Analyzing hospital expenses
After analyzing the contribution of major external factors to hospital profit margins, investors should consider the internal factors.
Break-up of total costs
You can break down average hospital costs into salary expenses, supply expenses, bad debt expenses, and miscellaneous expenses. Labor costs account for about 49% of expenses, and they’re the biggest expenses for hospitals.
Break-up of salary expenses
You can further divide salary costs into clinical, nursing, non-clinical, and physician costs. Clinical costs relate to the salaries paid to personnel working in hospital laboratories and those working on research activities. Non-clinical costs include salaries to personnel engaged mainly in administrative activities. Also, only physicians who are employees of a hospital are included in these expenses. Other affiliated physicians are paid directly by the patient or the insurance programs.
According to the American Hospital Association (the AHA), hospital revenues at the national level positively correlate with costs. Both revenue and costs per admission grew at a rate of 5% per year from 2000 to 2009. As labor costs vary across regions, hospital prices also differ, with higher prices in regions with costlier labor. This variation reflects in higher revenue per admissions in regions with higher costs.
Hospitals like HCA Holdings (HCA), Tenet HealthCare (THC), Community Health Systems (CYH), LifePoint Hospitals Inc. (LPNT), and Universal Health Services (UHS) are attempting to reduce labor costs. Their strategies include deploying automation technologies and data analytics to improve scheduling, reduce time spent on staffing, and efficiently allocate resources. Various functions—such as payroll management, leave management, and staffing—are coordinated through an integrated workforce management system. Staff utilization is improving in order to reduce overheads like overtime payments use resources optimally.
Breaking down supply expenses
Hospital supplies include food and food service supplies, drugs, and other patient care equipment. Hospitals use wholesale distributors or group purchasing organizations (or GPOs) to source these supplies at optimal costs.