Hospitals are Pigging Out on Commercial Reimbursement and Starving on Medicare. What’s Next?

The Spring 2016 Medpac report on Medicare payments is out.  This annual report to Congress (put together by the 17 members of the Medicare Payments Advisory Committee) provides an assessment of the way Medicare pays for care, and offers recommendations for how to modify payments going forward. It’s a fascinating snapshot:

First, the report confirms that hospitals are losing money on Medicare FFS business.  Nationally hospitals made a -5.8% margin in 2014, and are on track to hit -9.8% margins on Medicare business in 2016 due to earlier reimbursement changes.

Medpac, however, doesn’t seem moved.  The report suggests that Medpac is pretty convinced that revenue isn’t the problem.  They identify 1) high hospital fixed costs (driven by overcapacity) and 2) poor efficiency (driven by suboptimal performance metrics such as mortality, readmissions and costs per discharge) as the culprits.

As proof, Medpac points out that 302 hospitals nationally made a 1% margin on their Medicare business. On average, they had 5% lower readmissions, 12% lower 30-day mortality rates and standardized costs 9% lower than the nationwide average.

Here is how the 15% of hospitals nationally that made money on Medicare compared to the hospitals that lost money:

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The report points out that across the country hospitals ran at 61% occupancy, (indicating bed overcapacity).  It also notes that current Medicare reimbursement more than covers the variable cost of treating Medicare patients.

Medicare payments are lower than overall costs (fixed and variable combined) [and] Medicare payments continue to be about 10 percent higher than the variable costs of treating Medicare patients.

Here’s the paradox: despite this sea of red ink, hospitals actually did pretty well.  The average posted margins from all payers was 7.3% in 2014, a 30-year high.  How?

Modern Healthcare cut to the chase in a blog piece on the report that ran a few days ago.  Their title was: “Hospitals prosper on commercial payers as Medicare margins sink to -9%.”  Hospital margins, the blog notes, are riding squarely on commercial reimbursement.

Now, think what this means.  If you believe Medpac, nationally commercial reimbursement is high enough that a hospital’s commercially insured patients cover:

  1. The hospital’s excessive fixed costs related to inpatient overcapacity and
  2. Excessive fixed costs in terms of poor medical performance across commercial and governmentally insured patients

It was also enough to cover

  1. All the fixed costs for all Medicare patients (and presumably Medicaid patients and the uninsured too).

And, there was enough left over to easily cover the contribution deficits from Medicare patients….. and still generate a 7.3% profit margin.

No wonder commercial insurers are feeling the lift.  The system is squarely relying on commercial insurers to keep the wheels turning.

Last year I was on a speaker’s panel in the Midwest.  During question period a CFO stood up and bemoaned the “losing” rates on Medicare which were below their costs.

My (somewhat blunt) response was met with mixed reviews: I felt that probably the most important thing that hospitals can do to ensure long-term success is figure out how to get costs in line so that they can make a margin on Medicare (and perhaps on Medicaid too).

Because, even if you philosophically disagree with the Medpac assessment,

1) Government reimbursement shows no signs of a surge

2) The commercial insurance gravy train will soon end, driven by the the rise of managed care and narrowing networks (insurance companies will simply exclude health systems where going rate is too high).

3) The aging US population means that the elderly (and their Medicare rates) will represent an ever-larger fraction of the hospital population going forward.


The good news: It’s not impossible- at least 302 hospitals around the country have already cracked the code.


Photo: Blake Patterson Flikr, cc Search