Hospital Financial Analysis

All of the financial information below is from data obtained from three primary sources: The Centers for Medicare and Medicaid Services (CMS) including Medicare cost report data, California’s Office of Statewide Health Planning and Development (OSHPD) and the American Hospital Association (AHA).


According to CMS data, roughly 32% of our total healthcare expenditures and 38% of our personal healthcare expenditures went to hospitals in 2016. Hospital expenditures include money spent toward inpatient care as well as any outpatient service provided by a hospital from a routine blood test to an outpatient surgery or emergency room visit. Though a large proportion of our healthcare money still goes to hospitals, it’s less (as a proportion) than it was in 1980 when 39% of total healthcare expenditures and 46% of our personal healthcare expenditures went to hospitals.

Billing and Reimbursement

Previous sections have shown that hospitals usually bill far more than what they expect in payments from any of the insurance providers. The following graphs show how much hospitals over-bill, on average, and how over-billing has evolved over the last few decades.

According to Medicare cost report data, Just over 5,800 U.S. hospitals issued about $3.14 trillion in billed charges (gross patient revenue or GPR) in 2015 and collected (net patient revenue or NPR) $897 billion or about 28.5% of what they billed. What’s more, billing charges have risen steadily since the lat e 70’s as the following two graphs show:

Figure 1: Medicare cost report data shows that hospital billing charges (GPR) in the U.S. exceeded payments on those bills (NPR) by about 1.76 times in 1996. That ratio (GPR/NPR) rose to about 3.51 by 2015.

Figure 2: Data from California’s OSHPD shows that, in 2000, hospital billing charges (GPR) exceeded payments (NPR) for all patients and services by about 175% (2.75 to 1). By 2016, GPR exceeded NPR by 297% (3.97 to 1).

Figure 3: Data from California’s Office of Statewide Health Planning and Development (OSHPD) also shows that, in 1978, California hospitals billed an average of about 14% more than what they collected (GPR/NPR was about 1.14). By 2015 hospital bills exceeded payments by about 300% in California.

Figure 4: Adjustments are the discounts Medicare, MediCal (California’s Medicaid) and the private insurance companies get from hospitals off the billing charges. In 1995, these discounts averaged just over 50%. They averaged more than 70% by 2016.

Uncompensated Care

Most hospitals lose very little money as a result of uncompensated care each year for two main reasons:

1) patients who require hospitalization, but have no means to pay for the hospitalization, usually qualify for emergency medicaid in most states. Emergency Medicaid can cover any patient who is uninsured and can prove that they can’t afford to pay a hospital bill even if they don’t normally qualify for Medicaid as an outpatient. Emergency Medicaid greatly reduces the the number of cases a hospital might have to forgive as charity.

2) Hospitals are very aggressive in going after patients who owe them money. Most hospitals have collection agencies working for them and, if their own collection agency can’t collect the debt, the hospital will usually sell it to an outside collection agency. When a hospital sells a debt to an outside collection agency, they often get nearly as much on that debt as they would from most regular payers for the same service. This is because most payers only pay about the same fraction of the total billed charges for a hospital service as a collection agency will pay. Once the debt is sold, the agency that purchases it is allowed to go after the patient for the full billing charge.

Also, hospitals that do provide a lot of uncompensated care because they have to treat large numbers of indigent patients (for example county hospitals) qualify for disproportionate share funds (DSH) from CMS. DSH payments can amount to tens of millions of dollars each year for hospitals that treat large numbers of both indigent and Medicaid patients. DSH payments ensure that the hospitals that treat these patients don’t lose money on these patients.

Those three factors limit the exposure hospitals have to uncompensated care. According to CMS, all hospitals in the U.S. forgave only about 2.25% of their bills for charity and lost only about 2% to bad debt between 2011 and 2015.

Figure 5:¬†Hospitals account for the uncompensated care they provide in two ways: charity, in which a hospital forgives all the billing charges voluntarily, and bad debt, when a hospital can’t collect on a bill from any payer. Uncompensated care amounted to an average of less than four percent of billed charges for California hospitals in any year since 1995. In 2015 and 2016 California hospitals lost less than two percent of what they billed to uncompensated care.


