Factors Associated with Hospital Profitability

On August 9, 2016 we held a SIRIUSXM 111 The Business of Healthcare radio segment on the factors associated with highly profitable hospitals and what they are doing with these profits. The panelists for this segment were Dr. Ge Bai, Assistant Professor at the Johns Hopkins Carey Business School and Dr. Oanh Nguyen a physician and researcher at the UT Southwestern Medical Center, Dallas.

Dr. Bai recently published an article on hospital profitability in the May 2016 issue of Health Affairs where she defined profitability as net income from patient care services. It was found that the most profitable hospitals (of which the Hospital of the University of Pennsylvania was in the top 10), exhibited several characteristics which differentiated them from other hospitals. These included: regional power (which provided for negotiating leverage with payers); being part of a system; being held in high regard (i.e. regarded as prestigious institutions); mainly for profit; and significantly higher mark-ups to costs (defined as charge to cost ratios; exceeding 5). These charge to cost ratios, in turn allowed hospitals to extract higher contracted rates with payers.

As it relates to for-profit status and not-for-profit, the hospitals’ mission/focus is a bit different both Dr. Bai and Dr. Nguyen concluded. For-profits focus on investor return, while not-for-profits focus on caring for the indigent. There has been a recent trend in hospitals converting from not-for-profit to for-profit (with a consequent improvement in financial margin). While this helps the individual hospital, there was a concern expressed by both Dr. Bai and Dr. Nguyen that this in turn may create situations where the less fortunate are not cared for.

Dr. Nguyen discussed the relationship between hospital performance and publicly reported outcomes (reported on through CMS’s hospital compare website). This analysis was recently published in the July 2016 issue of the Journal of Hospital Medicine. Surprisingly, Dr. Nguyen found no relationship between robust financial performance and improved publicly reported outcomes (for 30-day mortality and 30-day re-admission rates) for several key conditions: acute myocardial infarction (AMI), congestive heart failure (CHF), and pneumonia. This runs counter to the initiatives promulgated by the Affordable Care Act which incents (pays/reimburses higher) for institutions that demonstrate improved outcomes – a rather concerning finding. Intuitively it would seem that profitability and outcomes would correlate.

What do these findings mean for policy makers? First, policy makers must ensure that the less fortunate have access to care. Second, they should ensure that the right care is being provided in a cost effective manner such that the institutions doing so are rewarded accordingly.

These are a couple of worrisome trends that should be monitored/evaluated over the near term.

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