Hospitals' all-payer margins climb in 2017 even as Medicare margins slump

Preliminary data from the Medicare Payment Advisory Commission shows hospitals' Medicare margins continue to decline, reaching their lowest point in 2017 in at least a decade. Even so, hospitals' all-payer margins continued their upward trek.

In aggregate, U.S. hospitals' Medicare margin was negative 9.9% in 2017, compared with negative 9.7% in 2016, according to MedPAC. The commission noted that the results are preliminary and subject to change. MedPAC publishes a report to Congress each March with finalized data.

The results varied by type of hospital. Not-for-profit hospitals reported Medicare margins of negative 11% in 2017, while for-profit hospitals reported Medicare margins of negative 2.6%, according to the preliminary data.

MedPAC also said hospitals in urban areas reported Medicare margins of negative 10%, while rural facilities, including critical-access hospitals, had Medicare margins of negative 5.9%. The commission's previous reports have explained that Medicare payments fail to fully cover the cost of caring for seniors. Last year, MedPAC warned that the widening gap between Medicare rates and higher commercial insurance rates may give hospitals an incentive to focus primarily on the commercially insured.

But even with declining Medicare margins, hospitals across the nation have grown more profitable overall. Hospitals' aggregate all-payer margin climbed to 7.1% in 2017 from 6.4% the year before, according to the preliminary data. Hospitals' operating margin stayed relatively flat at 5.9% in 2017, compared with 5.8% in 2016.

"They've done incredibly well," said Paul Hughes-Cromwick, co-director of sustainable health spending strategies at not-for-profit research organization Altarum, noting that 2015 to 2017 was for many hospitals "a golden era."

Hospitals have benefited from a strong post-recession economy and Medicaid expansion under the Affordable Care Act, which ushered in extra payments for providers, he said. Moreover, prompted by a provision in the ACA that adjusts hospital reimbursement for Medicare services based on productivity, hospitals have worked to become more efficient.

It's important to note, however, that hospital margins can vary widely. Much depends on a hospital's payer mix. One that sees primarily Medicaid and Medicare patients and few commercial patients may have lower margins than a hospital with a heavy mix of commercially insured patients.