By Jacqueline LaPointe

– The largest public payers continue to underpay hospitals, data from the most recent American Hospital Association (AHA) Annual Survey of Hospitals revealed. Medicare and Medicaid reimbursement fell $76.8 billion short of the actual costs of treating beneficiaries in 2017.

Specifically, Medicare reimbursement was $53.9 billion short of actual hospital costs, while Medicaid underpaid hospitals by about $22.9 billion, the AHA reported.

“Despite improvements in coverage, Medicare and Medicaid payment continues to fall further below the cost of providing care,” the AHA’s Vice President of Policy Research, Analytics, and Strategy Aaron Wesolowski told “While most hospitals have remained financially viable, one third have negative operating margins, threatening access to health care in the communities they serve. These underpayments continue as hospitals and health systems continue to invest in alternative payment and delivery models and to develop approaches that address the social, economic, and environmental factors that impact health outcomes and costs.”

Medicare and Medicaid underpayments occurred because the large public payers set reimbursement rates through rules and regulations, rather than negotiations like with private payers and managed care organizations. And typically the Medicare and Medicaid payment laws set hospital reimbursement rates below the actual costs of providing care to program beneficiaries.

For example, the most recent AHA data showed that hospitals only received 87 cents for every dollar they spent caring for Medicare and Medicaid beneficiaries.

READ MORE: The Difference Between Medicare and Medicaid Reimbursement

Furthermore, about two-thirds of hospitals received Medicare reimbursement less than cost in 2017, while 62 percent of the facilities were underpaid by Medicaid.

The most recent Medicare and Medicaid reimbursement shortfall should come as no surprise to hospitals. The public payers have been underpaying hospitals for the past several years.

In 2016, the AHA reported that Medicare and Medicaid reimbursement shortchanged hospitals by about $68.8 billion. The previous year the shortfall was approximately $57.8 billion.

Hospitals attempt to offset underpayments from the public payers by negotiating higher claims reimbursement rates with private payers and managed care organizations. In a process known as cost-shifting, hospitals charge private payers more and collect greater revenue to finance uncompensated care.

However, stakeholders argue that hospitals are not widely engaging in cost shifting. A recent National Bureau of Economic Research report found that cost containment strategies under the Affordable Care Act only resulted in hospitals negotiating 1.6 percent higher average private payer rates to offset the cuts from public payers.

READ MORE: Key Ways to Improve Claims Management and Reimbursement in the Healthcare Revenue Cycle

A 2013 Health Services Research study also showed that a reduction in hospital inpatient revenue from Medicare was linked to a greater decline in total revenue, indicating hospitals do not engage in robust cost-shifting.

The debate over whether hospital cost-shifting continues. But hospitals are still responsible for the uncompensated care costs left by Medicare and Medicaid reimbursement shortfalls. And for many of these facilities, caring for a large portion of Medicare and Medicaid beneficiaries is required to maintain their non-profit status.

“Hospital participation in Medicare and Medicaid is voluntary,” the AHA explained. “However, as a condition for receiving federal tax exemption for providing health care to the community, not-for-profit hospitals are required to care for Medicare and Medicaid beneficiaries. Also, Medicare and Medicaid account for more than 60 percent of all care provided by hospitals. Consequently, very few hospitals can elect not to participate in Medicare and Medicaid.”

The hospital association added that shouldering the financial burden of Medicare and Medicaid underpayments is not the only community benefit hospitals provide. A separate analysis of data from AHA’s Annual Survey of Hospitals showed that hospitals also provided $38.4 billion in uncompensated care in 2017 on top of shouldering Medicare and Medicaid underpayments.

Uncompensated care is the treatment for which hospitals receive no payment from a patient or insurer. It is the sum of a hospital’s bad debt and the financial assistance provided to patients.

READ MORE: When Claims Reimbursement Doesn’t Cover Healthcare Innovation

Hospitals delivered a similar level of uncompensated care compared to 2016. In the prior year, the AHA reported that hospitals also delivered $38.4 billion worth of unpaid care to patients.

Uncompensated care costs are notably up from $36.1 billion in 2015. However, the levels are stabilizing after a significant uptick in compensated care observed after the Affordable Care Act.

In a year after the Affordable Care Act, hospitals provided $41.6 billion worth of uncompensated care, and the level increased until 2013 where it reached $46.8 billion.

“Uncompensated care dropped significantly after initial ACA coverage gains. However, as the rate of uninsured has slowly started to rise, so has the level of uncompensated care provided by hospitals,” Wesolowski explained. “In addition, the rise in high deductible health plans among many patients in both employer-sponsored coverage and the individual market have left patients with upfront, out-of-pocket costs they cannot afford. The amount of uncompensated care provided by hospitals will continue to reflect uninsured rates, as well as health plan choices that do not provide affordable comprehensive health care coverage.”

The AHA noted that the uncompensated care figures do not account for all the community benefits a hospital provides, including charity care.

* Article updated on Jan. 7, 2019 at 4:15PM to include statements from the AHA.

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Medicare, Medicaid Reimbursement $76.8B Under Hospital Costs –