The calculations you'll actually run and the due diligence behind them
# The calculations you'll actually run and the due diligence behind them
A hospital CFO tells you the facility "runs at 68% occupancy with healthy margins." Sounds fine. Then you run the numbers: cost per adjusted discharge is 14% above the regional median, and 41% of revenue comes from a single Medicaid-heavy payer. The story falls apart in about ten minutes of arithmetic.
This lesson gives you that arithmetic, plus the checklist to pressure-test what management tells you.
The vocabulary you need first
You cannot run hospital math without these terms. Definitions on first use, then we calculate.
Discharge: one completed inpatient stay (patient admitted, treated, released). The basic unit of hospital "output."
Adjusted discharge: inpatient discharges scaled up to account for outpatient activity (ERERThe ratio of interactions (likes, comments, shares) to reach for a given piece of content, used to gauge how well audiences respond relative to how many people saw it.Voir la définition complète → visits, day surgery, imaging). Because hospitals now do huge outpatient volume, raw discharges understate the work. The adjustment multiplies discharges by (total gross revenue / inpatient gross revenue).
Case mix index (CMI): a number reflecting how sick and complex your patients are. A CMI of 1.0 is average; 1.8 means a hospital treats markedly more complex, resource-heavy cases (think cardiac surgery vs. routine births).
Payer mix: the share of revenue by who pays. In the US: Medicare (federal, over-65 and disabled), Medicaid (state/federal, low-income), and commercial (private insurers). Commercial pays the most per case; Medicaid usually pays the least.
Contribution margin: revenue per case minus the *variable* cost per case (supplies, drugs, some labor). It tells you what each additional case contributes toward fixed costs.
EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète →: earnings before interest, taxes, depreciation, and amortizationearnings before interest, taxes, depreciation, and amortizationEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète →. A rough proxy for operating cash generation.
Market context (as of 2026, all figures estimates)
US national health expenditure is commonly cited around $4.9 trillion, roughly 17% to 18% of GDP, per CMS (Centers for Medicare and Medicaid Services) historical and projection data. Hospital care is the single largest slice, usually estimated near $1.5 trillion. See the CMS National Health Expenditure data for the underlying tables.
Europe is more fragmented and mostly public-funded. Health spending across the EU averages roughly 10% to 11% of GDP, with wide variation (Germany and France high, several eastern member states well below). OECD's Health at a Glance is the standard free reference.
Structural contrast that drives every number:
US: mixed payer, price-driven, commercial insurers cross-subsidize government payers. Margins depend heavily on payer mix.
Europe: mostly single-payer or social insurance, tighter tariffs, thinner private margins, capacity often measured per capita rather than by profitability.
Calculation 1: Cost per adjusted discharge
The workhorse cost metric. It normalizes total operating cost across inpatient and outpatient work.
Formula:
Adjusted discharges = Inpatient discharges x (Total gross revenue / Inpatient gross revenue)
Cost per adjusted discharge = Total operating expense / Adjusted discharges
Worked example:
Inpatient discharges: 20,000
Inpatient gross revenue: $600M
Total gross revenue: $1,000M
Total operating expense: $420M
Adjusted discharges = 20,000 x (1,000 / 600) = 33,333
Cost per adjusted discharge = $420M / 33,333 = $12,600
Now compare to peers. US benchmarks vary widely by region and case mix, but many acute hospitals sit in a broad $10,000 to $16,000 range (estimate). A number well above peers is not automatically bad: adjust for CMI. Divide cost per adjusted discharge by CMI to compare a complex academic center against a community hospital fairly.
$12,600 / CMI of 1.6 = $7,875 per CMI-adjusted discharge. That is the number to benchmark.
Calculation 2: Contribution margin per case
This is where payer mix bites.
Formula: Reimbursement per case minus variable cost per case.
Same surgery, same cost, three completely different outcomes. The Medicaid case loses money at the margin. This is why payer mix is not a footnote; it is the business model.
Calculation 3: Payer mix impact on revenue
Small shifts in mix move millions.
Worked example: A hospital does 5,000 of these knee cases a year.
Scenario A (60% commercial / 30% Medicare / 10% Medicaid):
Commercial: 3,000 x $16,000 = $48.0M
Medicare: 1,500 x $4,000 = $6.0M
Medicaid: 500 x -$1,000 = -$0.5M
Total contribution: $53.5M
Scenario B (45% commercial / 35% Medicare / 20% Medicaid):
Commercial: 2,250 x $16,000 = $36.0M
Medicare: 1,750 x $4,000 = $7.0M
Medicaid: 1,000 x -$1,000 = -$1.0M
Total contribution: $42.0M
A 15-point drop in commercial share cut contribution by $11.5M on identical volume. When a payer contract renews or a big employer leaves the area, this is the exposure you model first.
