Return on Investment in For-Profit Hospitals

The adequacy of return on investment in for-profit hospitals allowed under the Medicare program was questioned. A June 1977 study by a private firm concluded that investor-owned hospitals are considered by investors to be high-risk investments, and that to be compatible with normally expected rates of return in industries of compatible risk, the Medicare return on equity should be increased from 1.5 to 3.7 times the rate of return on Social Security Trust Fund investments. The information available to investors, however, indicates that the financial strength of investor-owned hospitals is strong and raises questions about the validity of the study's conclusions. A comparison of the Medicare return on equity with the return allowed by selected state hospital rate-setting bodies and the Department of Defense indicates that Medicare rates are not out of line with the rates applicable to other programs and activities. Two of the three states having comprehensive regulatory authority over hospital rates allow a return on equity about the same as that of Medicare. The Department of Health, Education, and Welfare has in process three studies which may have a bearing on the overall issue of the adequacy of medicare reimbursement for proprietary hospitals.