iProtean— Medicare & Medicaid Underpayments Hit $56 Billion in 2012

The American Hospital Association (AHA) released a fact sheet last week that outlines the amount most U.S. hospitals were “underpaid” by Medicare and Medicaid in 2012. The underpayments affected at least 68 percent of hospitals and totaled $56 billion.


“Underpayment” occurs when the payment a hospital received for providing care is less than the costs of providing that care. (AHA Fact Sheet, 2014) Costs typically include the amount paid for personnel, technology and other goods and services required to provide hospital care. So underpayment occurs when the costs of providing care exceed the amount paid by Medicare and Medicaid for providing that care.


AHA collects aggregate information on the payments and costs associated with care delivered to Medicare and Medicaid patients by U.S. hospitals. The data come from AHA’s annual survey of hospitals. For this computation of underpayments, AHA noted that Medicare and Medicaid payments include all applicable payment adjustments (Disproportionate Share, Indirect Medical Education, etc.), and both fee-for-service and managed care payments.


Results of Data Analysis

Both Medicare and Medicare payments fell significantly below costs:

  • Combined underpayments were $56 billion in 2012—$42.3 billion for Medicare and $13.7 billion for Medicaid
  • Hospitals received payment of $0.86 for every dollar spent for Medicare patients, and $0.89 for every dollar spent for Medicaid patients
  • 69 percent of hospitals received Medicare payments less than cost; 68 percent of hospitals received Medicaid payments less than cost.


AHA also released a chart showing hospitals have seen $113 billion in Medicare and Medicaid payment cuts since 2010:


  • $53.8 billion—Cuts from sequestration (including cuts from the Bipartisan Budget Act of 2013)
  • $35.3 billion—MS-DRG Coding Offsets
  • $2.4 billion—Two-midnight offset
  • $3 billion—Long term acute care hospitals
  • $4.2 billion—3-day window
  • $12.2 billion—Medicaid SDH
  • $2.1 billion—Bad debt


(Sources: “AHA Says Medicare and Medicaid Underpaid Hospitals by $56 Billion in 2012,” Health Lawyers Weekly, January 17, 2014; and “American Hospital Association Underpayment by Medicare and Medicaid Fact Sheet 2014”)


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