Location and hospital margins
The hospital industry profitability is heavily affected by the concentration of hospitals in a particular area.
During the 1990s, the hospital industry underwent about 900 consolidation deals. These led to the formation of local markets, with limited hospital systems dominating cities like Boston, Pittsburgh, and Philadelphia. So the total density of hospitals varies across states, with the highest hospital density in California and Texas.
The lack of a competitive market allows hospitals to have greater bargaining power over private insurers, resulting in higher profits. Major for-profit hospital systems like HCA Holdings (HCA), Tenet HealthCare (THC), Community Health Systems (CYH), LifePoint Hospitals, Inc. (LPNT), and Universal Health Services (UHS) have a big network of hospitals concentrated in few geographies, boosting their profits.
Services and hospital margins
Hospitals also compete based on the service they provide. Hospitals with more specialized services in their portfolio command higher prices.
The above graph shows that specialty hospitals dealing with cardiac and surgical services consistently command higher profit margins. As specialists command higher training and procedural skills, they receive higher compensation. Also, general medical and surgical hospitals that have an emergency room are mandated by U.S. law to treat all patients—even if they don’t possess any health insurance. Specialty hospitals don’t have emergency room facilities and so have better control over the kinds of patients they treat. This control helps them to manage their bad debt expenses, which are a major problem for general hospitals.