The Growing Gap Between Medicare and Commercial Hospital Payments: Should 

We Be Concerned*

Stuart H. Altman Ph.D.Chaikin Professor of Health Policy

Heller School for Social Policy and ManagementBrandeis University

*The 2019 Leinhard Lecture, National Academy of Medicine‐February 27, 2019

Medicare Program Established in 1965

Medicare Beneficiaries Would Have Complete Access to All Approved 

Hospitals 

Medicare Hospital Payment System

Paid Hospitals Based on a Modified Blue Cross Cost Reporting System‐‐‐Rates Similar To Those 

Paid By Commercial Payers

Medicare Hospital Payment System Changed in 1983 to a Pre‐Determined DRG SystemBut Total Hospital Payments Set to Closely 

Follow Amounts Paid Under Previous Cost‐Based System 

Prior To Passage of 1997 Balanced Budget Act

Medicare and Commercial Hospital Rates Were Similar and Close to Hospital Average 

Costs

Hospital Now Paid Significantly Lower Amounts By Medicare and Medicaid

106%

125%

160%175%

100%90% 90% 85%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

1996 1998 2000 2002 2004 2006 2008 2010 2012

Pvt Ins. Paytas Percent ofMedicarePayments

MedicarePayt. GrowthRate

Seiden et al, Health Affairs December 2015

Payments in $2012 and adjusted for patient mix and geography

Since 2000 Medicare Hospital Margins Show Steep Declines: Almost All Hospitals Now Lose Money on Medicare Patients (Using Average Total Costs)* 

5.50%

2.20%

‐1.20%

‐3.00%‐3.00%

‐4.80%‐6.10%

‐7.20%

‐5.30%‐4.90%‐5.70%‐5.50%‐5.10%

‐5.80%

‐7.60%

‐9.60%

‐11.20%

‐14.00%

‐12.00%

‐10.00%

‐8.00%

‐6.00%

‐4.00%

‐2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Overall Medicare Margins*

* Still Profitable for Hospitals to See  Additional Medicare Patients ( Higher Marginal Revenues than Marginal Costs) 

Even Teaching Hospitals Which Had Significant Positive Medicare 

Margins Now Show Loses

Only Rural Hospitals With “CAH Payments”  Have Positive  Medicare Margins in 2013

2.40%3.00%

-2.20%

11.40%

1.60%

-2.10%

-7.30%-7.40%

-3.00%

-2.30%

-7.50%

-10.30%

-5.40%-5.90%

1.20%

-3.60%

-5.00%

-6.90%

-15%

-10%

-5%

0%

5%

10%

15%

2002 2008 2013All Hospitals Urban Rural Inc. CAH Major Teaching Other Teaching Non-Teaching

SO– Should We Be Concerned?

Are Hospitals In Financial Trouble? Are There Winners and Losers With Current 

Hospital Payment System?Are Medicare Beneficiaries Being Denied 

Services in Some Hospitals?

High Private Insurance Payments Relative to Costs  Keep Hospital Systems 

Profitable! 

YES I KNOW‐‐‐Hospital Cost Shifting Doesn’t Exist

And If Medicare Paid More Its Unlikely That It Would Lower Private Payments

Change in the Private‐Payer Ratio of Payments to Costs for Hospital 

Services 2006‐2016

13SOURCE: MedPAC analysis of Medicare cost report data from CMS, MedPAC June 2018 report. 

1.301.32

1.27

1.341.36 1.37

1.49 1.49 1.50 1.51 1.52

1.25

1.30

1.35

1.40

1.45

1.50

1.55

2006 2008 2010 2012 2014 2016

Ratio

 of P

aymen

ts to

 Costs

Fiscal Year

Hospital Total All‐Payer Margin 2006‐2016

14SOURCE: MedPAC analysis of Medicare cost report data from CMS, MedPAC June 2018 report. 

