As Many Hospitals Continue to Face Significant Financial Challenges, MedPAC Recommends Highest Ever Medicare Payment Update

The Medicare Payment Advisory Commission (MedPAC) today released its annual March Report advising Congress on the Medicare fee-for-service (FFS) payment systems. In it, the commission recommended its highest ever Medicare payment update for hospitals and health systems, recognizing the dire financial environment they continue to operate in. Specifically, MedPAC recommended that for fiscal year (FY) 2025, Congress update the Medicare base payment rate for hospitals by current law plus 1.5%.

The AHA appreciates MedPAC’s recommendation to attempt to improve — in small part — Medicare’s chronic underpayments to hospitals and health systems. Indeed, the hospital field has faced substantially negative Medicare margins for well over a decade.

Yet, the commission’s March findings also confirm what the AHA has stressed repeatedly — that 2022 was the most financially challenging year for the hospital field given input price inflation and ongoing workforce shortages. Specifically, the report found that all-payer operating and overall Medicare margins both fell to record lows. Indeed, Medicare margins for FY 2022 were negative 12.7%. Even MedPAC’s own analysis showed that “relatively efficient hospitals” — those hospitals that perform well on quality while keeping unit costs low — were paid less than costs, with Medicare margins of negative 3%. The AHA’s own analysis showed that Medicare underpayments to hospitals hit a record high in 2022 — $99.2 billion.[1]

We remain troubled that MedPAC also estimated that FY 2024 Medicare margins will not be any better than what hospitals experienced in FY 2022. Specifically, it predicted FY 2024 Medicare margins to be negative 13% and negative 3% for “relative efficient hospitals.”[2]

Margins at this level are simply unsustainable and we have seen their effects in real time. Hospitals have faced increased expenses and significant reductions in cash on hand[3]. Rural hospitals specifically continue to face challenges, with nine closing in FY 2023 despite a new Medicare provider type that allows them to convert to a rural emergency hospital.[4]^{, [5]} While we recognize the importance of examining hospital closures as a measure of access, we continue to encourage MedPAC to take on a more nuanced view of access and examine indicators such as service line closures, the ability for capital investments, and workforce recruitment and retention to gain a more complete picture of the many factors contributing to Medicare patients’ access to care.

And, as indicated by MedPAC’s margin predictions for FY 2024, hospitals and health systems continue to weather significant financial challenges. This is why we disagree with its sentiment that “most non-profit hospitals’ credit ratings are expected to remain stable,” and that “demand for hospital bonds remain strong.”[6] In fact, S&P^[7] most recently rated the not-for-profit acute health care sector as “negative,” citing “a constrained operating environment in 2024.” It reported the highest proportion of negative outlooks in a decade — affecting 24% of the sector — underscored by 51 credit rating downgrades in 2023 — the most in five years. Additionally, Fitch Ratings^[8] “continues to expect core credit drivers for the sector to remain challenged for the sector writ large again in 2024, coming off a generationally challenged period in 2022 and 2023.” Fitch reported a credit downgrade-to-upgrade ratio of 3:1 — alarmingly close to the ratio seen during the 2008 financial crisis.

Coupled with these headwinds is the ongoing cyberattack that has been deemed “the most significant attack on the health care system in U.S. history.”[9] The February 21 cyberattack on Change Healthcare — owned by UnitedHealth Group — has disrupted many aspects of the health care ecosystem, including the ability for providers to process claims and receive reimbursement. Essentially, this cyberattack has crippled the flow of funding and brought insurance payments to a halt for many providers.[10] Hospitals and health systems have long contended with chronic underpayments by government payers but now must also contend with inadequate cash flow from commercial payers. While providers have stepped up to care for their patients in these dire situations, the ongoing financial threat to the field is simply unworkable.

In light of all the challenges hospitals face, the AHA continues to urge MedPAC, Congress, and the Administration to support the hospital and health system field so they can continue providing 24/7 essential care to their patients and communities.

Shannon Wu is AHA's senior associate director of inpatient payment policy.