The financial structure of hospitals in the United States is a topic of intense public debate, where the perception of high prices often leads to assumptions of large profits. This reality is complicated because high revenue does not always translate into a substantial financial surplus. Analyzing hospital finances requires understanding the complex economic factors, ownership structures, and regulatory requirements that govern how medical institutions operate. A detailed look at the sources of funding and the heavy costs involved provides a more objective picture.
Understanding Hospital Ownership and Tax Status
The ownership model fundamentally dictates a hospital’s financial obligations and tax status. For-profit hospitals are typically owned by investors or private corporations, operating much like any publicly traded business. These institutions are required to pay federal, state, and local taxes, and they aim to generate a financial return for their shareholders. Conversely, non-profit hospitals make up the majority of institutions in the U.S. and are often affiliated with religious organizations or academic institutions. Because they are considered charitable organizations, they are exempt from most taxes under Section 501(c)(3) of the Internal Revenue Code. To maintain this tax-exempt status, these hospitals must demonstrate a commitment to the public good by providing a measurable “community benefit”. Both types of hospitals seek a financial surplus, but their legal mandates regarding the use of that surplus differ significantly.
Defining Financial Success in Healthcare
The term “profit” can be misleading in healthcare, leading financial analysts to rely on specific metrics to gauge an institution’s fiscal health. Hospitals typically report net income, which represents the surplus of revenue after all expenses have been paid. The Operating Margin is the key metric for evaluating the day-to-day financial viability of a hospital, calculated by dividing net income from patient care operations by total operating revenue. This margin reflects the results of core activities, such as surgeries and patient stays, and excludes non-patient revenue sources. The Total Margin provides a broader view of financial success because it includes all revenue sources, such as investment returns, philanthropic donations, and government appropriations.
Where Hospital Revenue Comes From
A hospital’s revenue stream is a complex mosaic determined by its mix of patients and the payers covering their care. Private insurance companies, which negotiate payment rates with hospitals, are the source of the highest reimbursement rates. In 2020, private plans paid hospitals, on average, 224% more than what Medicare would have paid for the same inpatient and outpatient services. Government programs, Medicare and Medicaid, account for the majority of a typical hospital’s patient volume. However, these programs generally reimburse hospitals at rates below the actual cost of providing care. Medicare historically covers about 84% of the costs of care for its patients. The combined underpayments from Medicare and Medicaid were nearly $130 billion in 2022, creating a significant financial shortfall that hospitals must absorb.
The Major Costs of Running a Hospital
Despite generating billions in revenue, hospitals face enormous and rising expenses that keep margins notably thin. Labor costs represent the single largest expense, typically accounting for 56% to nearly 60% of a hospital’s total operating expenses. This category includes salaries and benefits for the highly specialized workforce, with advertised nurse wages growing significantly faster than inflation in recent years. Supply and pharmaceutical costs are another massive expenditure, with medical supplies accounting for around 10.5% of the average hospital budget. The median annual list price for a new drug reached $300,000 in 2023, representing a 35% increase from the prior year. Hospitals must also make continuous Capital Investments in technology, such as magnetic resonance imaging machines, which can cost $3.2 million each. Administrative costs also strain budgets, as hospitals spent an estimated $26 billion in 2023 managing insurance claims. Notably, 70% of initially denied claims are eventually paid.
Average Hospital Profit Margins and Industry Data
The perception of high hospital profits often contrasts sharply with the narrow margins reported across the industry. Recent data shows that the median operating margin for U.S. hospitals has fluctuated significantly, with a median loss of 3.8% reported in 2022 due to rising expenses. Median monthly operating margins have recently recovered, reaching 4.4% in the first quarter of 2025, but they remain highly volatile. Historically, operating margins have often hovered in the low single digits, demonstrating the tight financial balance required for operations. For-profit hospitals tend to report higher operating incomes than their non-profit and government counterparts. Margins also vary by location and size. Smaller hospitals with 25 beds or fewer often struggle the most, frequently operating in the negative.
What Hospitals Do With Their Surplus Funds
A financial surplus in a hospital is not purely “profit” in the conventional sense; its use is determined by the institution’s ownership status. For-profit hospitals distribute their surplus funds to owners or shareholders, or they retain the earnings for future expansion. Non-profit hospitals, by contrast, are prohibited from distributing their net earnings to private individuals and must reinvest their surplus entirely back into the organization. These funds are channeled into capital improvements, such as technology upgrades and facility maintenance, or used to repay debt. The surplus is also used to fund uncompensated care and other services that fall under the required “community benefit” standard, which must be reported annually to the IRS on Form 990 Schedule H.