Health Care Industry Insights: What are a Hospital’s Gross Margins?

LEK recently released an article about the gross margins of hospitals and how they will be affected by health care reform. Their finds are fascinating, and the article is one of the best on health care I’ve ever read.

Today’s article is intended as a summary of the LEK article. Specifically we will talk about hospital economics today, the impact of Medicaid expansion, insurance exchanges, aging of the population, and cuts to Medicare.

What are Hospital Margins Today?

Hospital Economics Today

The patient breakdown in an average suburban hospital is 50% commercial (employer based), 30% Medicare, 15% Medicaid, and 5% uninsured.

As you can see from the above graph, hospitals make money on commercial patients and lose money on everybody else. If you’re wondering why they bother serving Medicare and Medicaid patients, it’s because a hospital is a high fixed cost business and serving more patients means losing less money.

Also, the average margin for a suburban hospital is around 4% (if that sounds low, remember that many of them are run as nonprofits).

What is the Impact of Medicaid Expansion?

Medicaid Expansion

The new health care law provides health insurance (via Medicaid) to many of the previously uninsured. This has the side benefit of improving hospital margins by approximately 2%, according to the report.

If that was the only change that came from the new laws hospitals would be in pretty good shape, but there are a few more things we need to consider.

What’s the Impact of the Insurance Exchanges?

Insurance Exchanges

Approximately 10% of commercial patients will lose their plans and move over to new plans purchased on the exchange market. For these commercial exchange plans reimbursement rates are lower for the hospital. This lowers the overall margin for hospitals.

What about Aging of the Population?

Aging of the Population

As the population gets older, more and more people move from the commercial to the Medicare segment, lowering the overall hospital gross margin to 2%.

And What About Cuts to Medicare?

Cuts to Medicare

Factoring in planned cuts to Medicare over the next decade, which lowers the margin on Medicare patients, we see that hospital gross margins drop to zero.

Conclusion

The new health care law does improve hospital margins by lowering the proportion of uninsured patients. But the problem is that the combination of cuts to Medicare and aging of the population more than balance that out.

If LEK’s predictions are correct, gross margins for the typical suburban hospital will fall to zero.

Future articles will touch on how hospital gross margins can be improved.

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