15 May 2017

How much does it cost to run a hospital?

Hospitals are places that operates 24 x 7 x 365. Crowded OPDs, long waiting time, queued up counters etc. are things that are considered a normal routine of any typical hospital. Many may wonder that the promoters of hospitals must be making big bucks out of this never slowing down business. While it’s true that hospitals generate big revenues from patients’ bills, they also spend a handsome amount on its operational expenses. The cost of running a hospital can be really high and fluctuating and can sometime result in financial losses instead of any gain. The cost at which hospitals operate leaves very thin margin and it is absolutely important that the business managers keep an eye on the expenses, or else the margin may vanish. Below, after going through the expense data of few large hospitals, I have listed down what are the important cost components and how much do they affect the overall expenses in a hospital.

Doctor’s share

Most private hospitals share the revenue they generate from a patient with the patient’s doctor. The share, which is over and above the fixed remuneration, could vary from place to place, speciality to speciality and also doctor to doctor. The percentage at which sharing is done and, whether it’s done on revenue or profit, determines the expense that hospital has to bear on this component.   The data of few corporate hospitals shows that doctor’s share accounts for about 27% to 30% of the total expenditure by the hospital and is amongst the highest expenditure component.

Employee salary and benefits

Besides doctors a large number of staff are employed in hospital. There could be around 30 categories of staff and cost involved towards their salaries and benefits accounts for another highest expenditure component. As per data, this accounts for about 25% to 27% of the total expenses.

Consumption expenses

A variety of medical and non-medical inventory gets consumed during patient care process. Medicines, surgical items, food, linen, stationary etc. are items that is required for patient care and adds a substantial cost on hospital management. Providing for these consumption item as per data can account for about 20% to 24% of the total expenses.

The above 3 components put together accounts for roughly 75% of the total hospital expenses. Besides this there are about 15-20 more components on which hospital spend remaining 25%. These components are minor expense component but, if not kept under check and can increase beyond manageable limit. These are,

Marketing expenses – This varies greatly from hospital to hospital, depending upon amount of money they spend on advertisement and other promotional activities. It could range from 0% to 10% of the total expenses

Power and fuel – Hospitals consumes a lot of energy and it can cost dearly if left unchecked. Varies from state to state, this can cost upto 5% of total expense

Repairs and maintenance – Hospitals requires continuous maintenance of its building and equipment. Although a lot of this cost depends upon the age of the hospital and condition of its infrastructure, in general about 2% of the overall cost goes into this.

Other components – All other cost components are insignificant as a proportion to the overall cost, but they do occur while operating a hospital. These includes cost of interest payment towards loans, insurance premiums, charges of auditors, legal charges, service tax, rent and lease of property, communication, travelling, outsourcing fees and other miscellaneous expenses.
(Check this post on 'all legal documents required by a hospital')

 Its important that hospital's business managers take these costs seriously for successfully running this business. Besides there are few business risks also, which can affect hospital's business significantly. I have covered these risks in my post on 'Risks in hospital business'

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