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MedPAC: Even Efficient Hospitals Can't Cover Costs with Medicare Reimbursement

By Steven Porter  
   March 15, 2019

The panel is recommending that Congress raise reimbursement rates for 2020 and restructure hospital quality incentive programs.

Hospitals have long complained that Medicare reimbursement rates are insufficient to cover the true cost of the care they provide.

That negative margin is now even afflicting hospitals that consistently deliver relatively high-quality care at relatively low costs, according to a report released Friday afternoon by the Medicare Payment Advisory Commission (MedPAC). The report includes recommendations for how Congress should update 2020 rates.

"When a hospital or other healthcare provider is being efficient and still cannot stay in the black in Medicare, that's cause for concern," MedPAC Executive Director James E. Mathews, PhD, said Friday on a call with reporters.

Medicare margins have been negative for hospitals overall for quite a while. What changed last year, however, was that MedPAC saw margins turn negative for relatively efficient hospitals, when the panel assessed 2016 data. The median Medicare margin fell to -1% for efficient hospitals.

"We didn't want to get unduly alarmed at that point because one data point doesn't necessarily represent a trend," Mathews said. "But now that we've got two years of data … that has captured our attention a little bit more."

In this year's report, which assesses 2017 data, the median Medicare margin slipped even further, to -2% for relatively efficient hospitals. These efficient hospitals remained profitable because they had a median non-Medicare margin of 11%, resulting in a total median margin of 8% for 2017.

The median Medicare margin for the other hospitals in MedPAC's sample was significantly worse: -9%. These less-efficient hospitals had a median non-Medicare margin of 9%, resulting in a total median margin of 5% for 2017.

MedPAC's report categorized 291 hospitals as highly efficient, based on their performance on certain risk-adjusted cost and quality metrics for 2014-2016, including mortality rates, standardized costs per discharge, and readmission rates.

MedPAC's Recommendations

Rather than recommending across-the-board rate increases only, MedPAC is recommending that Congress implement a two-pronged approach to address this problem, Mathews said:

  1. Revamp the Medicare hospital quality programs. There are currently four programs, some of which are burdensome and duplicative, so the recommendation calls for them to be consolidated, Mathews said. That should reduce the reporting burden that hospitals shoulder. Additionally, the MedPAC report recommends that the two penalty-only programs—the Hospital Readmissions Reduction Program (HRRP) and Hospital-Acquired Condition Reduction Program (HACRP)—be revised so that the dollars from those programs would be redirected to hospitals with the best quality scores.
  2. Update rates by 2% for all hospitals in 2020, plus additional money for top performers. The projected current-law update for 2020 is 2.8%, so MedPAC recommends that Congress give all hospitals a 2% update. The difference between that 2% update and the current-law projection—i.e., an estimated 0.8%—would then be distributed among acute care hospitals that perform the best on quality and cost metrics, the MedPAC report states.

Mathews says the recommendations, if implemented, would not quite close the gap for hospitals but would get them headed in the right direction.

"We rarely, if ever, recommend payment updates in excess of current law, so this is quite an unusual circumstance for us," he said. "But we do feel that the status of the efficient hospital, with respect to their financial performance under Medicare, does warrant these kinds of measures, and we have tried to be as judicious and targeted in spending these additional dollars as we can be."

“When a hospital or other healthcare provider is being efficient and still cannot stay in the black in Medicare, that's cause for concern.”

Steven Porter is an associate content manager and Strategy editor for HealthLeaders, a Simplify Compliance brand.


The panel saw median margins for relatively efficient hospitals fall below zero last year. The margins slipped even further this year.

While the report's recommendations would not completely close the gap for hospitals, it would get them headed in the right direction, MedPAC's executive director said.

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