Should Private Hospitals Make “Excessive” Profit?

Seven of the top ten most profitable hospitals in the U.S. are non-profit facilities. Each of them netted above USD150 million. All hospitals should make a small profit but some make “outrageous” profit on the misfortune of others.

Three factors drive private hospital profits – occupancy, scale and mix. Due to high fixed costs, busy hospitals are significantly more profitable. It is estimated that 60% hospital utilisation is necessary to break-even.

Figure 1: Hospital profitability above 60% occupancy rate

Greenfields may take three or more years to be profitable whereas brownfields can increase profit margin by increasing facility utilisation.

Scale is also critical. Larger hospitals tend to be more profitable – shared resources, less downtime and better doctors. A larger network can lead to a more profitable business model because of its ability to leverage on procurement, suppliers, insurers and others.

Case mix refers to mix of specialists to attract more profitable procedures into the facility. This leads to higher margins. The majority of expenses are paid for by private health insurers or in some cases government. Patients usually only bear a small portion.

Which hospitals in Malaysia offer cheap medical treatment? Government hospitals of course. Because they are heavily subsidised. With cheap price tag comes a long wait. Those who could afford would have medical insurance and enjoy better customer service and facilities in a private hospital. Even then be prepared for 20% (or more) of the treatment cost for admission. In the government hospital, you may only need RM50-RM100 to be admitted.

Sunway Health Care (“Sunway”) is embarking on an expansion to add almost 2,000 beds (or 8 new hospitals) by 2024.This expansion is privately funded. Hence the drive for profits. For nine months ending 31 December 2019, Sunway is expected to have a revenue of RM425 million and a net profit of RM50 million. According to Sunway, 70% of its patients rely on medical insurance while 20% are cash patients. The remaining 10% are foreign patients, who also largely pay in cash. Of this, 65% come from Indonesia while the rest are from China, Middle-East, India and other Asian nations.

Hospitals by their very nature should be not-for-profit. And if they do make a profit it should be close to break-even – that is 60% of their costs are met by patients through insurance schemes and/or they could generate recurring income from leasing/renting suites for independent and assisted living for the aged in their vicinity or premises.  Otherwise, hospitals driven by profit will have specialists recommending procedures that are really not necessary for the patients. And every year a new profit target will demand higher charges and the only people making money are the insurers and the hospitals.

References:

1. Three factors that drive private hospital profits (Nov 10, 2017) (https://rogermontgomery.com)

2. These hospitals make the most money off patients – and they are mostly non-profits, Lena H. Sun (May 3, 2016) (https://www.washingtonpost.com)

3. Sunway Healthcare embarks on expansion, The Star (Nov 25, 2019)