Display options
Cite
Turner J, Broom K, Elliott M, et al. A Decomposition of Hospital Profitability: An Application of DuPont Analysis to the US Market. Health Serv Res Manag Epidemiol. 2015;2:2333392815590397doi: 10.1177/2333392815590397.
Turner, J., Broom, K., Elliott, M., & Lee, J. F. (2015). A Decomposition of Hospital Profitability: An Application of DuPont Analysis to the US Market. Health services research and managerial epidemiology, 22333392815590397. https://doi.org/10.1177/2333392815590397
Turner, Jason, et al. "A Decomposition of Hospital Profitability: An Application of DuPont Analysis to the US Market." Health services research and managerial epidemiology vol. 2 (2015): 2333392815590397. doi: https://doi.org/10.1177/2333392815590397
Turner J, Broom K, Elliott M, Lee JF. A Decomposition of Hospital Profitability: An Application of DuPont Analysis to the US Market. Health Serv Res Manag Epidemiol. 2015 Jul 22;2:2333392815590397. doi: 10.1177/2333392815590397. eCollection 2015. PMID: 28462258; PMCID: PMC5266468.
Copy Download .nbib Format: NLM
Share it on

Health Serv Res Manag Epidemiol. 2015 Jul 22;2:2333392815590397. doi: 10.1177/2333392815590397. eCollection 2015.

A Decomposition of Hospital Profitability: An Application of DuPont Analysis to the US Market.

Health services research and managerial epidemiology

Jason Turner, Kevin Broom, Michael Elliott, Jen-Fu Lee

Affiliations

  1. Department of Health Management and Policy, Saint Louis University, Saint Louis, MO USA 63104.
  2. Department of Biostatistics, Saint Louis University, Saint Louis, MO USA 63104.

PMID: 28462258 PMCID: PMC5266468 DOI: 10.1177/2333392815590397

Abstract

OBJECTIVES: This paper evaluates the drivers of profitability for a large sample of U.S. hospitals. Following a methodology frequently used by financial analysts, we use a DuPont analysis as a framework to evaluate the quality of earnings. By decomposing returns on equity (ROE) into profit margin, total asset turnover, and capital structure, the DuPont analysis reveals what drives overall profitability.

METHODS: Profit margin, the efficiency with which services are rendered (total asset turnover), and capital structure is calculated for 3,255 U.S. hospitals between 2007 and 2012 using data from the Centers for Medicare & Medicaid Services' Healthcare Cost Report Information System (CMS Form 2552). The sample is then stratified by ownership, size, system affiliation, teaching status, critical access designation, and urban or non-urban location. Those hospital characteristics and interaction terms are then regressed (OLS) against the ROE and the respective DuPont components. Sensitivity to regression methodology is also investigated using a seemingly unrelated regression.

RESULTS: When the sample is stratified by hospital characteristics, the results indicate investor-owned hospitals have higher profit margins, higher efficiency, and are substantially more leveraged. Hospitals in systems are found to have higher ROE, margins, and efficiency but are associated with less leverage. In addition, a number of important and significant interactions between teaching status, ownership, location, critical access designation, and inclusion in a system are documented. Many of the significant relationships, most notably not-for-profit ownership, lose significance or are predominately associated with one interaction effect when interaction terms are introduced as explanatory variables. Results are not sensitive to the alternative methodology.

CONCLUSION: The results of the DuPont analysis suggest that although there appears to be convergence in the behavior of NFP and IO hospitals, significant financial differences remain depending on their respective hospital characteristics. Those differences are tempered or exacerbated by location, size, teaching status, system affiliation, and critical access designation. With the exception of cost-based reimbursement for critical access hospitals, emerging payment systems are placing additional financial pressures on hospitals. The financial pressures being applied treat hospitals as a monolithic category and, given the delicate and often negative ROE for many hospitals, the long-term stability of the healthcare facility infrastructure may be negatively impacted.

Keywords: DuPont analysis; capital structure; efficiency; hospital ownership; hospitals; profitability

Conflict of interest statement

Declaration of Conflicting Interests: The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

References

  1. Inquiry. 1985 Fall;22(3):219-36 - PubMed
  2. J Health Care Finance. 2001 Winter;28(2):65-73 - PubMed
  3. Int J Qual Health Care. 2012 Oct;24(5):483-94 - PubMed
  4. Int J Health Care Finance Econ. 2009 Dec;9(4):403-28 - PubMed
  5. J Health Econ. 1999 Jan;18(1):69-86 - PubMed
  6. East Mediterr Health J. 2006 Sep;12(5):670-8 - PubMed
  7. J Rural Health. 2006 Summer;22(3):229-36 - PubMed
  8. J Health Care Finance. 2013 Spring;39(3):1-13 - PubMed
  9. Health Care Manage Rev. 1991 Fall;16(4):67-77 - PubMed
  10. J Health Care Finance. 2005 Spring;31(3):82-8 - PubMed
  11. Hosp Health Serv Adm. 1993 Spring;38(1):63-80 - PubMed
  12. Health Care Manage Rev. 2013 Jul-Sep;38(3):201-10 - PubMed
  13. Health Serv Res. 1988 Aug;23(3):343-57 - PubMed
  14. J Healthc Manag. 2012 Sep-Oct;57(5):325-39; discussion 339-41 - PubMed
  15. Hosp Health Serv Adm. 1990 Summer;35(2):173-87 - PubMed

Publication Types