Hospital Margins Rebounded in 2023, But Rural Hospitals and Those With High Medicaid Shares Were Struggling More Than Others

Methods

The analysis included a number of sample restrictions. All analyses focused on non-federal general short-term hospitals not in US territories. This left 4,471 hospitals in 2023. Dropping cost reports that were less than or longer than a year left 4,337 hospitals in 2023. Dropping hospitals in years with missing, questionable, or certain outlier values left 4,200 cost reports for 2023, which represents 94% of non-federal general short-term hospitals not in US territories in the data. Some analyses of hospital characteristics included fewer hospitals based on the data available (see counts in Appendix Table 2). For example, price data, which are discussed below, were only available for 2,779 hospitals.

Total margins for hospitals overall or a specific group of hospitals were defined as net income (revenues minus expenses) divided by revenues. Operating margins were approximated by calculating the same ratio as for total margins after removing reported investment income and charitable contributions from revenues, in line with the approach used by MedPAC. This approximation may include other nonoperating revenues (such as from the sales of assets) as well as nonoperating expenses for a given hospital. It is possible that this approach could understate or overstate operating margins and that it may do so to a different degree over time and across hospitals, which would affect observed trends and hospital comparisons.

Aggregate margins for hospitals overall or a specific group of hospitals were calculated based on total relevant revenues and expenses for the given set of hospitals. Aggregate margins are equivalent to the average margin after weighting hospitals by their revenue (i.e., they give more weight to hospitals with greater revenue). Aggregate operating margins were larger than unweighted average operating margins in 2023 (5.2% versus 2.9%) and exhibited a larger increase from 2022 and 2023 (from 2.7% in 2022 to 5.2% in 2023 versus from 2.3% in 2022 to 2.9% in 2023 when evaluating unweighted averages). This implies that operating margins and increases in margins were higher on average among hospitals with more revenue. The relationship between margins and hospital characteristics was generally in the same direction when looking at either aggregate or unweighted average margins, though the magnitude differed.

We relied on additional datasets for certain hospital characteristics. We obtained geographic classifications from Census Bureau data. Rural and urban were defined as nonmetropolitan and metropolitan areas, respectively. Metropolitan areas represent a county or group of counties that contains at least one urban area with a population of 50,000 or more. The analysis also describes margins in micropolitan areas, which represent a county or group of counties that contains at least one urban area with a population of at least 10,000 but less than 50,000. We obtained hospital facility price data (combined inpatient and outpatient) from Round 5.1 of the RAND Price Transparency Study, which uses 2020-2022 claims data from a large population of commercial patients. These data were available for 2,779 hospitals in this analysis. We also relied on the AHA Annual Survey Database to obtain 2023 data on payer mix, system membership, and hospital referral region (HRR) market shares. For HRR market shares, we focused on available admissions data for non-federal general, short-term hospitals that could be matched to an HRR.

As noted, the share of patients covered by Medicaid may signal the extent to which a given hospital cares for a disproportionate share of low-income patients. This is complicated by the fact that Medicare-Medicaid enrollees are likely categorized as Medicare (rather than Medicaid) admissions and that Medicaid eligibility requirements vary across states. However, differences in aggregate operating margins based on Medicaid shares were similar when looking at Medicaid as a share of patients who are not enrolled in Medicare and adjusting for differences across states (3.0% versus 7.4% among the top versus bottom quarter of Medicaid shares).

There are a number of data sources on hospital and health system finances, and each has limitations. For example, audited financial statements are considered the gold standard of financial data, but they often do not break out information about individual hospitals in the common scenario where facilities are part of a broader health system. They also are not easily accessible, and they typically require laborious, specialized expertise to standardize financial information across systems.

There are also tradeoffs when using cost report data. Cost reports are unique in that they provide facility-level information for the vast majority of community hospitals, which is why we relied on them for this analysis. However, they include less detailed and standardized data than audited financial statements for calculating margins. For example, cost reports do not fully separate out finances related to operating versus nonoperating activities, which requires that operating margins be approximated. Further, cost reports do not undergo the same rigorous auditing process as audited financial statements and do not include system-level data that may have a bearing on the finances of member hospitals.