Rethinking Hospital Efficiency — from Ratios to Public Trust 

A response to the Peterson-Milbank report “Assessing Hospital Efficiency: Considerations for States Seeking to Reduce Health Care Costs.” 

Hospital efficiency has become more crucial than ever. Health insurance premiums continue to outpace wages, families face medical bills that strain their budgets, businesses struggle to sustain health benefit plans, and states face tough trade-offs due to health care costs. Meanwhile, many independent providers and small hospitals are unable to make ends meet, and large delivery systems report they are barely getting by. We are all seeking ways to assess whether hospitals are financially sustainable and if their communities can afford their services. 

But unlike most industries — where efficiency means producing more with less — in health care it is often defined by whether revenues keep pace with costs. This inversion creates a false sense of stability even when expenses are growing beyond what communities can manage.  

That is why the Peterson-Milbank report “Assessing Hospital Efficiency: Considerations for States Seeking to Reduce Health Care Costs”¹ is so important. It offers state leaders a clear overview of the most common efficiency measures in the field, organized into three categories: wasteful service delivery, revenue per unit, and hospital expenses. For regulators and policymakers alike, it is a crucial step forward: a reminder that efficiency is not an abstract idea, but something we can measure, compare, and improve. 

The authors explained how Vermont has started implementing efficiency measures in our hospital budget review process. As a member of the Green Mountain Care Board — the agency responsible for the review process — I have seen these measures in practice. (The perspective I share here is mine alone, not an official position of the Board.) While these measures are helpful, experience has shown they are not always sufficient. 

Vermont’s Experience 

Our experience in Vermont highlights both the strengths and the limitations of evaluating efficiency using standard measures of expenses and revenue. Like many other hospitals nationwide, our academic medical center’s operating costs have increased annually at a rate exceeding inflation, wage growth, and changes in patient volume. However, under the cost-to-payment framework described in the report, these systems can seem stable — even efficient — because commercial payments have increased alongside these rising expenses.  

Figure 1 (an illustrative example) shows how the cost-to-payment ratio can stay the same even as expenses and revenues grow. Hospitals often use this ratio to justify needing higher commercial prices to “cover” inadequate public insurance payments. However, this explanation is misleading. Rising prices create new revenue, but that revenue often funds higher nonclinical operating expenses — like administration, marketing, and overhead — that quickly become part of the hospital’s overall costs. Hospitals then point to those higher costs as evidence that they need even higher prices, while claiming they are “shifting” costs to cover shortfalls from public payers. In truth, the cycle works differently: Prices increase first, and those higher prices lead to higher costs. The outcome isn’t efficiency or cost-shifting — it’s an inflationary spiral driven by market power.^2–4  

Figure 1: Stable Cost-to-Payment Ratio Despite Rising Expenses & Revenue

That is the danger of relying too heavily on ratios that assess costs against payments. When hospitals grow their expenses to match their revenues, the ratios mask the reality that the underlying cost structure is driving an affordability crisis.  

Ultimately, efficiency measurement isn’t just about benchmarking hospitals. It’s about affordability — whether families, employers, and communities can bear the cost of care, and whether health systems are disciplined enough to operate within the limits of what the community they serve can afford. 

Introducing Breakeven 

As noted previously, health care often reverses the usual logic of efficiency — judging stability by whether revenues cover rising costs rather than by how well costs are managed. This is why many state leaders and researchers are adopting new benchmarks. One of the most useful is the Commercial Breakeven Calculator, created by the National Academy for State Health Policy (NASHP).⁵ It asks a simple question: How much revenue does a hospital need from commercial payers to cover its costs, expressed as a multiple of Medicare? The result clearly shows a hospital’s reliance on high commercial rates. 

But this also has limits. By accepting hospital costs as fixed, it risks endorsing structures that may themselves be inflated or not aligned with community needs. Commercial breakeven is calculated by dividing a hospital’s total costs by its total Medicare reimbursement, then determining the multiple of Medicare reimbursement needed from commercial payers to cover all costs. A result of 1.4 means the hospital would need 140% of Medicare rates from commercial payers to break even. Higher ratios indicate greater reliance on commercial rates. While this provides a clear midpoint view of dependence on commercial payers, it does not assess whether the hospital’s operating expenses are efficient or aligned with community needs. 

