Hailey Tran
Medicare and Medicaid account for most hospital utilization, with 96% of hospitals having 50% of their inpatient days paid for by these services. However, Medicare reimburses hospitals less than the cost of providing care, and reimbursement rates are non-negotiable. This has resulted in underpayments from Medicare and Medicaid to hospitals totaling nearly $130 billion in 2022, threatening access to care for patients. Additionally, Medicare Advantage plans have been accused of repeatedly denying coverage for necessary care, particularly in rural areas, threatening the existence of struggling hospitals.
| Characteristics | Values |
|---|---|
| Reimbursement | Medicare reimburses hospitals less than the cost of providing care. |
| Reimbursement Rates | Non-negotiable |
| Medicare Payment Advisory Commission Report | Hospitals experienced a record-low -12.7% margin on Medicare services in 2022. |
| Projected Margins | Will continue to remain near -13% in 2024. |
| Combined Underpayments | Medicare and Medicaid underpayments to hospitals were nearly $130 billion in 2022, up from $76 billion in 2019. |
| Hospital Utilization | Medicare and Medicaid account for most hospital utilization. |
| Inflation | Rising inflation is impacting hospital prices. |
| Medicare Cuts | Further cutting Medicare payments to hospitals and health systems will threaten access to care for patients and communities. |
| Medicare Advantage Plans | Medicare Advantage plans threaten rural hospitals and patients due to repeated denial of coverage for necessary care. |
| Medicare Advantage Providers | UnitedHealth Group and Humana are the largest Medicare Advantage providers. |
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What You'll Learn
- Medicare reimburses hospitals less than the cost of providing care
- Medicare underpayments to hospitals were nearly $130 billion in 2022
- Medicare Advantage plans threaten rural hospitals by denying coverage for necessary care
- Hospitals are unable to absorb inflationary forces due to fixed Medicare payments
- Medicare Advantage plans generated substantial revenue for providers in 2022
Medicare reimburses hospitals less than the cost of providing care
It is a widely acknowledged fact that Medicare reimburses hospitals less than the cost of providing care. The Medicare Payment Advisory Commission's findings from 2022 revealed that hospitals experienced a record-low -12.7% margin on Medicare services, with projections indicating that these margins will persist near -13% in 2024. This disparity is further exacerbated by the fact that Medicare and Medicaid account for the majority of hospital utilization. Specifically, 96% of hospitals have 50% of their inpatient days covered by these programs, and over 82% of hospitals have 67% of inpatient days financed by Medicare and Medicaid. The fixed nature of these payments poses challenges for hospitals grappling with rising inflation and growing expenses across labor, drugs, and supplies.
The underpayment issue has significant ramifications for hospitals and patients alike. The AHA estimates that Medicare underpayments to hospitals totaled $99.2 billion in 2022, a substantial increase from $76 billion in 2019. This underpayment crisis has placed hospitals and health systems in a precarious situation, as they are unable to fully absorb the escalating costs associated with providing care. Consequently, patients and communities may face restricted access to care if policymakers fail to address this critical issue.
The underpayment phenomenon occurs when the reimbursement received for delivering care falls short of the costs incurred. In practical terms, hospitals spend more on personnel, technology, and other goods and services required for patient care than they receive in payment from Medicare. This discrepancy has tangible financial implications for hospitals, hindering their ability to provide care effectively.
To illustrate the underpayment dynamic, consider the AHA Annual Survey, where hospitals report their gross charges for Medicare services. These charges are then converted into costs by multiplying them by the hospital's overall cost-to-charge ratio, which represents the ratio of a hospital's costs to its charges. When the aggregated payments across all hospitals for Medicare are compared to the costs, underpayment is evident when payments fall short of covering the expenses.
The reliance on Medicare and Medicaid by hospitals underscores the urgency of addressing the underpayment issue. With hospitals facing record-low margins and struggling to keep pace with inflation, the sustainability of patient care is at stake. Policymakers and healthcare administrators must collaborate to devise solutions that ensure hospitals receive adequate reimbursement for the critical services they provide. Without decisive action, the financial strain on hospitals will persist, potentially compromising the quality and accessibility of healthcare for patients and communities across the nation.
