Is Healthcare More Profitable Than Non-healthcare Entities?

In recent years healthcare profitability as a result of pricing variations, has become of interest to consumers and government agencies. Growing concern surrounding the cost and profitability of healthcare in the United States has placed healthcare profitability at the forefront of many discussions on the topic. The purpose here is to study the profitability among publicly traded healthcare (HC) organizations compared the non-healthcare (NHC) organizations. It is hypothesized that there is no significant difference in profitability between the Healthcare (HC) sector and Non-Healthcare (NHC) sector among publicly traded entities (H0: (µHC - µNHC) = 0).

This retrospective review of profitability analyzed 2018 financial statements of 80 (n = 80) randomly selected publicly traded companies. The data was further divided into two categories: Healthcare Sector (HC) and Non-Healthcare Sector (NHC). Companies within the HC sector were further divided into the following categories: Hospitals, Home Health Care, Long-term Care, Health Care Plans, Drug Manufacturing, Biotechnology, Medical Appliances, and Diagnostics. Here, we attempted to randomly select five companies from each category. The null and null alternative models are specified by,

H0: (µHC - µNHC) = 0

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H1: (µHC > µNHC) ≠ 0

H1: (µHC - µNHC) ≠ 0

where the null holds there are no significant differences between the profitability of the HC and NHC sectors.

We used the formula, (Net Income)/(Total Sales) x 100, to calculate the profit margin. The F-test is used to test if the variances of the HC sector and NHC sector are equal. For this study we used the two-tailed tests against the alternative that the variances are not equal. Based on the findings of the F-test, t-Test is used to determine if the difference between the means of the HC and NHC are statistically significant. The t-test yields a p-value, which indicates the probability that random sampling errors of the HC and NHC sectors caused the difference between the HC and NHC means. For the purposes of this study, when p .05, it will be indicative of no statistically differences among the means of the HC and NHC sectors.

Finally, regression analysis is used to allows for the examination of the relationship between HC and NHC sectors. The equation for the regression analysis for this study is as follows: Yt = β0 + β1DHC + ℇt. Regression analysis allows us to establish a causal relationship between y and regressors x1, x2,…,xn, and predict y based on a set of values for x1, x2,…,xn.

All 80 companies had complete financial statements posted with total sales and net income were included in the study. The F-test Two Sample for Variance was used to determine if there exist equal or unequal variances. Based on our findings, mean variances were determined to be unequal. Additionally, analysis of the F and F Critical one-tail also demonstrate unusualness of the variances. Therefore, we proceed with running a t-test two sample for unequal variances.

Using t-test two sample for unequal variances allows us to the P-value in relation to the null hypothesis, H0: (µHC - µNHC) = 0, in that the two populations, HC and NHC, means are equal, but their respective variances differ. The mean, variance, observations, and degree of freedom yield identical measures as with the f-test.

Since the p-value is smaller than the α (0.05), we can reject H0: (µHC - µNHC) = 0, that there is no significant difference in the means of the HC and NHC sectors and the alternative hypothesis H1: (µHC > µNHC) ≠ 0, that HC is more profitable than NHC. We accept there are significant differences, H1: (µHC - µNHC) ≠ 0 between HC profitability and NHC profitability.

The most important section of the regression analysis is the last section of the analysis output (Figure 4), Using this section we can determine that the HC section is less profitable than the NHC. To do this we look at the coefficients of the intercept (HC) and Group (NHC). Regression coefficients represent the mean change in the response variable for one unit of change in the predictor variable while holding other predictors in the model constant. This statistical control that regression provides is important because it isolates the role of one variable from all of the others in the model. The value for the intercept (slope) coefficient, 0.17703702, and that of the group, -0.069776597, tell us that NHC sector is more profitable than the HC sector. The last section also provides the linear regression equation: y = mx +b. Our equation for this study would therefore be y = 0.107x + b.

This study investigates the profitability of the HC sector in comparison to the NHC sector. The assumption of healthcare profitability surpassing that of all other industries has fueled much debate and brought about increase scrutiny. While pharmaceutical and biotechnology lead the HC sector in profitability, others, such as home health, long-term care, and hospitals demonstrate less profitability.

In 2016, Bai and Anderson (2016) found that earning from ten of the most profitable hospitals totaled more than $163 million in total profits and FP hospitals are more profitable than NFP hospitals. In 2019, just three years later, we see a drastic decline in hospital profitability. According to LaPointe (2019), weakened as margins significantly declined during November 2019 compared to October 2019. It is important to note that this study has important limitations.

First, this study exclusively focuses on publicly traded healthcare companies and excluded NFP hospitals due restricted availability of public information of income statements. Second, the analysis of profitability of both sectors was limited to 2018 data, which only provides evidence for a short term. This limitation should be considered when drawing implications regarding profitability. Third, the data collection of financial criteria is restricted by the public availability.

Herman (2018) asserts that 85 publicly traded healthcare companies amassed more than $47 billion dollars of global profits, with pharmaceuticals showing the highest profit margins. This would lend to the assertion that HC would be more profitable than NHC. However, evaluation of the profit margins of the HC sector versus the NHC sector revealed that there is no support for healthcare being more profitable. Therefore, based on my research, the findings indicate the NHC sector is more profitable.

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