How hospitals and insurers make money: costs, unit economics and operations
Hospital revenue and cost, insurer premiums and claims, worked examples in India and the UAE, operations, and the key metrics with plain definitions.
Industry brief, with a one-minute summary: Healthcare providers and payersFirm processes and online tests change from year to year and differ by office. Use this to prepare, and confirm the exact current steps on the firm's own careers page.
Key takeaways
- A hospital earns patients times revenue per patient on a mostly fixed cost base, so filling beds and theatres well decides its profit.
- Patient flow: waits in the emergency department, time to admission, and discharge early in the day.
- Operating theatres: the most expensive rooms in a hospital. Watch theatre utilization and whether the first case of the day starts on time.
- Staffing: nurse-to-patient ratios, overtime and agency (temporary) staff, who cost more per hour.
Key idea
A hospital earns patients times revenue per patient on a mostly fixed cost base, so filling beds and theatres well decides its profit. An insurer earns premiums minus claims minus costs, so pricing risk correctly decides its profit.
- Hospital profit
- Revenue
- InpatientBeds x occupancy x 365 x revenue per occupied bed day (or admissions x revenue per admission)
- Outpatient and day casesVisits x revenue per visit
- Diagnostics and pharmacyTests and prescriptions x price
- Key: Payer mixEach payer pays a different rate for the same care
- Costs
- StaffThe largest cost: about 56 percent of US hospital costs in 2024 (American Hospital Association)
- Drugs, implants and medical supplies
- Buildings, equipment and depreciationMostly fixed
- Administration and IT
Margins vary a lot. US-listed hospital operators averaged an operating margin of about 13 percent before tax in Damodaran's January 2026 data, but many hospitals are public or non-profit and aim to break even. Because most hospital costs are fixed in the short term, a few points of occupancy can decide whether a hospital makes or loses money.
Worked case
Hospital revenue: a private hospital in Pune
The prompt
A fictional 300-bed private hospital in Pune has average occupancy of 70 percent. Its average revenue per occupied bed per day (ARPOB, a metric Indian hospital chains report) is INR 60,000. What is its yearly inpatient revenue, in INR crore? If it raises occupancy to 80 percent with the same ARPOB, how much revenue does it add?
The structure
- Inpatient revenue = beds x occupancy x 365 x ARPOB
- Occupied bed days
- Revenue today
- Revenue at 80 percent occupancy
Working it through
1. Occupied bed days
300 beds, 70 percent full, 365 days.
Occupied bed days per year:300 × 0.7 × 365 = 76,6502. Revenue today
Times INR 60,000, divided by 10 million to get crore.
Inpatient revenue today (INR crore):300 × 0.7 × 365 × 60,000 ÷ 10,000,000 = 4603. Revenue at 80 percent
Same calculation at 80 percent occupancy.
Inpatient revenue at 80 percent (INR crore):300 × 0.8 × 365 × 60,000 ÷ 10,000,000 = 5264. Revenue added
The difference.
Revenue added (INR crore):525.6 - 459.9 = 65.7
The recommendation
The hospital should push occupancy from 70 to 80 percent, because that adds about INR 66 crore of revenue a year, from INR 460 crore to INR 526 crore, at the same ARPOB of INR 60,000. First, staff and building costs are mostly fixed, so much of the extra revenue becomes profit. Second, the levers are clear: more referrals, shorter waits for admission and a better payer mix. The risk is that filling beds with lower-paying patients lowers ARPOB. As a next step, track occupancy and ARPOB by department every month.
Pie chart: Where each premium dirham goes at the example UAE insurer below. Medical claims: 85 percent; Administration: 11 percent; Underwriting margin: 4 percent.
Illustrative figures for a fictional insurer. Real ratios vary by country, product and year.
So-what
Claims are most of the premium, so one point of claims cost is a quarter of the margin.
Worked case
Insurer economics: a health insurer in the UAE
The prompt
A fictional health insurer in the UAE covers 100,000 members with an average premium of AED 4,000 a year. Claims (the medical bills it pays) average AED 3,400 per member, and administration costs AED 440 per member. What are its medical loss ratio (MLR), its margin per member and its profit per member per month (PMPM)?
