The healthcare industry is one of the largest and most important sectors not only in the U.S. but in the world. It provides essential services to billions of people each and every day.
However, like any other industry, healthcare providers need to make a profit in order to remain viable.
In the healthcare industry, profit margin is particularly important because of the essential nature of the services provided. Healthcare providers must balance the need to provide high-quality care with the need to remain financially sustainable. This can be a tricky balancing act, as providers often face rising costs and increasing competition.
In this article, we will explore the average profit margin in the healthcare industry, the factors that affect it, and some ways healthcare business owners can boost their bottom line.
The healthcare industry is unique in many ways, and this is reflected in the way profit margin is calculated.
Unlike other industries, healthcare providers must deal with a wide range of factors that can affect their profitability. These can include things like changes in government regulations, shifts in patient demographics, and advances in medical technology.
One of the key factors that can impact profit margins in healthcare is the cost of providing care. Healthcare providers must pay for a wide range of expenses, including salaries for medical staff, equipment and supplies, and insurance.
Another significant cost factor is the level of competition in the market. Healthcare providers must compete for patients, and this can drive down prices and reduce profit margins further.
In addition, providers must also deal with changes in government regulations, which can impact their ability to provide certain services or receive reimbursement for those services.
Another key factor that affects profits in healthcare is the level of technology used for delivery. One of the main reasons telehealth startups like Talkspace and Sequence Health (recently acquired by Weight Watchers) are attracting so much investment: their operating costs are significantly lower than traditional healthcare providers and their profits are much higher.
As medical technology and telehealth continue to advance, healthcare providers must invest in new technology and rethink old ways of doing things in order to remain competitive.
In addition, providers must also deal with the rising cost of healthcare itself, which can make it difficult to maintain profitability.
The “average” profit margin in the healthcare industry is honestly not a super-useful metric. It varies widely depending on the type of provider and the specific market.
A hospital with thousands of staff and most patients on insurance is going to have a far lower profit margin than a privately owned small cosmetic surgery clinic with only a few employees.
According to Syntellis, the average profit margin was just 0.7% in May 2023. In other words, 99.3% of all revenue hospitals make goes right back into expenses and staff compensation. Not to mention this was after 9 months of profit losses (e.g., negative profit margins) from June 2022 to February 2023.
Now you know why so many hospitals — even the country’s most famous institutions — regularly request donations from wealthy sponsors, much like a museum might.
Of course, this is mostly because only 24% of hospitals are for-profit organizations. The other 76% are non-profits or state- and city-funded institutions, so this makes sense. They’re not really supposed to have a profit margin.
So, while hospitals are a significant part of the U.S. healthcare system and its revenues, they aren’t a great comparison for most healthcare business owners, who own for-profit enterprises.
While many urgent care centers (especially the older ones in any neighborhood) are also nonprofits, more urgent care centers have been springing up recently and tend to be for-profit businesses.
The rise of urgent care centers as a legitimate for-profit business model in the States has been a long time coming. Since the pandemic started, more patients have sought out more affordable, convenient, and faster options for seeing providers.
This is why urgent care centers are growing in popularity. Unlike PCPs, who you have to schedule visits with far in advance, you can walk into most urgent care centers without an appointment, and they’ll see you the same day. Urgent care clinics also provide a wide range of services, from basic medical care to more complex procedures.
However, like other healthcare providers, urgent care centers must also maintain a healthy profit margin in order to remain viable.
According to ProfitableVenture, the average “successful” U.S. urgent care center can expect a profit margin of 15%. It’s certainly doable since for 99% of urgent care patients, their insurance company will cover the costs anyway. But it’s an administrative headache to earn that 15% when all is said and done.
Hospitals and urgent care clinics are all well and good, but what about dentists? What about cosmetic surgeons? What about cryotherapy, botox, laser hair removal, etc.?
Well, while you might think this information would be more readily available on the Internet, it really isn’t.
As an example, the NYU Stern School of Business maintains a Margins by Sector page with a lot of useful and regularly updated information on retail margins and expenses by sector and subsector, too.
