Using return on equity and total profit margin to evaluate hospital performance in the U.S.: a piecewise regression...

We investigated hospital profitability by comparing Total Profit Margin (TPM) and Return on Equity (ROE) as measures of profitability, while controlling for inflation and other salient factors. We controlled for variables such as, Disproportionate Share Hospital status, location, type of ownership control, teaching status, conversion to or from nonprofit status, Critical Access Hospital status, sole Medicare provider status, case mix adjusted patient length of stay, bed size, number of employees, and occupancy rate. We allowed for nonlinearities in our model, and used 1996 and 1998 data in our analysis to bridge potential effects of the Balanced Budget Act of 1997. Most of the hospitals we examined were nonprofit organizations that did not convert their type of ownership control. As a consequence, we found TPM to be a better measure of profitability than ROE, and profitability was mainly influenced by location, size, occupancy rate, volume of Medicare and Medicaid patients, and teaching status. Our results clarify the primary factors associated with profitability for our sample hospitals, and will assist creditors, managers and regulators in their assessments of comparative hospital financial performance.