There are 6000+ hospitals in the United States. Some perform a broad range of medical procedures, from emergency rooms to surgery to diagnostic care. Others focus on a single medical specialty - for instance, MedCath (MDTH) focuses exclusively on cardiology, while Dynacq Healthcare (DYII) operates specialty surgical hospitals. All hospitals receive revenues from government programs Medicare and Medicaid, private insurers, and directly from uninsured patients. Hospital operators vary in size - Dynacq Healthcare (DYII) one of the smallest, runs only 3 hospitals, while the largest hospital operator in America, Community Health Systems (CYH), operates 116 facilities.
Though the hospital industry has traditionally been quite profitable, with many hospitals remaining virtual monopolies in their geographic areas, a host of new challenges has emerged over the past few years. The numbers of uninsured patients are growing, reaching 47 million in 2006; historically, hospitals collect only 10% of total amounts billed to such patients. Since hospitals are required by law to provide emergency care to all patients, bad debt expense has been rising throughout the industry. Additionally, the strain put on the Medicare system by the swift increase in beneficiaries has caused Congress to consider cutting back on reimbursements to healthcare providers. Even hospitals' monopoly positions are threatened by new competition from independent and physician-owned surgical and diagnostic centers.
Historically, the hospital industry has been characterized by low levels of competition, with most communities home to only a few hospitals. However, the number of new facilities for delivering hospital services, such as physician-run outpatient surgery centers, specialty hospitals, and diagnostic centers, has grown rapidly. For instance, in 2007, there were 4900 registered outpatient surgery centers, accounting for 31% of the 50 million surgeries performed each year. As a result of this jump in supply, for-profit hospitals are left with an excess of beds and not enough patients. Furthermore, because independent competitors frequently have lower costs due to their smaller size and simpler infrastructure, they can provide the same services at lower prices than traditional hospitals. Because hospitals use the income provided by high-margin operations to finance certain unprofitable services and procedures, the increased competition can completely erase profits by eliminating these margins.In fact, only 500-1000 of the nation's more than 6000 hospitals remain consistently profitable.
The number of uninsured patients has been rising throughout the nation, growing nearly 5% in 2006 to reach 47 million. Since all hospitals are legally required to provide emergency care to anyone who needs it, whether they are insured or not, they face high expenses (specifically bad debt expense) from this trend. Historically, hospitals have collected only 10% of total amounts billed to uninsured patients. While hospitals have attempted to combat these losses by charging uninsured patients more for procedures with hopes of thus recovering greater amounts, this strategy has not proved effective.
In order to increase or even maintain the breadth of specialized services available to its patients, hospitals have to hire qualified physicians and nurses. This has become an industry-wide challenge as the nation faces a shortage in both professions.
The retirement of the baby boomers, who make up slightly over a quarter of America's population, has had an economic as well as demographic impact on the nation as a whole. A rapid increase in the number of elderly Americans provides an opportunity for hospital owners, since people older than 65 generally need more medical care. People 65 and over account for 40-50% of total spending on healthcare; the per capita healthcare spending in this age group is 3-5 times higher than for people under 65. As a result, total healthcare expenditures are already growing swiftly, rising 6.7% in 2006 to reach $2.1 trillion. At the same time, the aging of the population will indirectly hurt the hospital industry through its effect on the Medicare system, which is becoming saturated as more baby boomers become eligible to participate. Medicare expenditures already comprised 5.3% of U.S. GDP in 2006 and existing reimbursement levels are not sustainable, suggesting that per-patient Medicare revenues for hospitals will decrease in the near future.
The US government limits the amount that hospitals will be reimbursed for treating Medicare and Medicaid patients, putting a ceiling on the prices hospitals can charge for services it provides to such patients. These limits have an especially significant effect on revenues because anywhere from 30% to over 40% of a typical hospital's patients are on Medicaid and Medicare. As the number of patients using Medicare and Medicaid grows in future years, stretching federal resources, the government considering making changes to these programs to cap reimbursements further. For example, Medicare reimbursement rates were cut 10.6% on July 1, 2008; though the move was reversed two weeks later, the current rates have been for 2008, thus making it impossible for hospitals to raise prices.
The hospital industry is fragmented, with hundreds of providers of various sizes spread throughout the country. Competition is limited by geographic constraints (there are never more than a few hospitals in one geographic area). Community Health Systems (CYH) is the largest for-profit national hospital operator, accounting for about 2% of the market (the chart below breaks down the market share of national for-profit hospital operators by revenues). The firm also holds the largest market share by number of hospitals - its facilities account for 2% of the 6013 total hospitals in America.