Amid tight margins, MedPAC seems set to recommend an additional hospital payment boost

Hospitals have improved financially in the latest reporting period but still should receive a supplementary Medicare payment increase, according to a meeting of the Medicare Payment Advisory Commission (MedPAC).

For 2026, Congress should authorize a 1% increase beyond the amount calculated using the statutory methodology, commissioners said during a December discussion. The notion is likely to translate to a formal recommendation when MedPAC issues its report to Congress in March.

Previously, in a proposal for 2025, MedPAC endorsed a 1.5% add-on. That recommendation did not gain legislative traction, and the inpatient and outpatient payment increases for 2025 were limited to 2.9% as calculated via the market basket and a mandatory reduction based on economywide productivity.

The recommendation for 2026 also likely will restate a 2023 suggestion to replace Medicare disproportionate share hospital (DSH) and uncompensated care payments with a payment determined by a new Medicare Safety Net Index (MSNI). Components determining a hospital’s MSNI score would include the facility’s share of:

• Medicare beneficiaries who receive the Part D low-income subsidy
• Revenue spent on bad debt and charity care
• Total volume associated with Medicare beneficiaries

The goal of the MSNI would be to more precisely direct supplemental payments to hospitals that care for a high share of low-income Medicare beneficiaries.

What the metrics show

The 2026 recommended increase would be based in part on an analysis showing that even for a subset of hospitals designated as relatively efficient, the 2023 aggregate fee-for-service (FFS) Medicare margin was minus 2%. That number was minus 14.3% among all not-for-profit (NFP) hospitals, compared with 0.1% at for-profit organizations.

“When you look at a negative margin for even the most efficient hospitals, that’s sort of alarming,” said Tamara Konetzka, PhD, a commission member and professor of public sciences at the University of Chicago.

She noted that although “we want [hospitals] to be fiscally responsible and as efficient as possible, minimizing costs is not really what we as a society, or as Medicare, expect of hospitals. … We don’t want hospitals to get rid of their unprofitable departments.”

Hospitals reaped a 2.4-percentage-point increase in all-payer operating margin in 2023, although the metric dropped by 0.5% among non-micropolitan rural hospitals. For-profit hospitals saw their margin surge by 12.9%, compared with 4.4% for NFPs, according to MedPAC’s numbers.

Kenny Kan, CPA, vice president and chief actuary with Horizon Blue Cross Blue Shield of New Jersey, said the 2026 payment recommendation might be too generous, given optimistic margin projections for 2024.

“I worry that the [methodology] may not be sufficiently dynamic to mitigate forecast variances,” he said.

Quality metrics showed improvement in the mortality rate among FFS beneficiaries, relative to 2022, while the readmission rate worsened slightly from 2022 yet improved from 2019.

Stacie Dusetzina, PhD, professor of health policy at Vanderbilt University, expressed concern about the overall state of the patient experience metrics, such as the reported prevalence of patients who do not understand their post-discharge instructions.

“Maybe we need to be thinking more about how to have a higher bar for those activities,” she said.

Inpatient vs. outpatient

A few commission members said payment updates should account for the difference between care funded through Medicare’s inpatient prospective payment system (IPPS) and outpatient prospective payment system (OPPS).

“We are mixing IPPS and OPPS services together, and doing a combined update,” said Brian Miller, MD, a commission member and an associate professor of medicine at Johns Hopkins University. “It doesn’t correlate with reality.”

He said it’s possible the inpatient update should be raised, while the outpatient update could be lowered and incorporate a more comprehensive form of site-neutral payment.

A key policy-focused distinction ideally would be made between inpatient and outpatient settings, said Scott Sarran, MD, founding chief medical officer of Harmonic Health.

“We need, in every market, vigorous, robust, accessible inpatient capacity,” Sarran said. “We don’t need every single acute-care hospital to be a vigorous, robust, effective competitor hospital against every type of ambulatory service component.

“And yet when we subsidize with one lump sum — as we need to do for the foreseeable future, absent more granular data — we enable hospitals to do what any prudent hospital would [do], if their margins in some types of ambulatory service are much higher than some other types of inpatient service: They’ll over-invest so they can be a robust competitor against already-present ambulatory players, and they’ll under-invest in the low-margin inpatient services.”

Analytical constraints pose an obstacle to considering inpatient and outpatient care separately, said Michael Chernew, PhD, MedPAC chair and a professor of healthcare policy at Harvard Medical School

“Certain things, like access to capital, I view as inherently hard to separate,” he said. “Applying some of the criteria across the sectors is just analytically challenging to do, and frankly, I don’t think it’s worth the time to try and do that in the grand scheme of things.”

Fixed vs. variable

Commission members also discussed the dichotomy between fixed and variable costs in determining the annual recommendation.

In 2023, Medicare FFS payments amounted to 85% of hospitals’ costs of providing Medicare services. Variable costs comprised between 75% and 85% of hospitals’ Medicare costs. Thus, hospitals seemingly had a financial incentive to serve beneficiaries.

But Chernew said that analysis may not see the full picture.

“It implies a notion that we should somehow just cover variable costs, and I actually don’t think that’s fundamentally true,” he said. “If that were the goal, there would be a very different update than, in fact, what we’re doing.”

Such an approach could hamper rural hospitals because their fixed costs are said to represent a greater share of total expenditures. The critical access hospital (CAH) program attempts to address that issue by paying hospitals based on costs.

“The more you know about fixed and variable [costs], the more you realize that it’s impossible to define [the difference] in a solid way,” said Gregory Poulsen, senior vice president and chief policy officer with Intermountain Healthcare. “What we find is that fixed and variable are defined by what time horizon you look at. If you look at the next 20 minutes [for example], almost all the costs are fixed.”