How to analyze a hospital income statement, step by step
From result to cause in five steps, with the management structure that makes the income statement useful to the board.
Analyzing a hospital income statement means answering five questions in order: is the result good or bad? Against what? Which line explains the difference? In which cost center does it originate? Is it volume, price or mix? This article walks through the method, the management structure that makes reading easier and the most common mistakes.
Statutory and management income statements
The statutory income statement follows accounting standards and serves reporting purposes. The management income statement reorganizes the same information for decisions: it separates what varies with patient care from what is fixed, and highlights contribution margin and operating result. A typical hospital management structure:
| Line | What goes in |
|---|---|
| Gross revenue | Billing from SUS, private payers and self-pay, on an accrual basis |
| (−) Deductions | Denials, revenue taxes |
| (=) Net revenue | |
| (−) Variable costs | Supplies, drugs, implants and special materials, volume-based physician fees |
| (=) Contribution margin | What is left for the structure |
| (−) Fixed costs | Payroll, structure, outsourced services, maintenance |
| (=) Operating result (EBITDA) | Cash generated by operations |
| (−) Depreciation and amortization | |
| (+/−) Financial result | Financial income and expenses |
| (=) Net result |
The exact structure varies by hospital. What matters is that it stays the same every month and that ledger accounts are always classified the same way.
Step 1: start with the result
First look at the period's operating and net results. Are they above or below budget? And against the same period last year? That answer sets the tone of the analysis.
Step 2: compare with two references
- Against budget: shows whether the hospital is delivering the plan.
- Against last year: shows real evolution, independent of the budget's quality.
An income statement below budget but above last year tells a different story from one below both references. The article on budget vs. actual goes deeper into this comparison.
Step 3: find the line that explains the difference
Go down the income statement and mark the lines with the largest variance in amount, not percentage: a 40% variance on a small line weighs less than 5% on payroll. Also use vertical analysis (each line's share of revenue) to see whether the structure changed: supplies moving from 18% to 21% of revenue is a signal, even if the absolute amount fell along with revenue.
Step 4: find the cost center
The income statement line tells you what; the cost center tells you where. Break the variance down by cost center and ledger account. This is where analysis becomes a conversation with managers: every relevant variance should have an owner and an explanation. See how to track costs by department.
Step 5: separate volume, price and mix
A cost that went up is not always a problem:
- Volume: the hospital saw more patients, and variable cost followed. Compare with volume.
- Price: the same consumption cost more (supplier price increase, collective wage agreement).
- Mix: the composition of care changed (more complex surgeries, more SUS, another payer).
- Efficiency: consumption per patient rose without changes in volume, price or mix. This is the variance that calls for action.
Common mistakes when analyzing the income statement
- Mixing cash and accrual: the income statement is on an accrual basis. Late payments do not change the month's income statement.
- Changing account classification mid-year: the comparison loses meaning.
- Looking only at percentages: the variance that matters is the largest in amount.
- Stopping at the total: without reaching the cost center, analysis does not become action.
- Ignoring non-recurring items: a settlement, an asset sale or a provision can hide the real trend.
How BI helps
With BI connected to the information system, steps 1 to 4 are ready right after the close: budget vs. actual income statement, variance by cost center and vertical and horizontal analysis. Controllership gains time for step 5 and for the conversation with managers. For hospitals running Tasy, see controllership and income statement with Tasy data. The function's role is described in hospital controllership.
Related questions
What is the difference between an income statement and a cash flow statement?
The income statement shows results on an accrual basis: revenue and costs in the month they occurred. The cash flow statement shows money in and out. A hospital can have a positive income statement and negative cash, because of payer terms and denials.
Are denials a revenue deduction or an expense?
In the management structure, denials usually go in as a revenue deduction, because they represent revenue that will not be collected. What matters is keeping the same criterion every month.
How often should the income statement be analyzed?
Monthly, right after the accounting close. Indicators that anticipate the income statement, such as volume, billing and unbilled accounts, should be tracked during the month.
Written by the team behind Clic Health: accountants, controllers and developers with more than 20 years of work in hospital management.