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Perspectives on health policy affecting America’s hospitals and the patients we serve.

Axios Vitals’ Report on Medicare Margins Misses Key Data Point from MedPAC Report

March 22, 2018 | FAH Policy Blog Team

Category: FAH News, Medicare

In a good report full of facts and figures, it is tempting to pick out one or two and claim they prove your point. Unfortunately, this morning’s (March 22nd) Axios Vitals selectively used data from MedPAC’s March Report to Congress to suggest that hospitals lose money on Medicare because they are inefficient. The blurb entitled “Let’s talk about hospitals’ Medicare margins” misses what is arguably MedPAC’s most compelling data point:  331 “relatively efficient” hospitals experienced a negative Medicare margin in 2016.  It’s on page 86 – just two pages past the points highlighted by Axios.

It’s always a good idea to read the whole story. 

Here are some additional facts to consider from the March report. Medicare hospital margins have been negative since 2003.  More recently, since 2013, margins will have fallen a stunning 116 percent by 2018 based on MedPAC’s projection that Medicare hospital margins will fall to an historic low of negative 11 percent.  This should come as no surprise because the average net increase in Medicare’s hospital payment rate over that time – 1.1 percent -- is less than half the average rate of increase – 2.6 percent -- in the market basket of goods and services used to determine the annual hospital inflation update. 

That wide gulf is due largely to cuts imposed on hospitals through legislation and regulation.  And frankly, it is not sustainable, especially as public payments – especially Medicare and Medicaid, which typically pays less than Medicare – are nearly half of total hospital operating revenue.

The pressure to lower costs is constant, and hospitals are doing their part keeping the increase “roughly equivalent to underlying price inflation,” notwithstanding what MedPAC notes are increasing drug and device costs, which together accounted for 26 percent of the 2016 growth in costs per Medicare discharge. 

Yet the actual fixed Medicare (and Medicaid) payment rate is not keeping up with inflation.  And that, along with the $38.3 billion in uncompensated care costs that hospitals provided in 2016, goes a long way towards explaining why hospitals must seek higher payments from private insurers, through arms-length marketplace negotiation, to meet the community mission hospitals commit to, and which our seniors expect and deserve. 

This commonly referred to cost-shift is not some mere “theory,” but a stubborn fact, something policymakers should keep in mind as they contemplate cutting hospital payments even further.