Analyzing hospital expenses

After analyzing the contribution of major external factors to hospital profit margins, investors should consider the internal factors.

Analyzing hospital expenses: Breaking down the important costs

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.

Analyzing hospital expenses: Breaking down the important costs

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.

Latest articles

WeWork is gearing up for an IPO. On Wednesday, the company made its IPO filing with the SEC public and expects to garner $3.5 billion from its IPO.

After FCC Chairman Ajit Pai recommended the approval of the T-Mobile–Sprint merger, Representative David Cicilline urged the FCC to allow public comment.

Cresco Labs (CRLBF) is set to report its Q2 earnings on August 21 after the market closes. The company's stock fell 5.3% yesterday.

Cannabis stocks mostly traded in positive territory today. Supreme Cannabis (FIRE) and Aurora Cannabis (ACB) rose about 9.5% and 5.5%, respectively.

NVIDIA (NVDA) stock soared 6% in today’s trading session as its Q2 earnings for fiscal 2020 beat estimates. However, its guidance missed estimates.

Nio Inc. (NIO) has disrupted the automotive space since 2014 but only made waves in the market since its IPO. Investors have suffered numerous setbacks.