The next step comes from a concept introduced by Dr. Peter Pronovost of University Hospitals Health System and others: the Medicare Breakeven Ratio. It is calculated by dividing a hospital’s cost per case by the Medicare reimbursement. A ratio of 1.0 indicates the hospital can cover its costs at Medicare rates.⁶ Ratios above 1.0 show how much costs exceed that threshold. Instead of asking how much commercial revenue is needed, this measure questions whether a hospital can sustainably operate at Medicare payment levels. The point is not that Medicare rates are perfect, but that they provide a clear benchmark. They compel hospitals to consider whether their operations are efficient enough to function at a level that public programs can reliably support. 

Case Examples 

The distinction between covering costs and managing them becomes clear when examining real-world examples. 

In Montana, Benefis Health System set a long-term goal of breaking even on Medicare. By tightening its cost structure and redesigning operations, it ultimately achieved this by streamlining staffing, boosting productivity, and reducing overhead.^7,8 In a sector where rising costs are often seen as unavoidable, Benefis demonstrated that discipline and strategic planning can make Medicare breakeven achievable. 

University Hospitals in Cleveland has recently taken a similar approach. In just two years, the system reduced fixed and indirect costs by over $250 million while enhancing safety, reliability, and quality.⁹ Their leaders describe it not as austerity, but as redesign: changing how care is delivered so the organization can operate within public payment levels while improving outcomes. 

Vermont’s Role 

In Vermont, we have begun incorporating these ideas into our regulatory efforts. We do not depend on a single measure to evaluate hospital performance. Instead, we are starting to use a set of indicators: affordability thresholds, staffing ratios, quality benchmarks, and structural alignment with public payment levels. 

Commercial breakeven and Medicare breakeven help us improve reviews focused on efficiency and affordability. They are not replacements for traditional measures like cost per case or Medicare margins, but they provide a clearer perspective — making it harder for inflated expense structures to appear as financial strain and shifting the focus to whether hospital operations align with what the public can afford. 

In this regard, our work in Vermont is part of a broader movement. The Peterson-Milbank Program for Sustainable Health Care Costs, NASHP, and state regulators like us are not following the same playbook, but we all face the same fundamental challenge: how to look beyond headline ratios and understand the core discipline of hospital operations. No single measure, such as Milbank’s cost-to-payment ratio, NASHP’s commercial breakeven, or Pronovost’s Medicare breakeven, provides sufficient insight into hospital operations. Together, they form a set that is primed for learning and moving toward more precise accountability. 

And the stakes extend beyond individual households. When costs escalate without control, entire communities shoulder the burden through rising out-of-pocket expenses, stagnant wages, higher taxes, and reduced public services.^10–12 For state leaders, this is the heart of the affordability crisis. Efficiency metrics are not aimed at punishing hospitals or winning accounting challenges. They focus on whether employers can keep coverage affordable, whether local governments can fulfill their responsibilities, and whether communities can maintain their hospitals without being drained by costs. 

Efficiency as Moral Architecture 

The next step should be to create a shared vocabulary that helps state leaders connect the dots between what hospitals charge, what they spend, and what communities can realistically afford. 

The Peterson-Milbank hospital efficiency report compiled common measures and made them more accessible for states to use. Now we should expand that work — not only to compare ratios but also to interpret them as signals of alignment or misalignment with public values. As more states start applying these measures in practice, we can learn from their experiences and develop a shared understanding. That is how metrics evolve from technical reference points to tools of accountability. 

Efficiency is more than just a financial idea. It is about trust. Hospitals operate within markets but are not typical market actors: Their legitimacy depends not only on transactional trust in the care they deliver, but also on institutional trust — their community’s confidence that they will steward resources responsibly and justify the privileges of nonprofit status, tax exemption, and public funding. Hospitals do so by delivering care that is not only effective and reliable, but also efficient and affordable. When hospitals align their internal systems with public expectations, they prove they deserve support. Hospitals or systems that increase their expenses beyond what communities can afford weaken that trust, regardless of their ratios.  

The path forward will require continued experimentation, refinement, and learning across states, researchers, and policy organizations. However, the principle is clear: The aim is not just to achieve better ratios, but to have health systems that communities can both afford and trust. By embedding measures like commercial and Medicare breakeven within broader affordability frameworks, policymakers can connect technical ratios to larger questions of alignment and accountability. In this way, efficiency becomes not just a financial measure, but a guide for designing health systems that are affordable, sustainable, and trustworthy. 

Acknowledgments 

I am grateful to Marilyn Bartlett of the National Academy for State Health Policy and Peter Pronovost of University Hospitals Health System for their thoughtful discussions over the past year and a half. Their insights helped sharpen my thinking. In addition, the authors of the Peterson-Milbank report, Alyssa Vangeli and Sarah Kinsler of Bailit Health, graciously improved the precision of this response. The views expressed here are my own. 

Notes