MedPAC Reports Stable Medicare Hospital Sector, Proposes Targeted Support for Safety-Net Facilities

The Medicare Payment Advisory Commission (MedPAC) reported stability in the Medicare hospital sector amid rising service use and improved financial metrics, according to its December 2024 review. Hospital inpatient bed occupancy remained steady at 71%, with emergency department throughput averaging 150 minutes, while employment grew to 4.8 million. Utilization trends showed a 1.5% increase in inpatient stays per fee-for-service (FFS) Medicare beneficiary and a 4% rise in outpatient encounters, indicating sustained demand for hospital services. Financially, hospitals saw a positive shift with all-payer operating margins reaching 6.5% in fiscal year 2024, supported by 340B drug discount program payments and slower labor cost growth. The Medicare FFS margin improved to -12.1% due to stronger outpatient drug revenue and easing labor pressures, although margins varied significantly across hospitals. "Relatively efficient" hospitals experienced a median Medicare margin approaching -1%, with projections indicating potential improvement to break even by 2026, partly driven by an expected $1.8 billion increase in uncompensated-care payments. Quality metrics revealed improvement in risk-adjusted mortality rates to 7.4% for 2024, while readmission rates increased slightly to 15.4%. Patient experience measures remained largely stable but have yet to recover to pre-pandemic levels from 2019. The Commission noted ongoing shifts in hospital operations with eight more closures than openings and a continued trend of converting certain hospitals to rural emergency hospital (REH) status, which offers a fixed monthly Medicare payment and enhanced outpatient reimbursement. MedPAC’s draft recommendations for 2027 propose updating hospital payment rates as mandated by current law and allocating an additional $1 billion in targeted funding for hospitals treating higher proportions of low-income Medicare beneficiaries. The Commission endorses replacing traditional disproportionate-share hospital and uncompensated care payment formulas with the Medicare safety-net index (MSNI), which better predicts hospitals' financial pressure and aims to direct safety-net support more efficiently. Site-neutral payment policies remain a strategic focus, with current rules applying to most outpatient services in non-excepted off-campus departments, and upcoming expansions to drug administration services in 2026. MedPAC also highlighted concerns that Medicare Advantage plans typically mirror FFS outpatient rates but do not provide fixed monthly payments for REHs, a discrepancy that may require regulatory attention to align payment consistency across payers. Overall, MedPAC’s analysis underscores a generally stable Medicare hospital sector with targeted payment reforms aimed at sustaining access, enhancing financial viability, and supporting facilities serving vulnerable populations. These insights serve as a basis for policymakers and industry stakeholders to navigate the evolving hospital payment landscape within Medicare.