In 2016, the latest year for which data was available for our analysis, U.S. hospitals lost almost $50 billion treating Medicare patients because of the disparity between the delivered cost of care and Medicare’s current payment rates.1 Hospital losses in treating Medicare patients accelerate significantly under Medicare expansion. Even if Medicare is not expanded after the 2020 elections, hospitals must improve how they manage their costs of serving Medicare patients or face increasing financial losses.2
The proposed savings of the most ambitious Medicare expansion scenarios – Medicare as the single payer – rely upon some challenging premises, including that it will be politically feasible to sunset the vast health insurance industry, while dramatically reducing the income of the equally large hospital industry.
How would hospitals respond to Medicare expansion?
In scenarios where private insurers continue to exist, hospitals likely would attempt to shift the cost of the lost revenues onto private insurers to the extent possible. Clearly, this cost shifting would pose a major business risk for insurers and their employer customers, which would likely respond with strategies to tier or narrow their hospital networks and to offer patients incentives to reduce hospital use.
Notably, there is little evidence of major cost shifting after the ACA coverage expansion. If hospitals had successfully shifted the ACA Medicare rate reductions onto private health plans, hospital margins would not have plummeted as they did from 2015 to 2017.3
If hospitals find cost shifting fails to mitigate the effect of Medicare payment shortfalls, their only recourse would be to reduce costs through non-incremental means. They would likely be forced not only to reduce FTE employment but also to cut salaries of remaining clinical and management personnel and make dramatic reductions in contracted services outlays, including outsourcing and clinical staffing firms and technology and pharmaceutical suppliers. Ripple effects could expand the circle of layoffs into the broader community and its economy.
Hospitals also would likely attempt to reduce duplicative clinical services in neighboring facilities and collaborate with their clinicians in rigorously examining care patterns for Medicare beneficiaries, reducing both excess variation and care defects that result in avoidable hospital expense.
Ratings agencies would likely react to the uncertainties created by Medicare expansion by downgrading existing hospital tax-exempt debt. Debt markets would likely demand higher rates (e.g. cost of capital) for those systems fortunate enough to be able to continue borrowing in tax-exempt markets.
The actual extent to which costs can be reduced will determine the level of harm to the industry and the political challenges of achieving expansion. A hospital’s current Medicare cost coverage (i.e., loss) ratios are a direct indicator of a hospital’s vulnerability to any political decision which expands Medicare coverage expansion.
Unfortunately, the capacity to reduce and manage cost will vary markedly from health system to health system and hospital to hospital, to the point that many organizations could find themselves no longer financially viable. Depending on the policy course chosen, Medicare expansion could compromise hospital access to capital and potentially force closure of essential hospitals.
Some of the most dramatic expansion scenarios, such as Medicare as a single payer, appear to have financial effects that exceed the capacity of hospital management to reduce expenses. Under all but the leak-proof Medicare buy-in scenario, without substantial increases in current levels of Medicare payment, increased Medicare enrollment could have a destructive ripple effect on the nation’s hospitals and health systems.
1American Hospital Association, "TrendWatch chartbook 2018: Trends Affecting Hospitals and Health Systems," 2018.
2Goldsmith, J., and Bajner, R., "5 ways U.S. hospitals can handle financial losses from Medicare patients," Harvard Business Review, Nov. 10, 2017.
3Goldsmith, J. Stacey, R., and Hunter, A. , "Stiffening headwinds challenge health systems to grow smarter," September 2018.