The Trouble with Calculating Hospital Revenue

Last week, we ran a story about hospital profits in Dallas based on Allan Baumgarten’s Texas Health Market Review, and it caused a bit of a stir. Baylor Scott and White Health said that the data, which was created from surveys from the American Hospital Association and Texas Health and Human Services information, was incorrect and that we had made an error. The DFW Hospital Council had questions about the figures as well.

Updates were posted, and discrepancies between what Baylor said was its profit margin and what was in the review were somewhat explained, but it highlighted just how difficult accurately measuring the profitability of hospitals can be. Most hospitals are part of larger networks that provide healthcare in a variety of ways, some more profitable than others. Some physicians are on staff, while other physicians groups merely have privileges at hospitals. How are those profits calculated?

In a conversation with Stephen Love, President of the DFW Hospital Council, we dove into why it can be difficult to measure the profitability of a hospital or health system.

One difficulty is that profits, or lack thereof, can be calculated from operations, but may also include how the hospital invests its capital. This means that the stock market can impact financial announcements or profitability over a certain time period when nothing about the hospital operation has changed. The timing of purchasing or selling property can impact profits as well. One quarter might see the market skyrocket while the hospital sells a large piece of property, making that quarter seem especially profitable.

Love also noted that running a hospital is a capital-intense business. The need to by equipment, provide better treatment, or expand the layout of the facility to accommodate new equipment requires hospitals to keep more cash on hand than other industries relative to their size. Especially in areas with great population growth, hospitals are constantly expanding, hiring the best talent they can find, and expensive equipment. This all requires cash on hand.

Love described how hospitals are income generators for their communities, and noted that the 90 members of the DFW Hospital Council injects around $18 billion into North Texas each year.

Another obstacle is differentiating between specialty hospitals to more of a full-service facility with an emergency room, labor and delivery and other services that can lose money because of all the uncompensated care, which is calculated differently by Medicare, the IRS, and the state of Texas. When this uncompensated care is measured with charge masters that don’t reflect the actual amount paid for a service, it adds another wrinkle. Speciality hospitals or facilities in more affluent areas who have less uncompensated care will tend to look more profitable.

“Hospital financial accounting is confusing and difficult. It is tough on the average consumer to navigate through this maze,” Love says.

As is often the case today, profit margins are linked with quality measures, but Love pointed out that the patient base has a great impact on health outcomes. The article compared Texas hospital outcomes to Wisconsin, which has a much higher insured rate than Texas’ leading 20 percent uninsured rate. Texas’ large uninsured population has a negative impact on the quality outcomes of hospitals, as they are often less healthy because they have not had as much contact with the health system prior to whatever brought them to the hospital.

Other hospital quality measures that are often paired with profits can have unintended consequences. Prior to the opioid epidemic, hospitals were graded based on patient surveys where they were asked to evaluate their pain while in the hospital. Looking to avoid pain for their patients and improve their evaluations, doctors began prescribing more pain killers, augmenting opioid abuse nationwide.

Love also recommends a more nuanced look at physician or hospital grades. If one physician has an “A” and another has a “C,” one must look at how those letter grades are made. If the surgeon with the higher score has only been practicing a few years and has only been given routine procedures, then his high grade might be less meaningful than the experienced surgeon who is tasked with the more complicated procedures and thus ends up with a lower grade.

Understanding hospital finance requires nuance and a well-rounded knowledge base, but what can’t be argued is how hospital profits have climbed while the United States has slipped in overall health outcomes. Income disparity, lack of insurance, and other social determinants are surely to blame for some of that discrepancy, and Love agrees that we need more transparency in calculating health costs, profits, and financial information. It is just much more complicated than it may seem at first glance.