The structure
- Insurer margin = premium minus claims minus administration
- MLR = claims / premium
- Admin ratio = admin / premium
- Key: Margin per member and PMPM
Working it through
1. MLR
Claims divided by premium.
Medical loss ratio (percent):3,400 ÷ 4,000 × 100 = 852. Admin ratio
Administration divided by premium.
Administration ratio (percent):440 ÷ 4,000 × 100 = 113. Margin per member
Premium minus claims minus administration.
Margin per member per year (AED):4,000 - 3,400 - 440 = 1604. PMPM
Divide by 12 months.
Profit per member per month (AED):160 ÷ 12 = 13.335. Total margin
Times 100,000 members.
Total underwriting margin (AED millions):160 × 100,000 ÷ 1,000,000 = 16
The recommendation
The insurer should focus first on claims, because it keeps only AED 160 per member a year, 4 percent of premium, about AED 13 per member per month or AED 16 million in total. First, the medical loss ratio is 85 percent, and one point of MLR is worth AED 40 per member, a quarter of the whole margin. Second, administration takes another 11 percent, which leaves little room for error. The risk is that premiums do not match the real risk of the members. As a next step, split claims per member into price per service and services per member.
Real insurers look similar. The US Affordable Care Act requires insurers to spend at least 80 or 85 percent of premiums on medical care, depending on the market, or pay rebates (CMS). In 2025 several large US insurers reported medical costs rising faster than they had priced for: UnitedHealth Group said Medicare Advantage cost trends were running at about 7.5 percent against the 5 percent it had assumed when setting prices (Fierce Healthcare, July 2025).
Operations: where hospitals win or lose
- Patient flow: waits in the emergency department, time to admission, and discharge early in the day. The bottleneck is often beds or staff, not doctors' time.
- Operating theatres: the most expensive rooms in a hospital. Watch theatre utilization and whether the first case of the day starts on time.
- Staffing: nurse-to-patient ratios, overtime and agency (temporary) staff, who cost more per hour.
- Supply chain: drugs, implants and consumables. Using fewer implant suppliers and buying through purchasing groups lowers prices.
- Revenue cycle: coding each stay correctly and collecting from payers. Claims that are denied or paid late hurt cash.
- Clinical quality: readmissions, infections and deaths. Quality failures harm patients and also cost money and reputation.
| Metric | Plain definition | Who watches it |
|---|---|---|
| Bed occupancy | Occupied bed days divided by available bed days | Hospitals |
| Average length of stay (ALOS) | The average number of days a patient stays | Hospitals, payers |
| ARPOB | Average revenue per occupied bed per day | Private hospital chains, especially in India |
| Case mix index | How complex, and so how costly and well paid, the average case is | Hospitals, DRG payers |
| Payer mix | The share of revenue from each type of payer | Hospitals |
| Readmission rate | The share of patients admitted again within a set time, often 30 days | Hospitals, payers, regulators |
| Medical loss ratio (MLR) | Claims paid divided by premiums | Insurers, regulators |
| PMPM | Cost or revenue per member per month | Insurers, providers paid by capitation |
| Waiting time | Time from referral or arrival to treatment | Public systems, patients |
| Out-of-pocket share | The share of health spending paid directly by patients | Governments |
So-what
For a provider, start with occupancy, length of stay and payer mix. For a payer, start with MLR and claims per member.
The Pune hospital above (300 beds, 70 percent occupancy) has an average length of stay of 3.5 days. How many admissions does it handle in a year?
An insurer collects premiums of USD 500 million and pays claims of USD 430 million. What is its medical loss ratio, in percent?
An operating theatre is available 10 hours a day. Surgeries plus cleaning between them use 7.5 hours on average. What is its utilization, in percent?
Why does higher occupancy raise a hospital's profit so much?
An insurer's MLR rises from 84 to 88 percent while premiums stay the same. What happened?
Which metric tells you how complex a hospital's patients are?
Sources for this lesson (5)
- American Hospital Association, The Cost of Caring: Challenges Facing America's Hospitals in 2025 (figures for 2024)
- Aswath Damodaran, NYU Stern: operating and net margins by industry (US), data as of January 2026
- CMS: Medical Loss Ratio requirements under the Affordable Care Act
- Fierce Healthcare: UnitedHealth cuts 2025 outlook as elevated medical costs continue
- Recognized public explanations of case-interview concepts and frameworks
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