Traditional Medicare Operating Margins Fall at California Hospitals

Between 2005 and 2019, California hospitals’ traditional Medicare operating margins declined steeply, and financial shortfalls in caring for Medicare fee-for-service patients more than doubled, according to a study published in Forum for Health Economics and Policy.

“Concurrent with the decline in traditional Medicare margins, margins from commercial payers greatly improved, and overall margins were stable,” wrote corresponding author Étienne Gaudette, PhD, of the University of Toronto in Canada, and Jay Bhattacharya, MD, PhD, of the Stanford University School of Medicine in California.

The observational study analyzed financial data from California hospitals and the Centers for Medicare & Medicaid Services (CMS) to investigate trends by payer.

“In recent years, Medicare margins of US short-term acute care hospitals participating in the inpatient prospective payment system have declined nationally by over 10 percentage points, from 2.2% in 2002 to -8.7% in 2019,” the authors explained in the study background. “This trend conceals critical regional variations.”

By analyzing data for California during the pre-COVID period of 2005 through 2019, researchers found that traditional Medicare operating margins at hospitals statewide fell from -27 to -40%. Financial shortfalls in caring for fee-for-service Medicare patients rose from $4.1 billion to $8.5 billion.

Over the same period, operating margins from commercial managed care patients increased from 21% to 38%, according to the study.

Areas in the state with higher health care wages tended to have lower traditional Medicare operating margins than areas with lower wages, researchers pointed out.

“Future research should aim to clarify whether and to what extent the ongoing trends we described are causally explained by cost shifting and market consolidation and whether trends in the remainder of the United States are headed in the same direction as California,” researchers wrote. “If that were the case, there may be a risk of declining access to and affordability of hospital care more broadly.”

Reference:
Gaudette É, Bhattacharya J. California hospitals’ rapidly declining traditional Medicare operating margins. Forum Health Econ Policy. Published online March 7, 2023. doi:10.1515/fhep-2022-0038