Continued commentary on Section 2 of the TIME magazine article “Bitter Pill: Why Medical Bills Are Killing Us“.
2. Medical Technology’s Perverse Economics
On page 3, author Brill begins to discuss operating profit margins for Stamford Hospital. He reports that Stamford’s operating profit margin is roughly 12.7%, higher than the average of 11.7% for non-profit hospitals.
If those numbers sound high to you – they are, and I question the numbers that Brill uses to determine the operating profit margins. In the article, he reports that Stamford Hospital reported a $63 million profit off of $495 million in revenue for fiscal year 2011. However, documents from the Connecticut Department of Public Health differ with Brill’s numbers. According to the state of Connecticut, Stamford Hospital generated $498 million in operating revenue, however operating profit was far lower at $36.5 million. Using these numbers, Stamford Hospital’s operating margin was 7.33% for fiscal year 2011.
That number is still fairly high though. By comparison, the median operating margin in the Commonwealth of Massachusetts for fiscal year 2011 was 1.7% (although there is wide variation across the state). As a side note, most community hospitals (the type of hospital which Stamford would fall into) usually aim for a total margin (both operating and non-operating) of 5% or greater in order to reinvest in facilities.
Operating margins vary widely within states (see the Massachusetts link above) and across state lines as well. I haven’t been able to find a good resource to break it down by state, but here is one source that reports the median operating margin in the 4th quarter of 2011 was 2.3% (not 11.7% as Brill reports). This same resource debunks another of Brill’s points – that the astronomically high operating profits are being used by hospitals to grow and expand existing facilities. In fact, the average age of hospital facilities has increased over time, meaning that hospitals are spending less money on capital improvement projects and new buildings. The average age of hospital facilities in 2011 was 10.4 years.