Here’s what they list for Healthcare, as of January 2023:
Industry Name
Gross Margin
Net Margin
Pre-tax, pre-stock operating margin
Healthcare Products
57.74%
7.00%
17.41%
Healthcare Support Services
14.72%
2.01%
4.35%
Healthcare Facilities (including hospitals)
35.63%
5.31%
12.24%
Note that private clinics would mostly fall under either “Healthcare Support Services” or “Healthcare Facilities,” while “Healthcare Products” includes retail businesses like supplement shops.
“Net margin” is also very misleading here. Most private healthcare clinics are owned by the main providers or surgeons, and the payroll portion of their compensation counts as an expense. But it’s really just profit for the business since they’re the owners.
In other words, looking at the “Pre-tax, pre-stock operating margins” are slightly more accurate. It’s still not perfectly accurate, since payroll has still been deducted already, but at least large distributions to the owners (e.g., in the form of stock) won’t be deducted.
Also, most small business owners don’t think about profit margins in terms of ‘after-tax’ profit margins. Maybe accountants do, but since taxes are a function of your taxable income after expenses anyway, it’s a largely meaningless distinction for the average small clinic owner.
If you know what your profit margin is, you’ll also likely know what your taxes are.
With all that in mind, the right-most column in this table shows us that the average privately owned U.S. healthcare clinic can expect a profit margin somewhere between 12.24–35.63%. If we’re counting healthcare products, that range goes up to 17.41–57.74%.
This seems to align with other recent data. According to Dentistry IQ, the average U.S. dental clinic has a profit margin between 30–40% of revenue.
And, according to Zippia, the average U.S. supplements shop has a profit margin of 38%.
Of course, what these types of surveys don’t account for is the fact that many clinic owners, especially in the U.S., graduate medical school with significant student loan debt — and pay it off for decades, sometimes into retirement.
According to the Education Data Initiative, the average U.S. medical school graduate has to pay off $250,990 in student loan debt. That’s nearly the cost of a single-family home in some states, and it certainly cuts into these already tight profit margins for any clinic owner that hasn’t paid down their debt already.
Maintaining a healthy profit margin in the healthcare industry can be challenging, but there are strategies that providers can use to improve their profitability.
One of the most effective is to focus on reducing costs. This can involve things like negotiating better prices with suppliers, using technology to streamline operations, and outsourcing certain services.
Another effective strategy is to increase revenue. This can be done by expanding services, targeting new patient populations, and adopting new payment models. For example, some providers have begun offering telemedicine services, which can help to reduce costs while also expanding their reach.
Despite these strategies, there are still many challenges that healthcare providers face when it comes to maintaining a healthy profit margin.
One of the biggest is the rising cost of healthcare itself. As medical technology advances, healthcare providers must invest in new equipment and systems in order to remain competitive. However, these investments can be costly, and may not always result in a significant increase in revenue.
In addition, providers must also deal with changes in government regulations, which can impact their ability to provide certain services or receive reimbursement for those services.
This can be particularly challenging for smaller providers, who may not have the resources to keep up with these changes but have no choice but to contend with the ongoing nightmare of insurance claims tit-for-tats.
Maintaining a healthy profit margin is critical for healthcare providers to stay in business, as it allows them to continue providing essential services to millions of people nationwide.
However, healthcare providers and clinic owners must also balance the need for profitability with the need to provide high-quality care.
This can be challenging, but by focusing on reducing costs, increasing revenue, and staying up-to-date with changes in the industry, healthcare providers can improve their profitability while also ensuring that patients receive the care they need.
Fortunately, there are some fairly simple cost-cutting tactics for retail healthcare businesses, like supplement shops and private clinics. In fact, if you accept credit cards, you could probably be saving significantly more than you realize per transaction.
If you’re a healthcare business owner who runs a clinic of some kind, maybe you’ve realized over time that you could be taking home more money than you are right now. If so, we can help by running a free savings analysis for your business.
