Press Release

Embargoed Until Contact

March 18, 2010
12:01 AM PST

Sue Ducat
Director of Communications
(301) 841-9962


From Health Affairs

Hospitals' Profit Margins: When It Comes To Medicare Payments, Some Surprising Findings


Bethesda, MD -- An article published today by Health Affairs challenges a common assumption about Medicare patients and hospital profit margins. The study found 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.

Private-Payer Profits Can Induce Negative Medicare Margins
By Jeffrey Stensland, Zachary R. Gaumer, and Mark E. Miller

The authors are affiliated with the Medicare Payment Advisory Commission (MedPAC) in Washington, DC.

Stensland is a principal policy analyst; Gaumer is a senior analyst; and Miller is executive director.

In their study, 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 if 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 that hospitals with large Medicare losses - margins of negative 10 percent or lower -- tend 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," concluded 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."

About Health Affairs

Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears each month in print, with additional Web First papers published weekly at The full text of each Health Affairs Web First paper is available free of charge to all Web-site visitors for a two-week period following posting, after which it switches to pay-per-view for nonsubscribers. Web First papers are supported in part by a grant from The Commonwealth Fund.