Report AHA and Underpayments Medicare and Medicaid

The American Hospital Association (AHA) collects annual data on payments and costs associated with care provided to Medicare and Medicaid beneficiaries by U.S. hospitals. This information is derived from the AHA's Annual Survey of Hospitals, which is the primary source for hospital financial data in the country. This fact sheet provides the definition of underpayment and explains how it is calculated for Medicare and Medicaid based on cost. Unlike private insurers, payment rates for Medicare and Medicaid are set by law rather than through negotiation. These rates are currently set below the actual costs of care, resulting in underpayment. Managed care plans have negotiated payment arrangements with hospitals. Although hospital participation in Medicare and Medicaid is voluntary, not-for-profit hospitals must care for beneficiaries as a condition for receiving federal tax exemption. Additionally, Medicare and Medicaid account for over 60% of all care provided by hospitals, making it difficult for hospitals to opt out. While underpayment is a challenge, hospitals also provide other community benefits such as uncompensated care. Underpayment is the difference between the costs incurred by hospitals and the reimbursement they receive for patient care. Calculating underpayment involves comparing payments received from Medicare and Medicaid to the costs of providing care. The AHA Annual Survey reports these payments, as well as the gross charges for Medicare and Medicaid services. Gross charges are translated into costs using a hospital's cost-to-charge ratio. In 2020, both Medicare and Medicaid payments fell below costs, resulting in underpayments of $100.4 billion. Medicare underpayments were $75.6 billion, while Medicaid underpayments were $24.8 billion. Hospitals received only 84 cents for every dollar spent on Medicare patients and 88 cents for every dollar spent on Medicaid patients in 2020. The majority of hospitals received payments from both programs that were less than the costs incurred.