Health plans

Four Reasons Medicare Is an Inadequate Benchmark for Commercial Health Plans

The researchers are misguided when they claim that the rate Medicare pays hospitals and health systems for services is an appropriate benchmark for commercial insurance rates. This approach ignores the limitations that almost always result in underpayments and allows commercial health insurers to get away with intentional cost increases and savings not passed on to consumers. It is wrong and misrepresents hospitals as the source of all health system problems.

Here are some facts:

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

This is widely recognized and clearly supported by the data. According to data from the AHA survey, Medicare paid 84 cents for every dollar spent by hospitals serving 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) acknowledges that Medicare underpays.2 For example, MedPAC found that in 2020, hospitals and health systems saw a -8.5% margin on Medicare services in 2020. MedPAC projects that this margin will drop to -9% in 2022, and that ‘it’s down further if you exclude the COVID relief funds.3 Simply put, Medicare rates are too low to serve as a reasonable benchmark for commercial plans. Considering them 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 rising staff costs.

Medicare payment rates are established in the rule making. Once finalized, they are in place for a year before they can be updated. Due to data lags, payout rate changes are usually made based on older data.4 For example, Medicare rates for fiscal year 2022 have not been adjusted for recent increases in inflation, supply costs, and rising labor costs due to shortages. which has added significant financial pressure for hospitals. In fact, given the murky nature of Medicare pricing, CMS’s recently proposed hospital payments for 2023 would be lower than hospital payments made in 2022. This is absurd given rising inflation and an emergency ongoing public health.

#3. Medicare rates are under political pressure

As policymakers try to balance the federal budget, they often rely on deep cuts in Medicare rates to offset budget shortfalls elsewhere. For example, the Fiscal Restraint Act of 2011 imposed, among other things, mandatory across-the-board cuts to certain types of federal spending, known as sequestration. The result is an automatic and arbitrary reduction in all Medicare payments. Benchmarking trade claims to Medicare payment rates means that these arbitrary rate reductions would have significant ripple effects on the care provided to all patients.

#4. Chronic underpayment threatens communities served by hospitals.

A third of hospitals are already operating in the red, and the COVID-19 pandemic has only compounded the financial pressures hospitals face. In 2020, a record number of rural hospitals closed in a single year. Arbitrarily reducing commercial tariffs will only exacerbate this financial pressure. Ultimately, it will be that much more financially difficult for hospitals serving rural and historically underserved communities to keep their doors open or continue to provide the same range 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 bolster Medicare payment rates, not treat them as the gold standard. Arbitrary rate reductions that fail to address underlying cost pressures would only hamper the ability of hospitals and health systems to serve their communities and prepare for the next public health emergency.

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


  1. https://www.aha.org/fact-sheets/2020-01-07-fact-sheet-underpayment-medicare-and-medicaid
  2. https://www.medpac.gov/wp-content/uploads/import_data/scrape_files/docs/default-source/reports/mar21_medpac_report_to_the_congress_sec.pdf
  3. https://www.medpac.gov/wp-content/uploads/import_data/scrape_files/docs/default-source/reports/mar21_medpac_report_to_the_congress_sec.pdf
  4. https://www.brookings.edu/blog/usc-brookings-schaeffer-on-health-policy/2022/03/29/what-does-economy-wide-inflation-mean-for-the-prices-of- health-care-services-and-vice-versa/