MedPAC predicts decline in hospitals' Medicare margins - Updata - Medicare Payment Advisory Commission - Brief Article

Healthcare Financial Management, Feb, 2002

Overall, hospitals' Medicare margins will average 3.8 percent in 2002, down from 4.7 percent in 1999, the Medicare Payment Advisory Commission (MedPAC) estimates. However, Medicare profits will vary dramatically based on the type of hospital. For example, MedPAC projects margins to average 6.8 percent for large urban hospitals and 10.8 percent for major teaching hospitals. However, MedPAC pegs margins for rural hospitals at minus 2 percent. (In its formal recommendations on payment policies for FY02, expected in late January, MedPAC may favor redistributing payments between rural and urban facilities.)

MedPAC further estimates that hospitals' margin from all payer sources was 4.5 percent for the first three quarters of 2001, compared with 3.9 percent in 1999. MedPAC predicts that the Medicare inpatient margin will be 10.8 percent in 2002, down from 11.9 percent in 1999. Overall, MedPAC's findings suggest that the hospital industry is healthy and, thus, should be viewed favorably by investors.

MedPAC attributes the decrease in overall Medicare average margins to higher costs and congressionally mandated spending reductions. Cuts in indirect medical education payments are expected to be particularly severe.

The method that MedPAC uses to compute margins is controversial among healthcare industry observers because it does not consider charity care, bad debt, and Medicare non-allowable expenses. MedPAC'S approach tends to result in more favorable projections than most hospital financial statements reflect.

For more information from MedPAC, go to http://www.medpac.gov/.