In an article published March 18 by Health Affairs, researchers at the Medicare Payment Advisory Commission challenge a common assumption about Medicare patients and hospital profit margins. The study finds that hospitals with strong market power lose money on Medicare patients because these hospitals tend to have high cost structures. In contrast, hospitals less able to charge higher private rates are under pressure to constrain their costs and thereby can generate profits on Medicare patients, say MedPAC principal policy analyst Jeffrey Stensland, MedPAC senior analyst Zachary R. Gaumer, and MedPAC executive director Mark E. Miller

The authors examined all 2,950 U.S. hospitals that had complete Medicare Cost Report data from the years 2002 through 2007, excluding critical-access hospitals. The two questions they tested were:  whether Medicare costs varied depending on a hospital’s financial resources; and whether hospitals with the largest Medicare losses were those under the most financial strain. Their findings: hospitals under financial pressure to restrain costs had inpatient costs per discharge that were 93 percent of the national average; and hospitals with large Medicare losses – margins of negative 10 percent or lower — tended to have the highest overall profitability due to strong profits on their non-Medicare patients.  

“There is general agreement that high private-payer margins are correlated with low Medicare margins. The debate is about which direction the causation flows,” conclude the authors. “Given the difficulty that employers have in paying rising health care costs — and the difficulty the Medicare Trust funds will have in remaining solvent, given current spending trends — payers will need to set rates so that hospitals feel financial pressure to constrain costs.  To maintain quality while constraining costs, there should be financial rewards and financial penalties tied to the quality of care.”