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Medicare underpayments to hospitals were nearly $130 billion in 2022
Medicare underpayments to hospitals reached nearly $130 billion in 2022, up from $76 billion in 2019. This is a result of Medicare reimbursing hospitals less than the cost of providing care, with reimbursement rates that are non-negotiable. This issue is exacerbated by the fact that Medicare accounts for most hospital utilization. Indeed, 96% of hospitals have 50% of their inpatient days paid for by Medicare, and more than 82% of hospitals have 67% of inpatient days covered by Medicare. This has resulted in a record-low -12.7% margin on Medicare services for hospitals in 2022, and this figure is projected to remain near -13% in 2024.
The underpayment crisis has been driven by the rising costs of labor, drugs, and supplies, coupled with increasing inflation. This has led to a dire financial situation for hospitals, threatening access to care for patients and communities. The fixed nature of Medicare payments means hospitals are unable to cope with the inflationary pressures they face.
The AHA has brought attention to this issue, with their data showing that Medicare paid just 82 cents for every dollar spent by hospitals caring for Medicare patients in 2022. This has resulted in calls for action from policymakers to address the crisis of government underpayment. The Medicare Payment Advisory Commission (MedPAC) has also recognized the problem, projecting that low fee-for-service Medicare margins will persist in 2025.
Medicare underpayments have severe consequences for hospitals, patients, and communities. The underpayments, coupled with rising costs, place hospitals in an untenable position, threatening their ability to provide care. This, in turn, impacts patients' access to care and the overall healthcare system.
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Medicare Advantage plans threaten rural hospitals by denying coverage for necessary care
Medicare Advantage plans are threatening the existence of rural hospitals by denying coverage for necessary care, according to CEOs of rural hospital systems. While Medicare Advantage plans are supposed to base their reimbursements on Medicare rules, there is room for interpretation, as pointed out by the Department of Health and Human Services. Insurers can use their own clinical criteria to determine whether to authorize or pay for care, which has resulted in repeated denials of coverage and reimbursement for rural hospitals.
A report by the Inspector General of the Department of Health and Human Services found that in June 2019, the top 15 Medicare Advantage plans denied authorization for 13% of claims that had met Medicare rules. These plans also denied payment for 18% of claims that complied with Medicare coverage and billing rules. The report also revealed that these plans reimbursed providers far less than traditional Medicare, with some rural hospitals forced to bear the increasing costs of care.
The impact of these coverage denials is particularly severe for rural hospitals, many of which are already struggling financially. According to a report from the Center for Healthcare Quality and Payment Reform, a nonprofit advocacy organization, about 170 rural hospitals are at risk of closing in six states: Arkansas, Colorado, Mississippi, Missouri, South Dakota, and Texas. CEOs of these rural hospital systems have expressed concern that the repeated denial of reimbursement is threatening their ability to continue operating and providing care to their communities.
While Medicare Advantage plans are marketed as a superior alternative to traditional Medicare, offering additional services such as dental and hearing care, they have failed to demonstrate better quality care. A federal audit from 2013 revealed that 8 of the 10 largest plans had submitted inflated bills to Medicare. Furthermore, the Medicare Payment Advisory Commission, a non-partisan agency of Congress, stated that it could not conclude that Medicare Advantage plans "systematically provide better quality" than regular Medicare.
The issues with Medicare Advantage plans highlight the complexities and challenges within the healthcare system. As Medicare Advantage plans continue to grow in popularity, particularly in rural areas, the financial strain on rural hospitals intensifies. The denial of coverage for necessary care not only jeopardizes the financial viability of these hospitals but also compromises access to healthcare services for rural residents, exacerbating existing healthcare disparities in these underserved communities.
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Hospitals are unable to absorb inflationary forces due to fixed Medicare payments
Hospitals are facing a challenging financial situation due to a combination of factors, including rising costs, inadequate reimbursement, and policy-driven inefficiencies. This has led to concerns about their ability to absorb inflationary pressures, especially with fixed Medicare payments.
