Sources of variation in U.S. hospital profitability

• Objectives To determine the association between hospital profitability and internal and external environmental factors.

• Background  The ability of hospitals to survive and be able to provide the latest services depends in part on the ability to earn a positive financial surplus. We wish to assess the association between hospital profitability and external factors such as competition, public payment policy, the Great Recession, household income,  the unemployment rate, and the early implementation effects of the Affordable Care Act (ACA). We also wish to examine internal factors such as ownership status, membership in a multihospital system, utilization of highly skilled professional employees, and provision of highly technological services.

• Policy Implications Operating characteristics can impact profitability. Membership in a system is associated with greater profitability. This is reflective of revenue (i.e., greater pricing power) and cost (firm level scale economies) effects. Location in more affluent counties is associated with greater profits, and this might affect the distribution of facilities in the future. The Great Recession had a pronounced one-time impact on total margin but not on operating margin, suggesting a greater impact on donations than on demand for services. County unemployment rate (which has served as a proxy for the lack of insurance) is negatively associated with profits, suggesting that a larger pool of uninsured can be a drag on profitability. Concentration of output is positively associated with profitability and suggests that hospitals might be using market power to increase prices.

• Data/Methods  We use an unbalanced panel of 2,163 metropolitan U.S. hospitals during the period from 2000-2013, resulting in 24,388 observations. Total margin and operating margin served as the dependent variables in (generalized least square) GLS random-effect regressions. Independent variables reflect the correlates of profitability described above. We included binary variables for k-1 years and states to capture temporal effects (such as the Great Recession and the implementation of the ACA) and state effects.

• Results Operating and total margin were positively associated (at p < 0.05) with system membership, for-profit ownership, concentration of output, and income. Medicaid share was negatively associated with total margin but not associated with operating margin. Teaching status was positively associated with total margin but not associated with operating margin.  There was no discernible temporal trend. However, total margin spiked downward in 2008 during the Great Recession but recovered afterwards.