Hospital financial metrics suggest need for added Medicare payment, MedPAC says

Hospital metrics suggest FY26 Medicare payment should increase by more than what’s provided in the statutory formula, according to a formal recommendation by the Medicare Payment and Advisory Commission (MedPAC).

Beneficiary access to care appeared to be strong in 2023, the latest year for which data was available, but quality indicators were mixed, according to the commission’s March 2025 report to Congress. Financially, all-payer margin showed positive trends, but Medicare fee-for-service (FFS) payments came in well below costs.

Thus, adding 1% to the net payment increase established by the hospital market-basket formula and the annual productivity adjustment is warranted, according to the recommendation.

“Ideally, payment rates will be set at a level that supports access to high-quality care provided by relatively efficient providers — that is, those with lower costs and higher quality — and provides incentives for all providers to control their costs and improve quality, thereby helping the Medicare program achieve greater value for its spending,” the report states.

Congress has not heeded MedPAC’s recommendations to nudge payment upward in recent years and seems unlikely to do so this year, with the focus instead on curbing spending. The projected payment rate initially will be conveyed in CMS’s FY26 rule for hospital inpatient care and long-term care hospitals, with the proposed version likely to be published in April.

During a January meeting to discuss the recommendation, MedPAC commission member Gregory Poulsen, MBA, senior vice president with Intermountain Healthcare, said the recommendation “provides an appropriate increase that reflects at least a lot of the financial stress and starts to maybe push us away from some of the expectation that we pay less than cost.”

Safety-net payments

MedPAC also reiterated a recommendation for Congress to phase out the system of Medicare disproportionate share hospital (DSH) and uncompensated care (UC) payments in favor of a new Medicare Safety Net Index (MSNI). The idea is to better target payments to hospitals that treat large numbers of low-income beneficiaries and are facing financial challenges.

As previously reported, formula components would include:

• Share of inpatient and outpatient claims filed for beneficiaries receiving the Part D low-income subsidy
• UC costs as a share of revenue
• Half the Medicare share of a hospital’s inpatient days

The payment pool to be distributed through the MSNI should be increased by $4 billion for FY26, with roughly half allocated to Medicare Advantage. The $2 billion apportioned to Medicare FFS would not negate the $3 billion decrease in Medicare DSH and UC payments between 2019 and 2025.

With the $2 billion factored in alongside the recommended 1% base-payment add-on, total Medicare FFS payments in FY26 would be 2.2% higher than current law would provide, according to the report.

“The hospitals that would benefit most from the new MSNI approach are hospitals with large shares of Medicare patients — in particular, large shares of low-income Medicare patients,” the commission wrote.

The MSNI “brings more money to the providers, and without it this recommendation is not as positive and as good as it should be,” MedPAC commission member Lynn Barr, MPH, the founder of Caravan Health (now known as CVS ACO), said during the January meeting.

What the numbers show

Per MedPAC’s data, hospitals’ all-payer operating margin increased from 2.7% in FY22 to 5.1% in FY23. The commission found substantial variation in the metric, with a quarter of hospitals exceeding a 10% margin and a quarter falling below negative 4%. A separate margin metric that examines profit after accounting for costs increased by 4 percentage points.

MedPAC also noted that borrowing costs were less for hospitals compared with the overall market, and merger-and-acquisition activity continued in the sector.

“Preliminary data suggest further improvement in hospitals’ access to capital in FY 2024,” MedPAC wrote.

On the downside, costs continued to exceed FFS Medicare payments in 2023, with hospitals’ Medicare margin coming in at negative 13%. MedPAC projects the same number for 2025.

A subset of “relatively efficient” hospitals, comprising 6% of hospitals nationwide, kept costs lower and compiled a margin of negative 2% (ticking up to negative 1% when including Provider Relief Fund disbursements). Metrics assessed to categorize the relatively efficient hospitals include mortality rate, readmission rate, patient experience and standardized FFS Medicare costs per unit.

Shares of relatively efficient hospitals were similar in the for-profit and not-for-profit sectors, with for-profit hospitals generally maintaining lower costs and not-for-profit hospitals achieving higher quality metrics.

“I think even the most efficient hospitals having negative margins seems unsustainable,” said R. Tamara Konetzka, PhD, professor of public health sciences at the University of Chicago and a MedPAC commission member. “And I think we expect hospitals to do a lot that’s not really aimed at efficiency. We want to maintain access for a variety of services.”

Trends in Medicare quality metrics included a slight improvement from 2022 in risk-adjusted hospital mortality rate and an increase in the readmission rate. Readmissions were lower than in pre-pandemic days, however.

Dissenting votes

In all, 15 of 17 commission members supported the recommendation, with the two who voted “no” saying assessments of inpatient and outpatient payment adequacy should be separate.  

Brian Miller, MD, MBA, MPH, associate professor of medicine at Johns Hopkins University and a nonresident fellow at the American Enterprise Institute, said the inpatient payment rate perhaps merits a greater increase, while outpatient payments could be more constrained.

“We are analyzing two payment chassis together for two different service markets,” Miller said.

Said Kenny Kan, CPA, vice president and chief actuary with Horizon Blue Cross Blue Shield of New Jersey, “I believe it is important to compare payments [in] hospital outpatient departments to the appropriate market for outpatient services, which would include ASCs [ambulatory surgical centers] and physician services.”

Such a comparison also could help push site-neutral payment policy forward, he added.

Michael Chernew, PhD, MedPAC chair and a professor of healthcare policy at Harvard Medical School, said data-related impediments would have to be resolved before the commission can potentially separate inpatient and outpatient payment policy.

“Certain of our core criteria — access to capital, margins — are hopelessly conflated between the inpatient and the outpatient,” he said.