5.3

6

1.8

4.3

6.36

6.4

7.2 7.16.8

6.4

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Margin (percent)

Fiscal Year

Growth In Private Insurance Spending Dominated By Hospital Price Growth

2007‐2014*Hospital Percent Growth

Inpatient 42%

Outpatient 25%

Physician

Inpatient 18%

Outpatient 6%

*Z. Cooper et al, Hospital Prices Grew Substantially Faster Than Physician Prices For Hospital Based Care in 2007‐14, Health Affairs February 2019

But The Growing Asymmetry Between Government and Private Payments Does 

Affect Different Types of Hospitals Differently 

Also Ratio of Private to Medicare Hospital Payments Are Significantly Different in Different 

Regions

Hospital Total All‐Payer Margin by Urban and Rural Location and Critical Access Hospitals 2006‐2016

17SOURCE: MedPAC analysis of Medicare cost report data from CMS, MedPAC June 2018 report. 

5.7 5.8

2.1

3.7

5.3

4.75.0 4.9 4.8 4.8 4.6

5.3

6.0

1.7

4.3

6.46.1

6.6

7.4 7.37.0

6.5

4.44.9

2.1

2.83.3 3.4 3.6 3.6 3.4

4.4

3.6

0

1

2

3

4

5

6

7

8

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Margin (percent)

Fiscal Year

Rural Urban Critical Access Hospitals

Hospital Total All‐Payer Margin by Teaching Status 2006‐2016

18SOURCE: MedPAC analysis of Medicare cost report data from CMS, MedPAC June 2018 report. 

5.55.9

3.0

4.7

6.5 6.36.9 7.1

7.5 7.57.2

6.2

7.0

2.4

5.4

7.47.1 7.1

8.38.6

7.67.1

4.2

5.1

‐0.5

2.5

4.94.3

5.2

6.2

5.1 5.34.9

‐2

0

2

4

6

8

10

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Margin (percent)

Fiscal Year

Non‐teaching Other Teaching Major Teaching

CBO Analysis of 2013 Data Showed Smallest Regional 

Difference of 44% and Highest 148%*

*Jared Lane Maeda and Lyle Nelson, “An Analysis of Hospital Prices for Commercial and Medicare Advantage Plans”, Paper Presented at 2017 Academy Health Meeting

Financial Survivability of Hospitals• As Gap Widens Financial Survivability Less Depended on Efficiency and More on Patient Mix and Regional Power Over Pvt. Insurance Companies

In 2013*‐55% of Highly Profitable Hospitals Were For‐Profit (25% of Total Hospitals)‐But Many Not‐for‐Profit Also Highly Profitable (7 of 10 Most Profitable)‐Having Strong Regional Power Key to Profitability‐2 of 10 Most Profitable Were Big Teaching Although Most Are Lower Profit‐Hospital in Systems Do Much Better Than Independent Institutions ‐Public and Rural Hospitals Have The Highest Loses

*Bai and Anderson, “A More Detailed Understanding Of Factors Associated With Hospital Profitability”, Health Affairs May 2016

In Massachusetts Which Has Had High Private Rates But Constrained Growth in Rates in Recent Years Gap was 57% in 

2016Differences in Rates Vary By Type of Procedure and Higher for Outpatient 

Services

8Notes: U.S. data includes Massachusetts. MA figure for 2017 is preliminary. Center for Health Information and Analysis data are for the fully-insured market only. Sources: Centers for Medicare and Medicaid Services, National Healthcare Expenditure Accounts Personal Health Care Expenditures Data (U.S. 2014-2017), and State Healthcare Expenditure Accounts (U.S. 2005-2014 and MA 2005-2014); Center for Health Information and Analysis Annual Reports (MA 2014-2017)

Annual growth in commercial spending per enrollee, MA and the U.S.,2006-2017

38Notes: Analysis includes facility payments only, excluding professional services. Analysis excludes claims with invalid payment codes and excludes outlier claims at each hospital. Excludes some maternity claims for which discharge of mother and newborn cannot be distinguished. Commercial average payment per di h i dj t d f i ht h it l M di l l t d di t M di t l i l di DSH d t hi

Distribution of average hospital facility payments per discharge, commercial andMedicare, 2016

39

Notes: Analysis includes facility payments only, excluding professional services. Analysis excludes claims with invalid payment codes and excludes outlier claims at each hospital. Commercial average payment per discharge is adjusted for case weight across hospitals; Medicare averages are calculated according to Medicare payment rules, including DSH and teaching hospital adjustments, and assume the same acuity and patient distribution as commercial discharges. Excludes hospitals not paid under Medicare’s Inpatient Prospective Payment System, including Critical Access Hospitals and certain specialty hospitals.Sources: HPC analysis of Massachusetts All-Payer Claims Database, 2016; Medicare Impact File 2016 and FY 2016 Final Rules Tables, Table 1A-1E.

