Profitability is a determinant of hospital financial distress and closure. Operating margin is one of the key measures of hospital profitability. Accurate use of the measure relies on the quality of data, and previous studies found inconsistencies in how operating margin is calculated and reported. There are three definitions of operating margin; each will produce different results. Researchers examined the measurement of operating margin of rural and urban hospitals using recent data, and assessed the distribution and extent of extreme values of operating margin. This brief serves as a technical note for researchers and policy makers when using and interpreting operating margins calculated using Medicare Cost Report data.

Key Findings:

• Among three different definitions for operating margin that use Medicare Cost Report data, an operating margin based on patient care plus other operating revenue probably has the best matching of hospital operating revenue to operating expense. However, other definitions may be more appropriate for specific questions.
• Similar to previous reports, researchers found there are rural and urban hospitals with unusually low and unusually high operating margins. Whether these values are due to real operating performance or reporting variations cannot be determined from Medicare Cost Report data.