The health-care institutions perched atop U.S. News and World Report’s annual best hospitals ranking are known as the leaders in their field, the place to be for their specialties, well-staffed and highly regarded.
New research from a Fisher College of Business professor found those accolades don’t, however, mean operating margins aren’t often razor-thin – or in the red.
Featured in the December 2013 edition of the Decision Sciences journal is a nearly decade-long glimpse at top hospitals’ profitability from W.C. Benton Jr., Edwin D. Dodd Professor Management Sciences at Fisher. The study, “A Profitability Evaluation of America’s Best Hospitals, 2000-2008,” is a follow-up to similar analysis conducted in 2000 and 2007.
It’s an attempt to answer a question Benton says nagged him for years:
“If they’re the best, are they sustainable? Are they liquid?” he asked. “You can be of the best quality in the world, but if the lights aren’t on, you won’t survive.”
The hospitals Benton analyzed in the latest research are the scant 3 percent of the nation’s 5,000-plus that make it on the U.S. News ranking, thanks to favorable scores on patient survival rates, structural resources, staffing levels, and reputation. In the second part of the research, Benton also conducted a more detailed analysis of the “honor roll” hospitals on the list, those that find at least six of their specialties ranked near the top of 16 sub-rankings.
While two in three hospitals are designated nonprofits, Benton’s research uses the metric to gauge how much revenue remains each year to reinvest into the organization.
The results paint an intriguing picture of how the financial state of the nation’s best hospitals changed throughout the last decade. Average net income among these hospitals rose from about $10 million in 2000 to more than $58 million in 2008, while net income per bed spiked to $115,000 from about $18,000.
Profit margins tell a different story. In 2008, they ranged from a high of 71 percent to a deficit of 19 percent among 123 hospitals, but the average fell closer to break-even at 4 percent, up slightly from 1 percent in 2000. That means even though average profit at these hospitals rose at a frenzied pace in those years, it remained only a tiny slice of the revenue received, indicating overhead and fixed costs in the form of technology, advertising, and brick-and-mortar investments were moving nearly as quickly.
Indeed, across all hospitals nationwide, the number of beds in those eight years shrank to 951,000 from 984,000, but expenses ballooned to nearly $700 billion, up from $400 billion in 2000, according to Census Bureau data. The total number of hospitals, meanwhile, was virtually unchanged.
Juggling these heavy investments amid an increasingly complex financial ecosystem of public and private dollars means that in order to keep the lights on, Benton said, “hospitals are getting smarter.”
“In some cases, they’re even trying to ‘game the system,’” he said. “But some won’t survive.”
How these best-in-class hospitals are surviving was the focus of Benton’s deep dive into the “honor roll” pack of institutions in the second part of his research. What emerged was no clear-cut formula for financial success.
One honor roll hospital tightened bed capacity, improved occupancy and took on a more complex caseload, only to see its profit margins take a hit over the nine-year period. Another increased bed capacity and reduced caseload diversity, flipping from a shortfall to a surplus.
“These (honor roll) hospitals are trying to adjust to a new environment,” Benton said. “They’re trying to size themselves the right way.”
With no silver bullet to slay the challenge of operating in this rapidly changing, Affordable Care Act era, the notion of segmentation will become even more critical, according to the research. In short, hospitals can’t continue to be all things to all patients, pumping resources into pricey or, worse, redundant technology. New changes to reimbursements through the health-care law might lead to more cooperation among hospitals, but Benton said survival ultimately will be a question of leadership.
“Hospitals are going to have to decide what their core competencies are and try to provide the best care per dollar spent,” he said. “They should keep an eye on the external environment, but in the end, what decides whether you’re going to be successful is you.”
This article appears in the March 2014 edition of COE’s Current State e-newsletter. Have a colleague who should be receiving this e-newsletter? Contact Matt at email@example.com.