Some recent articles and opinion pieces have willfully dismissed the role of government healthcare underpayments, spreading a misleading narrative that downplays the very real threat they pose to hospitals’ ability to operate. The reality is that for years, Medicare and Medicaid have reimbursed hospitals at a rate lower than the expenses that hospitals incur delivering this life-saving care to enrollees of the programs, contributing to increasing financial pressure on healthcare providers nationwide, especially in rural communities.
Medicare and Medicaid together account for nearly half of all spending on the care provided at hospitals and health systems as of 2023. Yet despite covering such a large share of the patients hospitals treat, Medicare, for instance, only reimburses hospitals 83 cents for every dollar spent on enrollee care, according to AHA analysis of AHA Annual Survey data. Even MedPAC agrees that Medicare underpays hospitals, as their latest recommendations show. General inflation compounds the issue, rising 14% from 2022 to 2024, while Medicare’s net inpatient payment rates increased only 5.1%, deepening the effective payment cut. Overall, this translated to $130 billion in underpayments to hospitals by Medicare and Medicaid in 2023 alone.
The picture is worse in rural communities, where a larger share of hospitals generally operate at a higher risk of financial distress compared to their urban and suburban counterparts. Some rural hospitals are eligible for special payment designations that allow them to be reimbursed at a higher percentage under traditional Medicare, but some patients in rural communities are choosing Medicare Advantage, which often leads to delayed care for patients, higher administrative costs, and lower reimbursements. This has contributed to the mounting financial challenges rural hospitals face. These burdens ultimately harm patient access to care when financial stresses lead hospitals to consider closing service lines to make ends meet, or worse, closing their doors entirely.
These chronic underpayments by government healthcare plans have continued, even as hospitals are treating an aging population with increasingly medically complex health issues, while the cost of acquiring medical supplies and drugs also continue to rise. This perpetual loop of public plans underpaying healthcare providers while the cost of delivering that care continues to rise helps explain why hospital bills can sometimes differ between those covered by public health insurance and those covered by private, employer-sponsored insurance. It represents a necessary way to mitigate shortfalls and still keep hospital doors open, maintaining access to care for the communities and patients they serve.
To learn more about how some large corporate insurer practices are driving up healthcare costs for American patients, click here.