Contrary To Popular Belief, Medicaid Hospital Admissions Are Often Profitable Because Of Additional Medicare Payments.

It is generally believed that most hospitals lose money on Medicaid admissions. The data suggest otherwise. Medicaid admissions are often profitable for hospitals because of payments from both the Medicaid program and the Medicare program, including payments for uncompensated care and from the Medicare disproportionate-share hospital program. On average, adding a single Medicaid patient day in fiscal year 2017 will increase most hospitals' Medicare payments by more than $300. When added to Medicaid payments, these payments often cause Medicaid patients to be profitable for hospitals. In contrast, adding a single charity care day in the same year will decrease overall Medicare payments by about $20 on average. The Centers for Medicare and Medicaid Services recently announced a proposal to shift some Medicare payments from supporting hospitals' costs for Medicaid patients to directly supporting their costs for uncompensated care. If that proposal is adopted, hospitals' profits on Medicaid patients would decrease, but their losses on care for the uninsured would be reduced.

Private-payer profits can induce negative Medicare margins.

A common assumption is that hospitals have little control over their costs and must charge high rates to private health insurers when Medicare rates are lower than hospital costs. We present evidence that contradicts that common assumption. Hospitals with strong market power and higher private-payer and other revenues appear to have less pressure to constrain their costs. Thus, these hospitals have higher costs per unit of service, which can lead to losses on Medicare patients. Hospitals under more financial pressure--with less market share and less ability to charge higher private rates--often constrain costs and can generate profits on Medicare patients.