California Hospitals’ Rapidly Declining Traditional Medicare Operating Margins

Gaudette Étienne () and Bhattacharya Jay
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Gaudette Étienne: Institute of Health Policy, Management and Evaluation, Dalla Lana School of Public Health, University of Toronto, 155 College St 4th Floor, Toronto, ON M5T 3M6, Canada
Bhattacharya Jay: Stanford Health Policy, Stanford University School of Medicine, Stanford, CA, USA

Forum for Health Economics & Policy, 2023, vol. 26, issue 1, 1-12

Abstract: In recent years, Medicare margins of U.S. short-term acute care hospitals participating in the inpatient prospective payment system (IPPS) have declined nationally by over 10 percentage points, from 2.2% in 2002 to −8.7% in 2019. This trend conceals critical regional variations, with recent studies documenting particularly low and negative margins in metropolitan areas with higher labor costs despite geographic adjustments by the Centers for Medicare & Medicaid Services (CMS). In this article, we describe recent trends in California hospitals’ traditional fee-for-service Medicare operating margins compared to hospital operating margins across payers and changes in the CMS hospital wage index (HWI) used to adjust Medicare payments. We conduct an observational study of audited financial reports of IPPS-participating California hospitals using California Department of Health Care Access and Information and CMS data for years 2005–2020 (n = 4429 reports included in the analysis). We describe trends in financial measures by payer and investigate associations between HWI and traditional Medicare margins, focusing on the pre-COVID period of 2005 through 2019. During that period, California hospitals’ statewide traditional Medicare operating margin declined from −27 to −40%, and financial shortfalls in caring for fee-for-service Medicare patients more than doubled ($4.1 billion in 2005 to $8.5 billion in 2019, both values in 2019 dollars). Meanwhile, operating margins from commercial managed care patients increased from 21% in 2005 to 38% in 2019. There was a stable negative association between HWI and traditional Medicare operating margins throughout the period (p = 0.000 in 2005; p

Keywords: Medicare payments; Medicare part A; inpatient prospective payment system (IPPS); hospital wage index (HWI); hospital operating margins (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1515/fhep-2022-0038

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