Hospital financial performance is generally discussed in terms of operating margin, which measures whether hospitals generate profits or losses from patient care. However, most hospitals generate additional revenue from non-clinical sources such as investment income, philanthropy, grants, etc. With the benefit of these non-operating revenue sources, many nonprofit health systems with negative operating margins are able to achieve positive overall margins. To gain a comprehensive understanding of hospital financial performance and sustainability, it is important to understand both patient and non-patient related revenues and expenses.
Hospitals account for the largest share of spending in the U.S. healthcare system, representing $1.6T, or 31%, of the $5.3T of national health expenditures in 2024, and employ millions of workers nationwide.1
In 2023, 39% of hospitals reported negative operating margins, while 14.5% of hospitals reported operating margins of at least 15% (Figure 1). The plurality of hospitals (22.1%) generated operating margins between 0% and 5%.
Operating margin measures the financial performance of hospitals based solely on patient care activity, specifically, net patient revenue minus operating expenses. However, most hospitals, particularly nonprofit health systems, generate revenue from numerous activities beyond direct patient care, including COVID-19 relief funds, grants, investment earnings, medical device sales, philanthropic contributions, real estate income and retail pharmacy operations. Among the fastest-growing of these revenue centers are specialty pharmacy and infusion services, a key profit driver for many nonprofit health systems as they expand their ambulatory presence and capture high-margin drug dispensing and administration revenue. Because of these additional revenue streams, a hospital’s total margin, which reflects revenue from all sources, may differ substantially from its operating margin.
This analysis examines hospital revenue and expenses from both the perspectives of operating performance derived from patient care and from all hospital revenue sources.
Leveraging hospital-reported data from CMS, the Agency for Healthcare Research and Quality and the National Academy for State Health Policy, financial metrics (e.g., revenue, operating expenses) were analyzed for non-Federal short-term acute care hospitals. Net patient revenue – a hospital’s total patient revenue less contractual allowances and discounts on patient accounts – was calculated as a share of gross revenue. Non-patient-related expenses – the portion of a hospital's total expenses not related to patient care and therefore not eligible for reimbursement under Medicare Federal regulations – were analyzed as a share of operating expenses. Select operating cost categories, including charity care, drug costs, non-patient labor care, capital-related costs and uninsured/bad debt costs, were examined as a share of operating expenses.
Net patient revenue as a percentage of gross revenue varied widely across non-Federal short-term acute care hospitals in 2024, ranging from a low of 8.3% to a high of 86.6% (Figure 2). The median share of net patient revenue as a percentage of gross revenue was 29.9%, while the average share was slightly higher at 34.0%. More than half of hospitals fell between 20% and 45%, with the 25th percentile share totaling 21.7% and the 75th percentile totaling 42.9%. The upper tail of the distribution was more dispersed, with revenue shares of 58.7%, 67.6%, and 82.5% at the 90th, 95th and 99th percentiles, respectively. For-profit hospitals had an average net patient revenue as a percentage of revenue of 28.8% as compared to 49.3% for faith-based nonprofit health systems.
The observed variance is likely attributable in part to hospital-level differences in chargemaster amounts. As a mathematical principle, hospitals on the lower end of the distribution are more likely to have comparatively higher chargemasters than most hospitals, and vice versa. Notably, many hospitals at the higher end of the distribution are located in Maryland, a state with global budget regulations for hospitals, eliminating the need to establish chargemaster prices as a revenue strategy.
Non-patient-related expenses as a share of operating expenses varied widely across non-Federal short-term acute care hospitals in 2024, ranging from a low of 0.2% to a high of 51.1% (Figure 3). The median share of non-patient-related expenses was 14.6% of operating expenses, while the average share was slightly higher at 16.0%. More than half of hospitals fell between 8% and 22%, with the 25th percentile share totaling 8.4% and the 75th percentile totaling 22.0%. The upper tail of the distribution had a wider range, with non-patient-related expense shares of 29.6%, 34.8%, and 44.3% at the 90th, 95th and 99th percentiles, respectively.
