Hospital Industry Overview
The US hospital industry includes about 6,500 hospitals with combined annual revenue of about
$700 billion. Major companies include Kaiser Permanente, HCA (Hospital Corporation of
America), Ascension Health, Tenet Healthcare, and Catholic Health Initiatives. The industry is fragmented: the top 50 organizations generate less than 30 percent of revenue.
Hospitals provide inpatient and outpatient services using specialized equipment. This industry doesn't include residential care facilities, outpatient care centers, or doctors' offices.
Demand for hospital services is driven by demographics and advances in medical care and technology. The profitability of individual companies depends on efficient operations, since many hospitals offer similar services, and customer perception, since in many cities hospitals compete for patients. Hospitals also compete for physicians, and seek to attract doctors with state-of-the-art equipment and an attractive work environment. Large companies have advantages in buying supplies, sharing best practices, and negotiating contracts with health insurers. Large hospitals may offer a wider variety of services. Small hospitals can compete successfully by serving a limited geographical area or offering specialized services. Hospitals are labor-intensive: annual revenue per employee is around $125,000.
Major services include in-patient hospital care (around 60 percent of industry revenue) and outpatient services that typically don't require an overnight stay (35 percent and growing).
Other sources of revenue include prescription drug sales, ambulatory surgeries, and contributions from private donors, nonprofit foundations, and the federal government.
Hospitals can be government- or privately run, either by a charitable organization or a for-profit corporation. Most hospitals, including teaching hospitals and other institutions, are exempt from federal income tax. Around 80 percent of hospitals are general medical and surgical hospitals, accounting for 90 percent of total industry revenue. Around 1,300 hospitals provide psychiatric, substance abuse, and specialized services, generating around 7percent of industry revenues. Hospitals provide an efficient way for doctors to use facilities, equipment, and services too expensive to buy for private practices. Hospital operations revolve around routine patient care such as feeding and hygiene; treatment procedures (including medication); record-keeping; personnel management; purchasing; and billing. A typical large hospital may have 300 beds and annual revenue of $ 100 million; community hospitals generally have fewer than 100 beds.
Hospitals pay close attention to costs, because they usually receive a fixed amount of revenue per patient and must bear actual costs themselves. There are some economies of scale: a 50-
bed hospital often needs the same expensive equipment (such as an MRI machine) as a 200bed hospital. Hospitals usually need to keep a nursing staff in proportion to the number of
“licensed” beds. Occupancy rates are often no more than 50 percent of beds. The average hospital stay for an in-patient is five to six days.
Labor is the largest single operating cost item, often equal to more than 40 percent of revenue.
Nurses, aides, and technicians comprise the majority of the workforce. While hospitals may employ their own doctors, most doctors who use their facilities have independent practices and use the hospital under contract. Doctors may be affiliated with several hospitals within the same area. Some hospitals are affiliated with medical schools to provide student training, and many others host research facilities.
Technology is important in hospital management, largely through computer systems that manage patient records and billings. Many hospitals also have computerized purchasing systems that keep inventories low. Recent…