Efficiency and profitability are key factors in the success of not-for-profit hospitals in the United States. A study published in the International Journal of Health Economics and Management analyzed the relationship between hospital profitability and efficiency using data from 1,317 U.S. metropolitan, acute care, not-for-profit hospitals in 2015.

Ben H.

Ben H.

Aug 05, 20234 min read

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Efficiency and profitability are key factors in the success of not-for-profit hospitals in the United States. A study published in the International Journal of Health Economics and Management analyzed the relationship between hospital profitability and efficiency using data from 1,317 U.S. metropolitan, acute care, not-for-profit hospitals in 2015.

The study employed a frontier method called stochastic frontier analysis to estimate hospital efficiency. The results showed that more efficient hospitals were also more profitable. This finding suggests that not-for-profit hospitals will be responsive to incentives for increasing efficiency and using market power to pursue their objectives.

Several factors were found to be positively correlated with profitability. These factors included size, concentration of output, occupancy rate, and membership in a multi-hospital system. Larger hospitals with higher patient volumes and higher occupancy rates were able to achieve economies of scale, leading to increased profitability. Additionally, hospitals that were part of a multi-hospital system were able to benefit from shared resources and expertise, leading to improved financial performance.

On the other hand, several factors were found to have an inverse relationship with profits. Academic medical centers, which often prioritize research and education over financial performance, were associated with lower profitability. Higher average length of stay, which may indicate inefficiencies in patient management and resource utilization, was also associated with lower profits. Hospitals located in Medicaid expansion states, where the reimbursement rates for Medicaid patients are typically lower, also experienced lower profitability. Furthermore, hospitals with a higher share of Medicaid and Medicare admissions had lower profits, likely due to the lower reimbursement rates from these public insurance programs. Lastly, hospitals located in areas with higher unemployment rates also had lower profits, potentially due to a higher proportion of uninsured or underinsured patients.

Interestingly, the study found that efficiency was exogenous in the profit equations, meaning that it was not influenced by profitability. This suggests that improving efficiency can be a strategic objective for not-for-profit hospitals, regardless of their financial performance. By focusing on improving operational processes, reducing waste, and optimizing resource allocation, hospitals can enhance their efficiency and, in turn, improve their profitability.

In a separate analysis of Elevance Health (ELV), a carrier with a large Medicare segment, it was observed that the company's exposure to Medicare was relatively small compared to its commercial and Medicaid segments. This raises the question of why ELV prioritizes its commercial and Medicaid lines of business over Medicare. It is possible that ELV faces challenges in competing with larger players like UnitedHealth Group (UNH) in the Medicare market. UNH has a significant market share in Medicare Advantage plans, which may make it difficult for smaller carriers like ELV to gain a foothold in this segment.

Despite its smaller Medicare exposure, ELV reported positive financial performance in the second quarter of 2023. Medicare Advantage membership grew by 5.8% year over year, indicating a positive trend in this segment. However, Medicare Supplement membership declined by 1.7% year over year. It is worth noting that ELV's overall operating revenue increased by 12.7% year over year, reaching $43.4 billion. This growth in revenue contributed to an increase in overall operating profit, which rose from $2.35 billion to $2.63 billion, a 12% increase.

While ELV's loss ratio decreased slightly from 87.1% to 86.4% year over year, indicating improved efficiency in managing benefit expenses relative to premium revenue, expenses as a percentage of revenue increased from 19.0% to 20.9% year over year. This suggests that ELV experienced higher operating and product costs, which impacted its profitability.

In light of these findings, there are three actionable pieces of advice that can be derived:

  • 1. Focus on efficiency: The positive relationship between efficiency and profitability suggests that not-for-profit hospitals should prioritize efforts to improve operational processes, reduce waste, and optimize resource allocation. By becoming more efficient, hospitals can enhance their financial performance and pursue their objectives effectively.
  • 2. Explore market power: Membership in a multi-hospital system was associated with higher profitability. Not-for-profit hospitals should consider partnering or affiliating with other healthcare organizations to leverage shared resources and expertise. This can lead to improved financial performance and better patient outcomes.
  • 3. Evaluate market dynamics: Smaller players in the healthcare industry, like ELV, may face challenges in competing with larger, more established companies. It is important for organizations to assess the competitive landscape and identify areas where they can differentiate themselves. This may involve focusing on specific market segments or developing unique value propositions that set them apart from their competitors.

In conclusion, the relationship between efficiency and profitability is crucial for not-for-profit hospitals in the United States. By improving operational processes, leveraging market power, and understanding market dynamics, hospitals can enhance their financial performance and effectively pursue their objectives. It is essential for healthcare organizations to continuously evaluate their strategies and adapt to the changing landscape to thrive in a competitive industry.

Resource:

  1. "Efficiency and profitability in US not-for-profit hospitals - International Journal of Health Economics and Management", https://link.springer.com/article/10.1007/s10754-020-09284-0 (Glasp)
  2. "Elevance Health (ELV) - a carrier w/ a large Medicare segment - r", https://www.linkedin.com/feed/update/urn:li:activity:7089578144336117761/ (Glasp)

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