When Benchmarks Lead You Astray: The Hidden Flaws in S&P's Stand-Alone Hospital Financial Benchmarks

Are hospital's financial benchmarks misleading you? For healthcare executives across the country, S&P Global's annual U.S. Not-For-Profit Health Care Median Financial Ratios have become a go-to resource for performance measurement. These ratios appear in boardrooms, strategic planning sessions, and executive dashboards as a readily available answer to "How are we doing compared to our peers?"

The appeal is obvious: S&P's data is accessible, comprehensive, and carries the credibility of a major credit rating agency. But what if this widely used benchmark is built on a less solid foundation than it appears? Last week's release of S&P's 2024 stand-alone hospital financial ratios provides a perfect case study in why convenience and availability don't guarantee meaningful comparison.

The AA Rated Problem

S&P's high-grade stand-alone hospital category (AA rating) serves as the aspirational benchmark for many hospitals. In 2024, this elite group included just 30 hospitals. Yet these institutions represent such diverse operational models that comparing a traditional community hospital to this group is like benchmarking an NHL team's performance against a collection that includes NBA, MLB, and NFL teams. They're all professional sports, but the metrics that define success are fundamentally different.

The Children’s Hospital Distortion

41% of S&P's AA rated stand-alone hospitals are children's hospitals. This significantly impacts the benchmark's relevance for traditional hospitals. Children's hospitals typically have Medicaid percentages exceeding 50% with virtually no Medicare revenue. Traditional hospitals face the opposite: single-digit Medicaid percentages while Medicare represents 30% to 50% of revenue or more.

This payor mix difference drives every aspect of operational strategy. When nearly half your benchmark operates under substantially different economic constraints, the financial ratios may not provide the strategic insight executives need.

The Payvider Wild Card

Four hospitals in the 30-hospital subset generate substantial revenue from insurance premiums. Payviders capture revenue on both sides of healthcare: providing care and collecting premiums. This dual revenue stream creates financial dynamics that don't exist for traditional hospitals.

Payviders can balance care delivery losses against insurance profits, creating risk mitigation strategies unavailable to traditional hospitals. This financial hedging capability results in performance metrics that reflect integrated insurance operations rather than pure hospital operational excellence.

The Shrinking Sample

Another significant issue involves year-over-year changes in the benchmark composition. The sample size fluctuates as hospitals are added or removed based on credit rating changes. When weaker performers are down graded and removed from the AA category, the remaining benchmark becomes progressively more selective.  In our current example, the sample size was 39 in 2022 before shrinking to 30 in 2024.  

This creates significant challenges for trend analysis within S&P's data table. Hospital executives can't simply look at the median net patient revenue figure in 2022 versus 2024 and calculate meaningful growth trends, since the peer group includes different hospitals in each year. What appears to be revenue growth or margin improvement may actually reflect changes in the hospital mix rather than genuine industry trends.

The Median Limitation

S&P's approach of providing only median figures creates another significant limitation for strategic benchmarking. High-performing hospitals comparing themselves to median benchmarks may find little value if they're already operating at the 75th or 90th percentile.

The absence of ranges also limits the ability to ensure true comparability. Without access to performance ranges, executives can't determine appropriate targets or understand whether the benchmark reflects a tight cluster of similar performers or a wide range of outcomes crucial for meaningful strategic planning.

The Path Forward

These limitations don't diminish S&P's valuable work in credit analysis, but they do highlight the challenges of using credit-focused benchmarks for operational decision-making. When hospital executives compare hospitals to benchmarks with mixed business models and fluctuating peer groups, they may develop unrealistic expectations or pursue benchmarks that don't align with operational reality.

This is why we're developing a comprehensive hospital benchmarking platform that addresses these challenges. By creating peer groups based on operational similarity rather than credit ratings alone, hospital executives can access more relevant comparative insights for strategic decision-making.

S&P's hospital financial ratios serve an important purpose in credit analysis, but hospital executives seeking operational benchmarks may benefit from tools designed specifically for strategic planning, with peer groups that reflect similar business models, timing, and consistent composition over time.

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