In today's Finshots, we explain how the healthcare industry works and which metrics matter for a hospital’s finances.

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The Story

A hospital has a rather strange business model. No one walks into a hospital because they found a good deal or liked the brand. They are there because they need help. In that moment, the hospital is expected to have the right doctor, the right equipment, and the right treatment available, regardless of whether it is ‘profitable’ to provide them.

However, a private hospital is still a business. Someone has to pay for the building, the beds, the MRI machines, the nurses, electricity, and everything else that needs to run even when there are no patients around.

That creates a rather unusual tension. The hospital has a public-facing responsibility to provide care, but it also has shareholders, employees, suppliers and lenders who expect the business to be financially sustainable.

And this becomes even more interesting when you look at what actually happens inside. Because a hospital isn't really selling just one thing. A patient's bill can include treatment, medicines, diagnostics, surgery, consultations and several other services, each with its own economics.

Which brings us to a question that is easy to overlook when we look at a hospital bill: how exactly does a hospital actually make money?

This question has become particularly relevant after the Supreme Court recently questioned the pricing of medicines sold through private hospitals. The court was told that a cancer drug supplied to retailers for ₹2,700 was being sold at an MRP of ₹27,000.

The Court also asked the Centre to examine whether a uniform 16% margin could apply to medicines. The case is still being heard, but it raises an interesting question about how the economics of private healthcare actually works.

You see, for years, India's private hospital chains have benefitted from a simple proposition. They can offer sophisticated medical treatment at a fraction of what patients might pay in the US, the UK or parts of the Middle East. For context, EY-Parthenon estimates that procedures in India can cost around 70% less than in developed markets. That cost advantage has also helped India build a meaningful medical tourism business. At the same time, inpatient revenue has grown mainly because treatments have become more complex, rather than because prices have risen sharply.

But a hospital is not really one business. It is a collection of businesses operating under the same roof, from beds and operating theatres to diagnostics, pharmacies and emergency departments. All of this infrastructure costs money whether or not it is being used. Meaning, a hospital may have 500 beds, but it cannot generate revenue from all of them every day.

So what we’ll have to focus on is how effectively the hospital converts all this infrastructure into revenue.

Take something as basic as a hospital bed. It generates no revenue when it is empty, which is why occupancy matters so much. ICRA's sample of 11 listed hospital companies averaged 63% occupancy in FY26. Despite this occupancy, the companies earned an operating profit margin of 24%, helped by a better mix of patients and lower costs.

The first lever, then, is simple. Get more patients through the existing infrastructure.

But here’s the thing. Two patients can occupy the same bed for the same amount of time and generate very different revenue depending on the treatment that they need.

This is where metrics such as average revenue per occupied bed (ARPOB) become useful. Fortis, for instance, reported an ARPOB of around ₹68,700 per occupied bed per day in FY26, with an occupancy of 68%. More importantly, its six focus specialities, including cardiac sciences, oncology, neurosciences, gastroenterology, orthopaedics and renal sciences, accounted for about 62% of hospital revenue.

The reason seems straightforward. A patient coming in for a complex cardiac procedure or cancer treatment may require expensive diagnostics, surgery, medicines and several consultations. But a routine admission may require far fewer of these services. So hospitals care not just about how many beds are occupied, but also about what happens to the patients occupying them.

This helps explain why the industry has been moving towards high-acuity specialities (acuity is the measurement of how sick a patient is and the level of nursing or care they require). Manipal, for example, reported that cardiac sciences, oncology, neurosciences, gastro sciences, orthopaedics and renal sciences accounted for 64% of gross inpatient revenue in the first half of FY26.

Another piece of the puzzle is how long patients stay. This is why hospitals pay close attention to average length of stay (ALOS). Apollo, for example, reported an inpatient ALOS of 3.14 days in Q1 FY26, down from 3.34 days a year earlier, while inpatient volumes rose by 3.2%. Average revenue per inpatient rose by 8.9% to ₹1.72 lakh.

So the point we’re trying to make is that shorter stays do not automatically mean better economics since clinical requirements come first. But when technology and treatment protocols allow patients to recover safely in less time, the same infrastructure can support more admissions.

But even then, not all admissions are equally valuable. The economics can also depend on who is paying for the treatment.

A hospital may treat self-paying, insured, corporate or government-scheme patients, and the amount it realises can differ significantly across these categories. Max Healthcare, for example, has said that its institutional business has historically generated an ARPOB of around 40% lower than other channels. The company has therefore been trying to increase the share of higher-yielding self-pay patients with personal insurance wherever possible. Max estimated that replacing some institutional beds with such higher-yielding channels could improve EBITDA margins by around 3-4%.

This is also why opening a new hospital is not as straightforward as adding another revenue-generating asset. Because a new hospital starts with the costs of a mature facility but only a fraction of the patients. It can take years to build its doctor network, referral base and patient volumes.

That is why hospital companies have increasingly looked at brownfield expansion (scaling up an existing facility), acquisitions and asset-light operating models alongside completely new hospitals. That’s because adding beds to an existing campus can be faster, as the hospital already has doctors, patients, referrals and supporting infrastructure. So it helps chains expand with less capital, while new hospitals can put pressure on margins until occupancy matures.

But hospital chains are also expanding beyond the core business itself.

Some listed healthcare companies are no longer just hospital operators. Apollo, for instance, simultaneously operates pharmacies and digital health. In H1 FY26, its offline pharmacy distribution business generated ₹4,498 crore of revenue at a 7.7% operating EBITDA margin before costs, while the digital business had a different cost structure. Fortis has a similar example through diagnostics. Its diagnostics business generated ₹1,527 crore of revenue in FY26 at a 23.6% EBITDA margin.

Which brings us back to the Supreme Court's question about medicine prices.

For years, medicine markups and captive in-house pharmacies have given hospitals an additional revenue stream to help absorb costs. But that does not justify a 10x markup.

However, it does help explain what could happen if regulation changes the economics of hospital pharmacies. If the government were to impose a margin cap or allow patients to buy medicines from outside pharmacies, that revenue stream could shrink. Hospitals would then have to decide whether to absorb the impact, cut costs or recover it from other parts of the bill, such as room tariffs, operating theatre fees and clinical consultations.

And that brings us to the core financial reality of private healthcare. Drug mark-ups may provide a useful revenue cushion, but they are not a sustainable substitute for a good hospital business.

A hospital becomes structurally profitable by keeping its beds occupied, moving patients through them efficiently, attracting higher-acuity cases such as oncology and cardiac care, managing its payer mix and controlling the cost of delivering treatment.

And that’s exactly what will create winners in the hospital sector as regulatory scrutiny closes the door on price arbitrage.

Until then... 

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