You could be forgiven for thinking that US hospitals make an absolute killing (pardon the pun). After all, they charge an obscene amount of money for many basic services and medications, and they provide an essential service that every single American citizen will need at some point in their lives.
On the surface, this seems like it could be a very lucrative industry, but once you dig a little deeper it’s a different story altogether. Around 8 out of 10 US hospitals are non-profit for one thing, and even the ones that operate solely to profit from mending and curing American citizens don’t have the sort of margins that you might expect.
How Much do American Hospitals Make?
The average US hospital has a profit margin of just 8%. To put that into perspective, Apple, who operate on a much bigger scale and don’t have our lives in their hands, have a profit margin of just under 40%.
You could argue that both overcharge for what they provide, but the end result is drastically different. And the problem with operating on such small margins is that it doesn’t take much for your profits to take a nose-dive. That’s why many hospitals are scrambling, trying their best to change-up their systems. Static budgeting in hospitals is becoming a thing of the past, which is good, but hospitals may also look to cut staff costs and customer care, which is not good.
Why are the Margins so Small?
So what is the issue here, why the small margin? Well, contrary to what they may want you to believe, it’s not because the service they provide costs them a lot of money. Medical equipment purchasing and maintenance certainly doesn’t come cheap, but the average hospital bill is over 3.5x greater than the cost of the service provided.
It’s also not the result of something known as “uncompensated care” which is when hospitals provide care that isn’t paid for, and that’s because this is something they rarely do. Not only will Medicaid cover many patients who can’t pay, but hospitals are relentless in chasing debt.
The simple fact is that a single service, and indeed a single patient, requires a great deal of care from numerous staff members; the machines are ridiculously expensive; and, perhaps most importantly, they are constantly being sued for negligence.
Multi-million dollar medical negligence lawsuits are commonplace in hospitals and are a direct consequence of them taking on more patients. On the one hand they need to take on more patients and assign these to fewer staff members if they want to keep their profits high, but on the other hand busier staff members mean more mistakes, which leads to an increase in medical negligence lawsuits.
Don’t feel bad for the hospitals though. The margins may be small, but we’re dealing with billions of dollars in turnover here, so there is still plenty of cash to go around. These margins are also on the increase, and have nearly quadrupled since 2008, when they reached the lowest they have been for a long-time.