Hospitals Face Financial Challenges Serving Medicare Inpatient Fee-for-Service Cases

Medicare is the largest single payer of health care services in the U.S., totaling $900.8 billion in 2021. New research from the AAMC Research and Action Institute reveals that not-for-profit and teaching hospitals generally incur losses on the majority of inpatient fee-for-service Medicare diagnosis-related groups (MS-DRGs).

These hospitals provide a wide spectrum of clinical services, often treating more complex cases, which impacts profitability. In 2021, hospitals faced an aggregate loss of $4.9 billion on Medicare inpatient fee-for-service discharges, averaging a loss of $2,244 per discharge. Only 29 of 737 MS-DRGs were profitable across hospital types that year. Not-for-profit teaching hospitals had Medicare margins of -17.5%, compared to -10.2% for nonteaching hospitals, while all-payer margins remained positive, indicating reliance on private insurance reimbursement to offset Medicare losses. For-profit hospitals showed a higher likelihood of profitable Medicare MS-DRGs (24.3%) compared to not-for-profit hospitals (3.8%) and tended to incur lower average losses per discharge. For-profit hospitals also exhibited lower cost-to-charge ratios and higher payment-to-cost ratios relative to not-for-profit hospitals, contributing to better financial outcomes.

Teaching and not-for-profit hospitals treated a larger share of high-complexity cases, with higher losses on these cases compared to for-profit hospitals. Not-for-profit hospitals lost an average of nearly $5,900 per complex Medicare discharge. Limitations exist in using MS-DRGs and case-mix indices to fully capture patient complexity and costs. The research underscores that hospitals cannot negotiate Medicare rates and must rely on higher payments from other payers, philanthropy, or investments to maintain financial viability.

Data analysis excluded certain patient groups and hospital types and was based on claims and survey databases from CMS, AHRQ, and AHA for 2021. The findings highlight the financial challenges for hospitals in serving Medicare populations, especially for not-for-profit and teaching institutions, and the varying financial dynamics across hospital ownership and teaching status.