Operating Margin
Operating margin is the percentage of net patient revenue remaining after subtracting operating expenses — the primary metric for evaluating a healthcare organization's financial sustainability from its core clinical and operational activities, excluding investment income and philanthropy.
What is Operating Margin?
Operating margin is calculated as Operating Income divided by Net Patient Revenue, expressed as a percentage. Net patient revenue equals gross charges minus contractual adjustments, bad debt, and charity care. Operating expenses include labor (typically 70% of total hospital expenses), supplies, purchased services, depreciation, and overhead — but exclude non-operating income such as investment returns. MedPAC considers a 3–5% operating margin to be the threshold for financial health for hospitals; margins below 2% signal financial distress. The median hospital operating margin in 2022 was -1.6%, meaning the typical U.S. hospital lost money from operations and relied on investment income and philanthropy to achieve overall profitability. EBITDA margin (operating margin plus depreciation and amortization) is used in bond covenant compliance and credit rating analysis. Key drivers of operating margin include payer mix (Medicaid-heavy patients generate significantly lower net revenue per case), labor cost ratios (traveling nurse rates during COVID drove margins negative for many systems), supply chain costs, and volume trends. Operating margin analytics by service line reveal which clinical programs are cross-subsidizing others.
Why It Matters for Healthcare Analytics
Operating margin deterioration rarely arrives suddenly — it builds from payer mix shifts, labor cost creep, volume changes, and coding quality degradation that individually seem minor but compound into financial crisis. Monthly operating margin monitoring by service line, provider group, and facility allows leadership to identify and act on negative trends months before they appear in annual financial statements.
How Vizier Tracks Operating Margin
Upload your financial and operational data and ask "What is our operating margin by service line this quarter and how has it trended year-over-year?" — Vizier calculates service-line margins, decomposes the drivers of change, and identifies which departments are above and below the breakeven threshold.