How Should We Measure The Profitability Of The Hospital Industry?

“Hospital profits pale in comparison to the rate of return earned by doctors, MBA and lawyers. The typical primary care doctor earns an annual rate of return north of 15% on their investment in medical education (this investment includes both what they spend for tuition, books, room and board etc. to get through medical school, but also the earnings they foregone in the process of spending 4 years in medical school and then 3 or more years as low-paid medical residents).”
This passage triggered from Chris Tucher the following comment: “You compare profit margins of the hospital sector with the rate-of-return of getting a law degree or MBA? Seriously? What an apples-to-bananas comparison!”

To which Conover replied: “Perhaps you could explain more clearly why the comparison of education ROIs is so different than an examination of profits in the hospital industry. In both cases, someone is investing something of value (time, money etc.) and expecting to get paid back over time.”
Let me try to provide that explanation.
It may well be that the rate of return on investment (ROI) achieved by doctors, MBA and lawyers on their investment in their human capital is higher than the ROI hospitals achieve on their investment. So Conover may have a point here. But we don’t know, because he doesn’t show any data to make that case.
The concept of ROI is used by financial analysts to assess what an enterprise earns as a percent of the capital investments made to achieve these earnings. As Investopedia points out, how analysts define the numerator and denominator in the ROI varies. In their well-known textbook on corporation finance, Financial Management: Theory and Practice (2014), authors Eugene Brigham and Michael C. Ehrhardt define the ROI as:
           ROI = EBIT(1 – tax rate)/Operating capital
where EBIT denotes “earning before interest and taxes” and” operating capital” includes working capital.
But the data for hospitals Conover features in his post are not ROIs, but only profit margins. “Profit margins” are generally defined as “profits as a percent of revenue,” not as a percent of investments. Here, too, the precise definition may vary by context. So-called operating profit margins, for example, exclude non-operating items such as interest on debt or revenue from investments.
Evidently then, ROIs really are apples (so to speak) and profit margins are oranges.
Further insight on this issue can be had by examining a close cousin of the ROI, namely, the so-called rate of return to total assets (ROA) of enterprises. It is defined as:
           ROA = Net Income/Total assets
                     = (Net Income/Revenue)x(Revenue/Total assets)
In this expression, “net income/revenue” is the profit margin and “revenue/total assets” is known as the “asset turnover ratio.”
It is immediately apparent that two different industries may have vastly different profit margins and yet have the same ROA, simply because their asset turnover ratios may differ. Supermarkets, for example, have very high asset turnover rates and can achieve a handsome ROA even with paper-thin profit margins. By contrast, highly capital intensive industries, such as public utilities or jewelry shops, have low asset turnover rates and therefore need much higher profit margins to achieve the same ROA as can supermarkets.
Another close cousin of the ROI is the rate of return to owners’ equity (ROE). According to the well-known DuPont identify we can write it as:

           ROE = (Net Income/Revenue)x(Revenue/Total Assets)x(Total Assets/equity)

Here the ratio “total assets/equity” is known as the “equity multiplier” and “equity” refers to the investments made in the enterprise by its owners (partners, shareholders or trustees on behalf of community-owned non profit enterprises). We can extract from it the same insights we get from the definition of the ROA, although here the capital structure of the enterprise—its debt-to-equity ratio—enters the picture.