The issue of hospitals' reliance on Medicare and the resulting financial strain has been a long-standing one. Medicare, a public insurance program, reimburses hospitals at rates lower than the actual cost of providing care, and these rates are non-negotiable. The Medicare Payment Advisory Commission's findings highlighted this issue, showing that hospitals experienced a record low margin on Medicare services in 2022, with margins projected to remain near -13% in 2024. The combined underpayments from Medicare and Medicaid to hospitals were significant, totalling nearly $130 billion in 2022 and continuing to rise.
The impact of these underpayments is exacerbated by the high utilization of Medicare and Medicaid in hospitals. A large proportion of inpatient days are paid for by these programs, with 96% of hospitals having 50% of their inpatient days covered by Medicare and Medicaid. This reliance on fixed Medicare payments leaves hospitals vulnerable to inflationary forces. As expenses grow, hospitals struggle to keep up without adequate reimbursement.
The financial pressures on hospitals are further compounded by factors such as labour shortages, supply chain disruptions, and an ageing population with more complex health needs. These factors contribute to the overall challenge of maintaining financial stability while providing essential services. Additionally, tariff-related expenses are expected to further increase hospital costs, and hospitals may be forced to delay equipment upgrades and seek new vendors, potentially impacting the quality of care.
The erosion in payment value due to inflation has resulted in significant revenue losses for hospitals, making it difficult for them to care for Medicare beneficiaries, who constitute a large share of their patients. The growth in expenses across labour, drugs, and supplies, coupled with rising inflation, has put hospitals in a difficult position. As Medicare payments continue to fall short of the actual cost of care, hospitals' ability to sustain comprehensive services in their communities is threatened.
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Medicare Advantage plans generated substantial revenue for providers in 2022
The growth in Medicare Advantage plans has raised concerns about the impact on traditional Medicare and hospitals' reimbursement rates. Medicare Advantage plans are more restrictive in determining medical necessity and require prior authorization for high-cost services, such as inpatient hospital stays and certain diagnostic procedures. Traditional Medicare, on the other hand, reimburses hospitals at a lower rate than the cost of providing care, and hospitals experienced a record-low margin of -12.7% on Medicare services in 2022.
The Medicare Payment Advisory Commission projected that margins would remain near -13% in 2024, and combined underpayments from Medicare and Medicaid to hospitals were nearly $130 billion in 2022. These fixed payments make it challenging for hospitals to cope with rising inflation and increasing expenses across labor, drugs, and supplies. Further cuts in Medicare payments could threaten access to care for patients and communities.
To address these challenges, Congress is considering legislation to improve the prior authorization process and enhance network adequacy. The Inflation Reduction Act of 2022 established an annual limit on out-of-pocket spending for Medicare Part D drugs, providing protection against very high levels of spending. Additionally, payers are investing in digital engagement and expanding their reliance on shared technology platforms to manage costs and improve the member experience.
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Frequently asked questions
It depends on the context. Medicare Advantage plans, an alternative way to get Original Medicare, help cover the costs of services provided by hospitals. However, these plans have been known to deny coverage for necessary care, threatening the existence of rural hospitals. Medicare also reimburses hospitals less than the cost of providing care, with reimbursement rates being non-negotiable.
When Medicare Advantage plans deny coverage, hospitals are forced to bear the increasing costs of care, causing some to close operations, leaving residents without access to treatment.
Hospitals experienced a record low -12.7% margin on Medicare services in 2022, with projections of margins remaining near -13% in 2024. Combined underpayments from Medicare and Medicaid to hospitals amounted to nearly $130 billion in 2022.
Rising inflation affects hospital prices, and further cuts to Medicare payments will threaten access to care for patients and communities.
While the number of older Americans in rural areas relying on Medicare Advantage plans increases, coverage denials from these plans play a significant part in the financial woes of rural hospitals, threatening their existence.
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