Calculation 4: EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète → per bed
A fast comparability metric for capacity-heavy facilities and a common M&A screen.
Formula:EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète → / licensed (or staffed) beds.
Worked example:
EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète →: $60M
Staffed beds: 300
EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète → per bed = $200,000
Watch the denominator. Licensed beds (regulatory maximum) and staffed beds (actually operational) can differ sharply. A hospital that quotes EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète → per *licensed* bed can look artificially lean if a third of those beds are dark. Always confirm which figure is used.
Benchmarks to keep in your head (2026 estimates)
Treat all as directional, not precise:
Operating margin: US non-profit hospitals often cited in the low single digits, roughly 1% to 4% on average, with a wide spread and many facilities near break-even.
Occupancy: US acute occupancy commonly estimated around 60% to 70%; note that very high occupancy signals capacity strain, not just efficiency.
Average length of stay (ALOS): US acute stays commonly cited near 4.5 to 5 days; several European systems run longer averages due to different care models.
Labor as share of operating cost: frequently 50% or more, the single biggest cost line and the one most exposed to nursing shortages and agency staffing.
Vérification des acquis
1. Why does the 'adjusted discharge' metric multiply raw inpatient discharges by (total gross revenue / inpatient gross revenue)?
2. A hospital reports strong occupancy and margins, but analysis shows a very high share of revenue from a single Medicaid-heavy payer. Why is this a red flag despite the healthy headline numbers?
3. Two hospitals have identical cost per adjusted discharge, but Hospital A has a CMI of 1.8 and Hospital B a CMI of 1.0. What does this suggest?
CHOIX MULTIPLES
4. Select ALL correct answers about contribution margin in hospital analysis.
Sélectionnez toutes les réponses correctes.
CHOIX MULTIPLES
5. Select ALL correct answers about why running the arithmetic can expose problems management narratives hide.
Sélectionnez toutes les réponses correctes.
The due-diligence checklist
Numbers are claims until you verify them. Run these before you commit capital, sign a contract, or trust a projection.
1. Reconcile the denominators
Ask exactly how each ratio is defined. Adjusted vs. raw discharges. Licensed vs. staffed beds. Gross vs. net revenue. Most misleading hospital metrics come from a quietly favorable denominator, not fake numbers.
2. Stress-test payer mix
Get the mix by revenue *and* by volume, and the top three commercial contracts with renewal dates. A hospital carried by one commercial payer is one contract renegotiation away from the Scenario B outcome above. Check for local employer concentration too.
3. Separate volume from price
Rising revenue can mean more patients (durable) or higher rates (fragile, and often one-time). Ask for a volume/price bridge across three years. Flat volume with rising revenue is a rate story that may not repeat.
4. Look at CMI trend, not just level
A rising CMI can mean genuinely sicker patients, better documentation, or aggressive coding. Coding-driven CMI gains attract regulatory attention (in the US, from CMS and the Office of Inspector General) and can reverse.
5. Check labor and agency dependence
Pull the split of employed vs. contract/agency staff. Heavy agency use inflates cost per adjusted discharge and signals retention problems. It is often the fastest-moving line in a hospital P&L.
6. Read the quality and regulatory record
In the US, review CMS Star Ratings, readmission penalties (Hospital Readmissions Reduction Program), and any accreditation issues. Quality penalties hit reimbursement directly. Free public data lives on Medicare Care Compare.
7. Verify capital and deferred maintenance
Ask the average age of plant (accumulated depreciation / depreciation expense). An old plant means a capexcapexCapital Expenditure (CapEx) is money spent to acquire, upgrade, or extend long-lived assets like equipment, property, or software that deliver value over multiple years.Voir la définition complète → wave is coming that no EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète → per bed figure reveals on its own.
8. Confirm cash, not just accrualsaccrualsAccrual accounting records revenue and expenses when they are earned or incurred, not when cash changes hands, giving a more accurate picture of financial performance.Voir la définition complète →
Days in accounts receivable and the aging schedule. Slow collections, especially from government payers, can make a "profitable" hospital cash-strapped.
Key Takeaways
Always adjust the denominator. Cost per *adjusted* discharge and CMI adjustment make comparisons honest; raw figures mislead.
Payer mix is the business model, not a detail. A 15-point commercial swing moved contribution by over $11M in our example on identical volume.
Split volume from price and level from trend. Durable growth comes from patients, not one-time rate hikes or coding changes.
Labor and deferred capex are the hidden margin killers. Agency staffing and an aging plant sink hospitals that look fine on EBITDAEBITDAEBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) measures a company's operating profitability before financing and accounting decisions, used to compare core performance across firms.Voir la définition complète → per bed.
Verify against free public data. CMS and OECD sources let you benchmark and fact-check claims before you commit.
*This lesson is educational and not investment, legal, or medical advice. All market figures are estimates as of 2026; verify against primary sources before acting.*