MedPAC finds the hospital industry is on a more stable financial footing now

Hospitals do not need a Medicare payment boost for 2027 beyond the update to be provided in the statutory formula, says the Medicare Payment Advisory Commission (MedPAC).

Whereas the commission had recommended that Congress increase hospital payments by an additional 1% or 1.5% ahead of each year from 2024 through 2026, the recommendation for 2027 is to retain the base payment update for inpatient and outpatient care as determined by the market basket and accompanying adjustments.

The recommendation will not be formalized until MedPAC publishes its next semiannual report to Congress in March, but commission members mostly supported the proposal during a December public meeting.

Practically speaking, the recommendation for 2027 likely will not make a difference to hospital reimbursement. When MedPAC suggested a payment add-on in recent years, Congress did not heed the advice.

Regardless, the discussion about the recommendation offered analytical perspective on the state of the hospital industry.

The health of hospitals

Hospitals’ all-payer operating margin was 6.5% in 2024, compared with 5.2% in 2023, MedPAC staff said during a presentation. Anecdotally, the metric has increased again in 2025, they said, citing financials presented by large health systems.

The $9 billion remedy payment made to hospitals that participate in the 340B Drug Pricing Program was one factor in the 2024 improvement, according to the MedPAC presentation. Another favorable financial driver was the slower growth in labor costs as hospitals phased out contract labor. That shift also helped hospitals’ Medicare fee-for-service (FFS) margin increase by 0.5 percentage points, to -12.1% (the remedy payment was factored into all-payer margin but not Medicare margin).

One drag on Medicare FFS margin was a decrease in uncompensated care (UC) payments, but those are set to rebound by $1.8 billion in 2026. FFS Medicare margin is projected to rise to -10% due to that increase and continued growth in profitable outpatient drugs.

Hospitals in 2024 had a 71% occupancy rate, indicating availability of inpatient capacity, although there was wide variation, MedPAC staff said. Emergency department capacity likewise was seen as adequate. Volumes increased by 1.5% from 2023 to 2024 in inpatient settings and by 4% on the outpatient side.

Across 2024 and 2025, the overall supply of hospitals fell by 0.6%, to 4,530, as closures slightly outpaced the launch of new facilities. Low volumes and high operating costs were the most commonly cited reasons for closures.

Among measures of care quality, risk-adjusted mortality improved by 0.2 percentage points from 2023 to 2024, while risk-adjusted readmissions worsened by 0.3 percentage points but were slightly better than in 2019, the most recent pre-pandemic year. However, patient experience measures generally were worse compared with 2019.

Looking at high-performing hospitals

As is customary for the yearly discussion on hospital reimbursement, MedPAC analysts also examined financial metrics for a subset of hospitals categorized as efficient, meaning they perform relatively well on metrics of both cost and quality.

Among those organizations, which constitute roughly 13% of all hospitals, Medicare margin improved from -2% in 2023 to -1% in 2024. In 2026, those hospitals are projected to eke into positive territory, at 1%.

Some commission members wondered about the validation process for the model used to designate hospitals as efficient. MedPAC does not publish its list of efficient hospitals nor how hospitals fare in the individual metrics.

“We’re not trying to say this is the one and only definitive [assessment], but more to provide insight that there are hospitals out there that are able to constrain costs while having relatively high quality,” replied Alison Binkowski, MPH, a MedPAC principal policy analyst.

A new methodology for safety-net hospitals

Since 2023, MedPAC has recommended replacing Medicare disproportionate share hospital (DSH) and UC payments with a model called the Medicare Safety Net Index (MSNI).

The MSNI is intended to more precisely funnel supplementary payments to hospitals that treat large shares of low-income Medicare patients, compared with the longstanding DSH formula. MSNI inputs would include the hospital’s:

• Share of patients who receive the Medicare Part D low-income subsidy
• Amount of uncompensated care as a percentage of total revenue
• Overall volume of Medicare patients

MSNI funding for 2027 should be supplemented with $1 billion beyond the payments that otherwise would be paid to safety-net hospitals, according to MedPAC. That’s down from a recommended $4 billion add-on in earlier years when the MSNI was proposed.

The $1 billion corresponds to roughly 0.5 percentage points in margin collectively gained for MSNI payment recipients, said Michael Chernew, PhD, MedPAC chair and director of healthcare policy at Harvard Medical School.

“We’re trying to make the broader point that we think the hospital sector needs a little bit more money, but that money needs to be targeted,” Chernew said. “Hospitals overall are actually doing better. The concern that we have is people say, ‘Look, hospitals seem like they’re OK. Why are we putting any more money in?’ The answer is, loosely: Well, there are some hospitals that aren’t.”

The DSH formula would not be phased out altogether under the MSNI recommendation, Chernew noted.

Commission members have had “some concerns about moving from DSH to MSN because of what that would mean for things like 340B,” he said. “For other types of programs that are built off DSH, we don’t intend there to be a change.”

Not the rosiest picture

Although metrics indicate increased stability for the hospital industry, some commissioners see reason for concern with hospital reimbursement even though they did not express opposition to MedPAC’s anticipated recommendation.

An increasing number of hospitals “are now consciously shaping their service offerings and their medical staffs to, in some cases, eliminate the least profitable or greatest-loss Medicare services,” said Gregory Poulsen, MBA, senior vice president at Intermountain Healthcare. “We’re seeing that happen more inpatient than outpatient, more medical than surgical, but they are dropping those services or making those services unattractive to the community, and particularly to the Medicare community. And those patients end up going somewhere [else].”

Not all hospitals that end up taking in greater shares of Medicare and Medicaid patients would be among the primary recipients of MSNI payments, Poulsen added. Without financial support, it’s unclear how they will be able to bear the additional burden.

The payment update also may not ensure hospitals can access adequate capital to invest in equipment and technology and even to keep up with general depreciation, said Robert Cherry, MD, chief medical and quality officer at UCLA Health. An inability to invest in AI may pose particular drawbacks since healthcare applications for the technology can help hospitals attain cost-effective improvements in care delivery, he said.

Even among hospitals categorized as efficient in MedPAC’s analysis, net margin is projected to be only about 1.5% in 2027, Cherry noted.

“The problem is that acute care hospitals probably need a 3% net operating margin just to allow for capital investments, just to maintain or improve the quality of care for the patients that they serve,” he added.