Across non-Federal short-term acute care hospitals in 2024, operating expenses were distributed across a mix of patient-related and non-patient-related cost categories, with median shares ranging from 1.0% to 23.9% across the categories examined (Figure 4). Among the select operating cost categories examined, direct patient care labor represented the largest share of operating expenses with a median of 23.9% and a maximum of 62.3%, followed by non-patient-care labor costs with a median of 12.6% and a maximum of 47.4%. Drug costs represented a median of 6.1% and a maximum of 52.8%, while capital-related costs had a median of 4.8% and a maximum of 38.5%. Uninsured and bad debt costs and net charity care costs were the smallest categories at the median, at 1.0% and 1.1%, respectively, with maximums of 55.2% and 50.6%, respectively.
For most hospitals – except for-profit hospitals – financial performance is not solely determined by the amount and nature of patient care delivered. Operating margins measure whether hospitals generate profits from patient care, but they do not capture the full range of revenue sources that support hospital finances. On average, net patient revenue accounts for just 34% of total hospital revenue, highlighting the importance of revenue from other sources.
Even though hospital spending represents the largest portion of national health expenditures, fewer than half of U.S. hospitals had an operating margin greater than 5% in 2023. Notably, 39% of hospitals reported negative operating margins in 2023, relying on non-clinical revenue sources to achieve a positive overall margin. The causes of negative operating performance are multifaceted, likely resulting from a combination of factors (e.g., below-market reimbursement, inefficient management and operations, patient demographics, geography). The degree to which hospitals rely on these sources varies considerably, with the median of non-patient-related expenses of operating expenses at 14.6%. As a result, financial market conditions can materially influence the financial stability of hospitals with significant investment assets.
It is broadly understood that CMS reimburses a hospital the lesser of a hospital’s charges and the Medicare allowed amount. This results in hospital charges higher than the Medicare allowed amount at almost all hospitals. Similarly, hospitals with managed care agreements that reimburse services at a percentage of net charges typically have higher chargemasters than hospitals being reimbursed in accordance with prospective payment systems. Finally, some hospitals set charges in the unlikely event that a fully indemnified patient is admitted.
Labor expenses, both clinical and non-clinical, represent the largest percentage of operating expenses. Direct patient care labor alone represents a median of 23.9% of operating expenses, and non-patient care labor has a median of 12.6%. With a single category like labor accounting for more than a third of expenses at the median, and non-patient revenue accounting for the majority of gross revenue for most hospitals, discrete financial metrics cannot offer a complete assessment of hospital financial performance or status.
For policymakers and health system executives, distinguishing between operating margins from patient care and total hospital income is critical when evaluating reimbursement policy and hospital financial transparency, especially with the increasing number of Traditional Medicare and Medicare Advantage beneficiaries. CMS’s Office of the Actuary reports that 79% of hospitals had negative Medicare margins in 2023 and projects that 83-85% of hospitals will have negative Medicare margins in 2027. Additionally, CMS projects that, in 2040, 93% of hospitals will have negative Medicare margins, and 44% will have negative total margins.2 Those projections are logical as care continues to shift from inpatient to ambulatory settings, leaving hospitals with patient populations that are increasingly clinically complex and resource intensive.
The key question for policymakers is whether society will continue to support hospitals, particularly nonprofit hospitals, explicitly or implicitly. Will Federal and state government use their power of taxation to compel funding necessary to provide sufficient Medicare and Medicaid funding to keep hospitals financially viable without revenue from non-patient activities or, at least, an increase in those revenue sources? If not, will hospitals continue to remain financially viable through a mixture of investment income, donors and opportunistic interpretation of regulatory flexibilities? The answers to these questions directly impact the design of reimbursement policy and the assessment of hospital financial viability and capacity constraints. All of this echoes what management expert Peter Drucker once said: “The hospital is the most complex human organization ever devised."