Figure 6: In spite of the fact that California hospitals don’t collect most of what they bill, their profits, on average are quite robust. Profit margins for California hospitals have averaged about five percent each year since 1995, though not all hospitals are profiting each year and some years have definitely been better than others for these hospitals. Also, roughly 90% of California’s hospitals are non-profit.

Figure 7 is from AHA data and shows that hospital profit margins in the U.S. have ranged from four to six percent most years since 1981, though, in recent years, they’ve done much better. Figure 8 shows that, with the exception of 2008, profit for U.S. hospitals have risen consistently since 2001. The average profit margin for hospitals in the U.S. was 8.3% in 2014 even though 80% of hospitals admissions in the U.S. were to non-profit hospitals.

Figure 7

Figure 8

Payer Differential

The average discount or “adjustment” the different payers (private insurance vs. Medicare or MediCal) get have varied considerably in recent years. The following graphs show these differences.

Figure 9: Medicare and MediCal payments to hospitals have not grown nearly as fast as hospital billing charges. Medicare and MediCal paid just over 30% of what they were billed by California hospitals in 2001. By 2016 they were paying less than 20% of these billing charges.

Figure 10: Private health insurance payments, on the other hand, have kept largely in step with hospital billing charges since 2001. Private health insurance companies have consistently paid an average of 36-37% of what California hospitals have billed them since at least 2001.

Figure 11: Unlike Medicare or MediCal, private insurance companies have paid nearly a fixed portion of what they’re billed by hospitals for most of the last two decades.

The following three figure show just how much private health insurance companies have been overpaying California hospitals in recent years. Keep in mind, Medicare covers the elderly and disabled and MediCal covers the impoverished and the disabled whereas private health insurance usually covers the young and employed. It makes very little sense to think that privately insured people would be more expensive to treat than Medicare or MediCal recipients.

Figure 12: Average Medicare, MediCal and private insurance payments each year for each patient admitted to a California hospital since 1995.

Figure 13: Average Medicare, MediCal and private insurance payments each year for each day a patient spent in a California hospital since 1995.

Figure 14: Average Medicare, MediCal and private insurance payments each year for each outpatient visit to a California hospital since 1995.

Figures 13 and 14 show a similar pattern in payments to hospitals. Figure 10 is from data from the American Hospital Association (AHA) and shows average payments divided by costs for inpatient care for all U.S. hospitals each year since 1981. Figure 11 is the same data only since 1995 to make an easier comparison to figure 8. According to AHA data, private insurance companies have consistently overpaid hospitals for inpatient care for more than three decades. These overpayments have varied significantly over the years, but have grown dramatically in the past few years.

Prior to 2000, private health insurance companies overpaid hospitals by an average of about 20% but, since 2000, that average has grown to 30% and been as high as 48% in 2012. Also, since 2000, Medicare and Medicaid have been paying an average of 8-10% less than what it costs to take care of inpatients.

Figure 15: (From AHA data) Private insurance companies have consistently overpaid for inpatient care since 1981 while Medicare and Medicaid have, at times paid enough for this care but often underpaid hospitals.

Figure 16: Figure 15 data only starting from 1997.

How does the AHA data reconcile with the OSHPD data above for California hospitals?

Medicare covers almost exclusively people over 65 and the disabled and Medicaid covers the impoverished and the disabled. Private health insurance usually covers people who are younger and healthier than Medicare or Medicaid recipients. Because of this, hospitalized patients covered by private insurance would likely be less expensive to treat than either Medicare or Medicaid patients.

According to the data from the OSHPD, private health insurance companies paid roughly the same amount (on average) for inpatient care as either Medicare or MediCal paid. If the care of a privately insured patient should be less expensive (on average) than the care of a medicare or mediCal patient yet the insurance companies are paying the same amount for their care, then the insurance companies would be overpaying. So the data from the AHA agrees with the data from the OSHPD.