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Medicare has not been paying its fair share of medical costs for decades.

Medicare for all: what would it do to hospitals? Hospital CFOs tell us that Medicare does not pay as much as other payers, and that Medicare for all would result in many hospitals closing.

To answer this question, we should start by going back into history. When Medicare was introduced in 1966, the government reached out to the Blue Cross Blue Shield Association to come up with a way to determine what to pay hospitals for treating patients. Included in this analysis was the reality that Medicare made up a small sliver of all patients. Blue Cross created a “Cost Report.” It was a simple computation of inpatient and outpatient costs that was divided by total patient days to get a “cost per diem.” This cost per day was multiplied by Medicare days to compute an allowable cost. 

For-profit hospitals complained that they need a profit margin, so Medicare created a “return on equity” factor. So nonprofit hospitals got cost, and for-profits got cost plus a return on equity. 

Medicare quickly figured out a sad truth. There wasn’t enough Medicare money. 

For Medicare’s limited inpatient “routine” or “room and board” costs, they created a “routine cost limit.” They would pay ancillary inpatient and outpatient sums at cost, but limit costs related to “room and board.” 

For just a few years, in the early 1980s, Medicare paid at inpatient cost subject to a “per discharge” limit.

But Medicare stopped paying a return on equity. The Inpatient Prospective Payment System was implemented, meaning all direct connection to costs were now gone, but however you sliced it, Medicare was now paying less than the cost of treating patients. If Medicare did not pay its fair share, then hospitals would make it up on other payers. This is known as cost shifting.

What about current data? We took the latest Medicare cost reports from across the country. We compared only acute-care hospitals. We took net revenue as reported on worksheet G3 and divided it by total patient days from worksheet S3, line 14. The result was average net revenue of $5,947.42 per patient day. Then we took Medicare payments from worksheets E, Part A and E Part B. We added back coinsurance (very generous to Medicare). 

We then divided that amount by Medicare days reported on worksheet S3 of the cost reports. The result was Medicare payments of $3,877.34 per day. This means that Medicare is paying only about 65 percent what would have to be paid for hospitals to have the same net revenue under “Medicare for all.”

In conclusion, any “Medicare for all” program will have to contend with the truth that Medicare has not been paying its fair share of medical costs for decades.


Timothy Powell, CPA

Timothy Powell is a nationally recognized expert on regulatory matters, including the False Claims Act, Zone Program Integrity Contractor (ZPIC) audits, and U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) compliance. He is a member of the RACmonitor editorial board and a national correspondent for Monitor Mondays.

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