals do show a slight correlation between operating margins and inpatient revenue share, even when eliminating the Ben Taub General Hospital outlier.

Other contributing factors could be expenses related to MD Anderson’s large workforce, which dwarfs many of the other hospitals on the list, and its comparatively longer length of stay, which in some cases can reduce the margin from any single DRG payment if the associated costs of treatment are higher than anticipated.

Texas Children’s Hospital, which ranks second, also had a negative operating margin, but different factors could be at inpatient care comprises a much greater share of total revenue at Texas Children’s, the hospital has an unfavorable payor mix compared to most others on the list, with Medicaid representing nearly 20 percent of its reimbursements.

The Texas Hospital Association recently reported that the state Medicaid program covers an average of 58 percent of an inpatient episode’s cost, while reaching 72 percent for outpatient care. With less revenue per service, hospitals with high Medicaid exposure can often struggle to make a profit. Inversely, hospitals that treated a higher share of patients with private insurance tended to have better margins. The Woman’s Hospital of Texas, which had the highest operating margin of the 25 hospitals listed in 2016, also had the highest rate of private payors, at 92.7%, compared to the list median of about 65%. Higher operating margins were also associated with hospitals classified as forprofit entities.

While researchers have extensively studied the differences in management structure, clinical operations, and organizational purpose among nonprofit and proprietary hospitals, the data in the list show a few basic characteristics that may explain some hospitals’ higher profits. Of the 25 hospitals shown, nine are for-profit, 13 are nonprofit, and three are government owned. For-profit hospitals have the highest median inpatient revenue component and a slightly higher median private payor mix. They also have a median Medicaid mix of 6.8%, compared to 8.7% at nonprofit and government-owned facilities.

Together, the characteristics could explain how for-profit hospitals had a median operating margin of 6.6%, compared to 5.6% at all other institutions on the list.