A look at hospital operating margins in the United States
The past few years have impacted hospitals’ operating margins by increasing costs and decreasing net patient revenue.
Hospitals use operating margins to measure and track how much they spend on expenses – everything from doctors’ salaries to medical supplies – and then compare it to their revenue – the money that they receive from patients, insurance companies, and the government for delivering patient care. Operating margin can be used to benchmark provider organizations on their financial performance.
In this Healthcare Insight, we review operating margins at U.S. hospitals in relation to their bed quantity and physical location.
What are operating margins for U.S. hospitals?
Based on data from more than 5,600 hospitals in the Definitive Healthcare HospitalView product, the median operating margin for U.S. hospitals in 2021 was actually a loss of 1.5%. Meanwhile, the average operating margin for hospitals was a loss of 11.7%.
Data used in this analysis is from the October 2022 Medicare Cost Report. According to the report, hospital operating margins range from -36% to over 100%. For this analysis, we compared median values since the averages vary widely.
Average and median hospital operating margins
How do hospital operating margins change each year?
Based on analysis of historical hospital operating margins, many hospitals run on a small loss each year and do not have high profit margins. Between 2017 and 2019, median hospital operating margins were between -1% and -2%.
In 2020, likely due to reduced capacity and delays in care because of the COVID-19 pandemic, the median operating margin dropped to -5.4%. Hospital expenses increase about 5% each year, while hospital revenue increases at about 3% each year, potentially widening the gap in profit for the coming years.
Hospital operating margin by bed size
Small hospitals with 25 beds or fewer have the lowest operating margins. In 2021, these hospitals report a median operating margin of nearly -6%.
Hospitals with 25 or more beds had positive median operating margins from 2017 to 2019. For 2021, hospitals with 26 to 100 beds had the highest median operating margin at 1.6%. Some of the largest healthcare systems in the country even report 2022 operating margins that exceed pre-pandemic levels.
Hospital operating margin by region
Hospitals in the northeastern U.S. have the lowest median operating margin at -5.7% and historically have the lowest operating margins compared to other regions across the country. The northeast hospitals also had some of the largest drops in average net patient revenue, likely contributing to the margin results.
Hospitals across all regions had negative median operating margins for 2020. In 2021, the southeast and southwest were the only regions with hospitals that had a positive median operating margin.
How do you calculate operating margin for a hospital?
In the Definitive Healthcare HospitalView product, operating margin is calculated using metrics from the Medicare Cost Report. The difference between net patient revenue and total operating expense is divided by the net patient revenue to create an operating margin percentage. The current data is based on the October 2022 release of the Medicare Cost Report.
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