Distribution of average hospital facility payments per discharge, commercial andMedicare, select diagnoses, 2016

Commercial pr

40

Notes: Commercial averages weighted by hospital volume, and exclude claims with invalid payment codes and outlier claims at each hospital. Medicare professional averages are based on statewide average payments for these services; Medicare facility averages are calculated according to Medicare payment rules, including DSH and teaching hospital adjustments, and assume the same patient distribution as commercial visits. Facility amounts exclude hospitals not paid under Medicare’s Outpatient Prospective Payment System, including Critical Access Hospitals and certain specialty hospitals.Sources: HPC analysis of Massachusetts All-Payer Claims Database, 2016; Medicare Impact File 2016; Medicare Outpatient Prospective Payment Addendum B 2016.

Average payment per hospital outpatient department visit, commercialand Medicare, for colonoscopy and brain MRI, 2016

Commercial priestudy

41

Notes: Commercial professional average includes all commercial claims for E&M codes billed in hospital emergency departments with valid payment amounts; Medicare professional average based on statewide average payments for E&M codes, weighted by volume of commercial codes at each hospital. Commercial facility average excludes claims with invalid payment codes; Medicare facility average calculated according to Medicare payment rules, including DSH and teaching hospital adjustments, and assume the same patient distribution and mix of procedure codes as commercial visits. Facility amounts exclude hospitals not paid under Medicare’s Outpatient Prospective Payment System, including Critical Access Hospitals and certain specialty hospitals.Sources: HPC analysis of Massachusetts All-Payer Claims Database, 2016; Medicare Impact File 2016; Medicare Outpatient Prospective Payment Addendum B 2016.

Average payment per hospital emergency department visit (evaluation and managementportion only), commercial and Medicare

mmercial e study

42

Notes: Analysis includes only claims for adult patients receiving care from primary care providers, and excludes outlier claims. Medicare averages are calculated according to Medicare payment rules, and assume the same patient distribution and mix of procedure codes as commercial visits.Sources: HPC analysis of Massachusetts All-Payer Claims Database, 2016; primary care providers identified using HPC Registration of Provider Organizations filings and SK&A provider database; Medicare State HCPCS Aggregate Summary Table CY2016

Average payment per primary care office visit, commercial and Medicare, evaluation andmanagementportion only

Commercialpricestudy

For Medicare Patients: No Cause for Concern NOW

“Most of our payment adequacy indicators for hospitals are positive but 2016 Medicare margins remain negative for most hospitals and were      ‐1.0 percent for median relatively efficient providers” (Medpac March 

2018 Report)

What About Going Forward?

Hospitals Face Growing Government and Declining Pvt. 

Patient Growth Will This Lead to Less Growth in Revenue and Constraints on Hospital Cost Growth or More Focused Emphasis on Services for Private 

Patients?

6%

57%

71%

0

10

20

30

40

50

60

70

80

Private Medicare Medicaid

Perc

ent C

hang

e in

Enr

ollm

ent

CMS, National Health Expenditure Projections, 2012 to 2022, January 2013.

Growth in Enrollment by Payer Source, 2006 - 2022

If Medicare Payments Continue to Be Constrained and Pvt. Payments Grow‐‐‐

Could There Be Access Limits for Medicare Patients?

The Growing Use of Restrictions on Physician Coverage for Medicare Patients‐‐‐ ”Concierge 

Care” ‐‐‐ Could be Just The Beginning

Let Me Be Very Clear‐‐‐I am NOT Advocating for Higher Hospital 

Payments

I Believe as Do Many Economists That Health Care Spending Can Only Be Constrained by 

Reducing The Growth in Revenues

But Should Constraints Only Come From Lower Government Payments and 

Should Government Ignore The Growth of Relative Private Rates‐‐‐In Three 

States‐‐‐Maryland and Massachusetts and Rhode Island The Answer is NO!