MedPAC says hospital payments are sufficient, urges better safety-net targeting

Medicare payment to hospitals is broadly adequate but should be better targeted for lower-resourced facilities, according to a formal recommendation by the Medicare Payment Advisory Commission (MedPAC).

In its annual report to Congress on Medicare payment policy, MedPAC said 2027 inpatient and outpatient payments should increase in accordance with the statutory formula and do not need an additional boost. Per CMS, the 2027 payment update is projected at 2.3% when the proposed rule for FY27 inpatient payments is published in upcoming weeks.

The commission found that beneficiary access to care remains good, and hospital financial health is improving, as seen in an increase in all-payer operating margin from 5.2% in 2023 to 6.5% in 2024, helped by slower growth in labor costs.

Early data for 2025 suggests continued improvement, MedPAC wrote. Operating margin increased by between 0.5 and 2.5 percentage points at three large for-profit health systems, and by roughly 1 percentage point among five not-for-profit systems.

What Medicare margins still signal for hospitals

An overall Medicare margin of negative 12.1% for 2024 suggests that payments remain below costs for many hospitals, which rely on other payer segments to make up for the losses.

The metric was negative 1% for hospitals that MedPAC categorizes as efficient based on measures of cost and quality, which is why the commission does not see a pressing need to increase payments beyond the statutory formula.

“The median FFS [fee-for-service] Medicare margin among the set of hospitals we identified as relatively efficient provides some insight about whether FFS Medicare payments to hospitals are adequate to cover the cost of providing inpatient and outpatient hospital care efficiently,” MedPAC stated in the report.

In 2026, the sector-wide Medicare margin is projected to improve to negative 10%. Factors in the upward momentum include a $1.8 billion increase in uncompensated care (UC) payments, stemming from increases in the uninsured population and in Part A inpatient volume. In addition, hospital margins stand to benefit from the increasing utilization of separately payable drugs, for which the payment rate is average sales price (ASP) plus 6%.

Drags on Medicare margin for 2026 include a 0.5% reduction to hospital outpatient payments as a budget-neutral measure in relation to the $9 billion remedy payment made in late 2023 for prior underpayments in the 340B Drug Pricing Program. CMS has advised that the reduction could increase in subsequent years until budget neutrality is achieved.

Nonfinancial metrics reflect a stable sector

Healthcare access among Medicare beneficiaries remains in good shape nationally, MedPAC said, with a stable supply of hospitals, even though closures resulted in net reductions of eight hospitals in both 2024 and 2025. Capacity is available, as suggested by a 71% occupancy rate nationwide.

Inpatient utilization increased in 2024 but remained below pre-pandemic levels, while outpatient use has matched or surpassed the pre-pandemic era since 2021. In 2024, the per capita growth in outpatient utilization stemmed largely from evaluation and management services, specifically clinic services. Most other categories of outpatient visits increased as well, led by imaging services.

MedPAC notes that, as in previous years, most Medicare outpatient services in 2024 were provided by hospitals in urban areas (83%) and by nonprofit hospitals (77%).

When assessing care quality, MedPAC found that mortality rates improved from 7.6% to 7.4% year over year, while readmissions worsened from 15.1% to 15.4%. Measures of patient experience, as quantified in the HCAPHS survey, have been stable in recent years but are worse than before the pandemic.

Overall, the commission said, quality metrics do not suggest a pressing need to increase payments.

Why MedPAC wants to replace current DSH and UC payment methods

MedPAC continues to push for replacing Medicare disproportionate share hospital (DSH) payments and UC payments with a new Medicare Safety Net Index (MSNI). The commission says the formula would ensure funding goes to hospitals that care for large shares of low-income Medicare patients and have tighter margins.

In conjunction with implementing the MSNI, Congress should authorize an additional $1 billion to be distributed to recipients, according to MedPAC. The distribution would cover both FFS and Medicare Advantage beneficiaries.

Disbursement would be based on where hospitals place on the index. For example, hospitals in the top quartile of the MSNI would be projected for an increase of 3 percentage points in Medicare margin, as would rural hospitals. Government-run hospitals would incur a margin decrease of 3 percentage points, given their lower shares of Medicare patients and the amounts they currently reap from UC payments.

Treating large numbers of Medicaid and uninsured patients would not necessarily translate to higher MSNI scores, compared with the DSH formula. Hospitals would be more likely to place higher on the index if they treat relatively large numbers of patients who are dually eligible for Medicare and Medicaid.

The DSH formula could be retained for other purposes, such as determining 340B eligibility, MedPAC notes.

The MSNI recommendation may amount to little more than a theoretical exercise as Congress has not shown an inclination to strongly consider alternatives to safety-net funding.

Proposed site-neutral payment expansion targets outpatient cost variation

MedPAC also continues to advocate for expanding site-neutral payment policy. The push may stem in part from the recognition that increasing shares of hospital outpatient services are furnished in off-campus hospital outpatient departments (HOPDs): 20% in 2024, up from 17% five years earlier.

Site-neutral payment currently applies to all care at off-campus HOPDs that began billing Medicare after enactment of a November 2015 law. At older HOPDs, the policy covers clinic visits and, starting in 2026, drug administration services. The expansion to drug administration services is projected to add $290 million in Medicare savings this year.

Future expansion should incorporate clinic visits at on-campus HOPDs and additional services at off-campus facilities, based on an assessment of whether comparable volumes take place in ambulatory surgical centers or physician offices for a given service, according to MedPAC.

Rural emergency hospital program shows early impact on access

MedPAC also looked at the rural emergency hospital (REH) program, which began in 2023 as a mechanism to allow rural hospitals to continue operating if they lacked the resources to offer inpatient care.

As of 2024, the program included 38 REHs that received more than $100 million in supplemental payments, according to the new report.

“The ability of hospitals to transition to REHs has likely prevented a number of rural hospital closures since 2023,” MedPAC states.

While closures remain an ongoing concern, “According to hospital press releases and news reports, FFS Medicare payment rates did not appear to be the main contributor to the financial difficulties of the hospitals that closed in 2024 or 2025,” MedPAC states. “Rather, many hospitals that closed cited other financial reasons; low patient volume was the most common.”