How do hospitals generate revenue

They do not simply place a price on a service based on its cost and its desired mark-up or profit margin. Instead, complicated algorithms must be calculated and various formulas applied, each separately based upon the insurance company paying the bill.

Much of the confusion is historically based and not worth much time to discuss, but if you wish, there are many papers written on hospital finance that deal with the history of the development of such things as cost-based reimbursement and DRGs. A great deal of the lack of business clarity comes from the involvement of multiple players with multiple agendas and perspectives. This includes the federal and state governments and legislatures, employers, insurance companies, and individuals themselves.

All of these parties contribute to the bewildering state of hospital finance and, ultimately, to how hospitals make money. The following represents a few principles to understand how the hospital will try to make a profit from your patients.

Some insurance plans are better then others. This is a widely understood rule of thumb and does not require much discussion.

Depending on your locale and the roster of insurance programs available to your patients, both physicians and hospitals will make more or less money taking care of certain patients rather then others. This is not often an entirely controllable situation, often due to geography, but all parties will strive to have a better payor mix, i.

It should be noted that some physicians are choosing to bypass insurance programs and are only accepting cash payment from their patients. They represent a small percentage of the total physician population and it remains to be seen if it will become a significant trend.

Hospitals are particularly on the lookout for physicians whose patient population contains better paying payors, as generally both the doctor and the hospital benefits here. Hospital administrators are also very sensitive to physicians who admit one type of patient to a certain institution and a better-insured patient to another.

Surgical patients are better them medical patients. In general, hospitals make more money from your patients who will undergo surgery. The procedures are usually reimbursed at a higher rate then a typical medical patient who only generates a daily room rate for their care.

Now, while these are all generalizations, they are accurate often enough to be used as rules of thumb. Yes, length of stay matters, as does many other issues, but the hospital that has more surgical patients then medical patients makes more money. Conversely, hospitals that have a higher proportion of general medical patients will have a difficult time financially. The more procedures the better. Patients who undergo tests and procedures generate what is known as both technical and professional fees.

Another source of operating revenue for health care organizations comes from private payers like health insurance paid by employers, individually purchased insurance and direct payments.

The model of private health care coverage allows paying only a share of medical costs sharing them with other people who are not currently being beneficiaries of their plans Sullivan, The provision of health care has been governed by the revenue cycle that has been focused on the fee-for-service payment arrangements for many years Sullivan, This model has allowed the reimbursement of health care practitioners for the services they provide for their patients.

It has also made possible to control the amount of medical services and their absolute necessity. However, in response to the rising costs of health care, new revenue models have been developed Sullivan, The precipitous rise in health care delivery costs has led to the creation of value-based reimbursements systems Sullivan, They allow a provision of health care services on a per-member-per-month basis. Other value-based reimbursement models are built around pay case rates that allow charging different prices for pre-specified conditions or treatments Sullivan, It is necessary to realize that reliable sources of revenue allow health care organizations constantly increase the quality of their services.

Health care providers negotiate payment rates with multiple parties simultaneously thereby significantly driving up administrative costs.

According to a recent study, if a trend of ever-increasing health care spending is going to continue, it is projected to exceed the economic growth of the country and amount to a quarter of its gross domestic product GDP by Emanuel et al.

Health care spending on the federal level is estimated to reach 40 percent of the total federal budget by the same year Emanuel et al. Taking into consideration that baby boomers are reaching an age that is associated with higher need in medical services, it is reasonable to assume that new Medicare beneficiaries will lead to the increase in federal health care spending Emanuel et al. Therefore, it is necessary to address the issue of excessive medical costs for both public and private payers as well as restructure current payment system that produces enormous administrative expenses because of its fragmentation Emanuel et al.

Furthermore, it leads to the providers of medical services concentrating the economic power that allows them to drive up health care costs. The fragmented nature of the existing system significantly complicates negotiation of payment rates by moving costs from public entities to private payers and shifting them from large to small insurance companies.

Therefore, it can be argued that existing payment system has to be changed to more efficient one Emanuel et al. The self-regulating model can allow payers from the public and private sector negotiate their payment rates directly.

This model would also make sure that growth of health care spending is corresponding with the wage growth. It could be achieved through the creation of an independent regulatory body that would consist of both payers and providers of health care services who would be responsible for establishing a spending target. According to Emanuel et al. Hospital median D2B time has also declined by 33 minutes over the same period Krumholz et al.

Therefore, it can be argued that regardless of what approach is taken to the process of rates negotiation, it should not interfere with this downward trend. Managing and predicting revenues can be a challenging task for changing models of health care provision. Private health insurance companies deliberately overpay hospitals to ensure that their revenues continue to grow each year.

Hospital expenditures include money spent toward inpatient care as well as any outpatient service provided by a hospital. Outpatient services might include anything from a routine blood test to an emergency room visit or an outpatient surgery.

Previous sections have shown that hospitals usually bill far more than what they expect in payments from any of the insurance providers. The following graphs show how much hospitals over-bill, on average, and how over-billing has evolved over the last few decades. According to Medicare cost report data , just over 5, U. Emergency Medicaid greatly reduces the the number of cases a hospital might have to forgive as charity. When a hospital sells a debt to an outside collection agency, they often get nearly as much on that debt as they would from most regular payers for the same service.

This is because collection agencies often pay about the same fraction of the total billed charges for a hospital service as an insurance company will pay. Once the debt is sold, the agency that purchases it is allowed to go after the patient for the full billing charge.

DSH payments can amount to tens of millions of dollars each year for hospitals that treat significant numbers of both indigent and Medicaid patients. Those three factors limit the exposure hospitals have to uncompensated care. According to CMS , all hospitals in the U. Uncompensated care amounted to an average of less than four percent of billed charges for California hospitals in any year since Between and California hospitals lost less than two percent of what they billed to uncompensated care.

Profit margins for California hospitals have averaged about five percent each year since , though not all hospitals are profiting each year and some years have definitely been better than others. Figure 8 focuses on hospital profits since and shows that, with the exception of , profits for U. The average profit margin for hospitals in the U. Figure 7 Figure 8. Medicare or Medicaid get can vary considerably.

The following graphs show these differences. Figure Private health insurance payments, on the other hand, have kept largely in step with hospital billing charges since The following three figures show just how much private health insurance companies have been overpaying California hospitals in recent years.