Four Reasons Medicare Is an Inadequate Benchmark for Commercial Health Plans

Researchers are off base when they claim the rate Medicare pays hospitals and health systems for services is an appropriate benchmark for commercial insurance rates. This approach ignores limitations that nearly always result in underpayments and lets commercial health insurers off the hook for intentionally increasing costs and failing to pass on savings to consumers. It is misguided and wrongly paints hospitals as the source of all problems in the health care system.

Here are a few facts:

#1. Medicare reimbursement rates do not cover the actual cost of the care provided.

This is widely acknowledged and clearly backed up by the data. According to AHA survey data, Medicare paid 84 cents for every dollar spent by hospitals caring for Medicare patients in 2020.¹ This resulted in $75.6 billion in underpayments for Medicare services in 2020. Even the Medicare Payment Advisory Commission (MedPAC) recognizes that Medicare underpays.² For example, MedPAC found that in 2020, hospitals and health systems experienced a -8.5% margin on Medicare services in 2020. MedPAC projects that this margin will fall to -9% in 2022, and it declined even further when excluding COVID relief funds.³ Put simply, Medicare rates are set too low to serve as a reasonable benchmark for commercial plans. Holding them up as an appropriate benchmark for commercial rates threatens access to care and puts more hospitals at risk of closure.

#2. Medicare rates are slow to respond to inflation, supply shortages and increases costs for staff.

Medicare payment rates are established in rulemaking. Once finalized, they are in place for a year before they can be updated. Due to data lags, payment rate changes are typically made based on older data.⁴ For example, Medicare rates for fiscal year 2022 were not adjusted for recent increases in inflation, supply costs, and growth in labor costs due to shortages, which has added significant financial pressure for hospitals. In fact, given the arcane nature of Medicare rate setting, CMS’ recently proposed inpatient payments for 2023 would be lower than inpatient payments made in 2022. This is nonsensical given rising inflation and a continued a public health emergency.

#3. Medicare rates are subject to political pressure

As policymakers attempt to balance the federal budget, they frequently rely on steep Medicare rate reductions to make up for budget shortfalls elsewhere. For example, the Budget Control Act of 2011 imposed, among other things, mandatory across-the-board reductions in certain types of federal spending, known as sequestration. The result is an automatic and arbitrary cut to all Medicare payments. Benchmarking commercial claims to Medicare payment rates mean these arbitrary rate cuts would have far-reaching ripple effects for care provided to all patients.

#4. Chronic underpayments threaten the communities hospitals serve.

One-third of hospitals already operate in the red, and the COVID-19 pandemic has only worsened the financial pressures that hospitals face. In 2020, a record number of rural hospitals closed in a single year. Arbitrarily reducing commercial rates will only exacerbate this financial pressure. Ultimately, it will make it that much harder financially for hospitals serving rural and historically underserved communities to keep their doors open or continue providing the same breadth of services.

Conclusion

Hospitals and health systems need to be able to invest in programs that improve care and support the communities they serve. Policymakers should be strengthening payment rates from Medicare, not holding them up as the gold standard. Arbitrary rate cuts that fail to address underlying cost pressures would only hinder hospital and health systems’ ability to serve their communities and be prepared for the next public health emergency.

Benjamin Finder is AHA’s director of policy research and analysis.

Medicare

Population/Community Health

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