There is this idea that Medicare pays hospitals "below cost." On March 17, 2009, Glenn Hackbarth, the chairman of MedPAC, testified before the House Ways and Means Committee on this very issue. Hospitals, Hackbarth argued, are inefficient. Their costs are too high.
And this was backed up in the data. "MedPAC analysis has identified a set of low-cost hospitals that consistently out-perform other hospitals on a series of quality measures, including mortality and readmissions," Hackbarth explained. "Among this set of hospitals, we found that Medicare payments on average roughly equaled the hospitals’ costs." In less "efficient" hospitals, Medicare's payments were below costs.
Among the major differences between "efficient" and "non-efficient" hospitals was that the less-efficient hospitals were not under financial pressure: They made a lot more money from other sources. As such, they spent a lot more money on things like capital expansion. What MedPAC found was that hospitals under "financial pressure" -- hospitals that made less money, in other words -- managed to control their "cost" better.
Medicare's payments sufficed for them. And their quality outcomes weren't any worse.
Medicare's rates aren't where the hospitals like them to be. But it's still worthwhile for them to do business with Medicare. That suggests there's significant space between where hospitals are today and where they could be in a more efficient system.
That's not true for everyone, of course. As Hackbarth admits, Medicare underpays primary care providers, and it needs to redress that balance. And Medicare itself does a lot to increase costs across the system (in particular, it's fee-for-service payments give doctors incentive to increase volume).
Examine the payments to individual hospitals in more detail and you discover that many hospitals actually make a profit on most Medicare patients. According to the American Hospital Association, 42% of hospitals make a profit on Medicare overall. In the remaining hospitals, most Medicare patients are profitable, but losses are related to a minority of patients who need much more care than average because of longer stays, more complications, and underlying health problems.
http://www.ihatoday.org/issues/payme.../underpymt.pdf