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The Secret of Success for Independent and Thriving Hospitals?

Consolidation remains a major trend in the healthcare industry, especially among hospitals. In 2016, there were 102 announced partnership and transaction deals, compared to 66 in 2010, according to a Kaufman, Hall & Associates analysis. In the current climate of declining reimbursements and greater emphasis on value-based care, many hospital executives see mergers as a necessary way of reigning in costs and benefiting from economies of scale. Yet, a significant number of acute care hospitals remain independent and even thrive. A recent article highlighted Marin General Hospital, which separated from Sutter in 2008 but has performed well enough on its own to fund construction of a new $400 million replacement hospital. What do high-performing independent hospitals have in common? An analysis of Definitive Healthcare data suggests independent hospitals with consistently strong operating margins have limited competition from other facilities, high discharge volumes, and a greater proportion of private payers.

Under the analysis, a high-performing hospital was classified as a facility with a median operating margin of at least four percent during a five-year period from 2011 to 2015, as four percent is often cited as the traditional minimum necessary for a hospital to be able to raise capital effectively. 143 out of around 1,450 independent hospitals met this condition, according to Definitive Healthcare data. Of them, 67 were non-profit, 56 were proprietary (for-profit) companies, and 30 were government owned.

IDN Member and Independent Hospitals, Selected Characteristics

Hospital Metrics Analyzed  Total Hospitals Median Operating Margin * Discharges Medicare Mix Medicaid Mix Private Mix
IDN Hospitals
Total 3,683 -0.3% 4,675 39.4% 6.7% 50.7%
Independent Hospitals
 Total 1,399 -5.0% 792 50.8% 5.9% 37.8%
 Total OM>%4 143 8.5% 1,662 41.1% 6.0% 50.4%
 Non-Profit 639 -3.2% 1,344 48.8% 6.0% 40.1%
 Non-Profit OM>%4 67 -7.2.% 2,722 46.2% 7.2% 42.3%
 For-Profit 135 -0.3% 966 40.1% 3.6% 56.0%
 For-Profit OM>%4  56 25.9% 1,228 37.6% 2.5% 60.9%
 Govt  626  -8.8%  503  56.5%  6.0%  33.4%
 Govt OM>%4  30  6.7% 1,545 49.1% 7.5% 41.1%

*Median of 2011-2015 Operating Margins (OM=Operating Margin)
Source: Definitive Healthcare

A favorable payor mix and higher-than-average discharge volume appear to be the most common characteristics among the selected hospitals. The median payor mix for independent hospitals was 38 percent private/other, 6 percent Medicaid, and 51 percent Medicare, compared to 50 percent private, 6 percent Medicaid, and 41 percent Medicare at hospitals with median margins over four percent. The greater percentage of private payors means higher reimbursement rates per procedure and can reflect the presence of a more affluent patient base. The larger volume of discharges compared to the overall median, 1,662 to 792, also helps explain their higher margins. Despite the trend towards outpatient treatment, inpatient care is still necessary and tends to be more profitable for hospitals. Some facilities actually witnessed discharge increases from 2011 to 2015, possibly indicating a growing area population, but they were the minority and the trend did not always coincide with a stable operating margin.

Geography also appears to be an important factor. Isolated hospitals with limited competition have a natural advantage, being the only source of inpatient care within the immediate area. Some independent critical access hospitals, which by definition are geographically isolated, do have strong margins, but so do many regular acute care hospitals. Of the top 10 non-critical access facilities by median operating margin, eight are located at least 15 miles from the next-closest hospital, making them the primary destinations in terms of convenience and emergency care for local residents.

The company status of independent hospitals is also associated with high profitability. While proprietary hospitals constituted only around 10 percent of all independent hospitals, they were 37 percent of all those with median margins over four percent. In addition, they tended to have the highest margins overall. Of the top 30 hospitals by median margin, only three identified as non-profits or government-owned hospitals. Nearly all were specialty hospitals, which are generally more profitable than acute-care hospitals as they usually have more favorable payor mixes and focus on a single high-margin specialty, such as surgery or orthopedics. Non-profits came next, while government-owned facilities were the least likely to have strong margins. Of course, the margin of a government-owned hospital is less significant due to its ability to leverage tax revenues to support operations.

While financially strong independent hospitals appear to benefit largely from circumstances beyond their control, such as patient income, insignificant competition, and fundamental organizational structure, they are not a guarantee of success. Previous research, such as that here, has identified other characteristics that are equally if not more critical to an independent hospitals’ fortunes. Among them are strong business and clinical planning, high levels of cooperation with both local providers and national institutions (such as those covering specialty consults and clinical trials access), and capable leadership. Obviously, such qualities are easier described than achieved, but if attained, could be enough to create a strong, thriving hospital even in spite of unfavorable geography, payor mixes, or organization type.

Definitive Healthcare has the most up-to-date, comprehensive and integrated data on over 7,700 hospitals, 1.4 million physicians, and numerous other healthcare providers. Our information includes current and historical clinical and financial statistics for hospitals, health systems, and more.

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