5 Myths and Facts about Medicare — In Pictures

Summary: Not long ago the Medicare Payment Advisory Commission (MedPac) came out with a data book on Medicare spending. The information is condensed into tables and charts.  As I looked at the charts, I found some surprises. Below, myths and facts about:

  • how hard it is for Medicare patients to find a doctor
  • where most of our Medicare dollars go
  • increases in Medicare payments to physicians– and whether doctors automatically hike the volume of services they provide when Medicare cuts reimbursements for services.
  • hospitals losing money on Medicare patients
  • which hospitals make a profit on Medicare, and which hospitals cannot break even on Medicare reimbursements

MYTH #1 Physicians have been refusing to take new Medicare patients; many have a hard time making appointments.

FACT: As charts 5-3 and 5-4 reveal, Medicare patients report as good or better access than privately insured patients—even to primary care physicians.

* On each of the following charts just click on the image to enlarge if necessary


MYTH #2: The bulk of our Medicare dollars are spent on acute care during the final weeks of life.

FACT: About 25% of Medicare dollars are spent on patients during the final year of life—not during the final weeks.

In most cases, it is not possible to know how much time the patient has left—one year, two years, three years . . . particularly if they suffer from heart or lung disease or are simply “dwindling”—growing frailer as they grow older. See figure 1 here

Meanwhile, as table  2-7 shows, more than half of all Medicare dollars are spent treating long-term chronic conditions.  And as table 2-8 illustrates, in recent years, reimbursements for certain conditions have been soaring by more than 10 percent a year, including:  lymphoma, joint degeneration, chronic renal failure, lung disease, metabolic disorders, breast cancer, rheumatoid arthritis and stomach cancer .



MYTH #3:  Medicare reimbursements to physicians have remained flat to down over the past decade.

FACT:  As chart 1-2 reveals, from 1998 to 2008 Medicare fee-for-service reimbursements to physicians climbed by 75%.  Of course, over the same ten years, the cost to the doctor of providing services also has risen.  In some specialties, doctors who are solo practitioners or working with a small group of physicians have watched their real income drop, particularly if they are located in an area where the cost of labor and real estate is high.

But many doctors in more lucrative specialties have seen their income rise over the same. And those working in large groups that enjoy economies of scale have not been hard-hit by rising expenses.

The 75% increase reflects the fact that Medicare has raised fees for some services, but, as chart 8-2 shows, most of the hike in income can be traced to higher volume: doctors have been “doing more” as they prescribe more tests, and  recommend more procedures.  In particular, chart 8-2 demonstrates, they’ve been ordering more diagnostic tests, MRIs and CT Scans. From 2003 to 2006 Medicare reimbursements to physicians for imaging services rose by 11% a year.

In 2007, Medicare responded by capping physician fees for imaging. The conventional wisdom says that if fees  for a medical service are lowered, doctors will make up the difference by increasing volume. But that didn’t happen.  Growth in the number and intensity of imaging services slowed from 11% a year to 3.8%. This suggests that diagnostic testing had become so popular in part because it was so lucrative. Meanwhile, as chart 8-2 reveals, case “evaluation and management,” which is not as well paid, grew more slowly. (Evaluation and management involves listening to and talking to patients. In general our health care system does not pay as well for what some call “thinking medicine.”)


MYTH #4 Medicare has been underpaying hospitals for years. Reimbursements rarely match the cost of actually treating the patients, which is why hospitals must charge private insurers more. 

FACT: From 1998 to 2008, Medicare fee-for service reimbursements to hospitals for outpatient services climbed by 85%. Payments for inpatient services rose by more than 40%. (Chart 7-4) During this time hospitals were treating more patients, but as Chart 7-7 shows, reimbursements outstripped growth in the number of patients served. From 1998 to 2008, total outpatient visits rose by just 32% while inpatient admissions crept up by just 12%. 

This suggests that hospitals were performing more tests and procedures on each patient. Over the same span, length of hospital stays for Medicare patients fell. (chart 7-9)

Growth in Medicare reimbursements slowed from 2005 to 2007 as beneficiaries switched from tradition fee-for-service Medicare to Medicare Advantage programs. But of course Medicare was still footing the bill by paying Advantage insurers —that spending just doesn’t show up on this chart.

Hospital profit margins vary widely, but many do make a nice profit on Medicare reimbursements. As chart 7-12 shows, in 2008, one-quarter of hospitals had Medicare inpatient margins that were 6.5 percent or higher, while another quarter reported inpatient margins that were 20.3 percent below the cost of caring for patients.  It’s worth noting that during the 1990s the average hospitals enjoyed Medicare profit margins that ran as high as 18 percent. Margins on inpatient care didn’t begin to sink until 2004. And even then, in 2008 thirty-seven percent of hospitals enjoyed positive profit margins while caring for Medicare patients– and 2008 was the toughest year hospitals had seen in fourteen years.

When you add profits made on outpatient care, inpatient psychiatric care, rehab, skilled nursing facilities and home health services, the cost of graduate medical care and bad debts, overall Medicare margins follow the same pattern. Chart 7-14 illustrates the fact that in the 1990s average overall margins climbed as high as 11.9 percent; in 2008 the average fell to -7.2% Nevertheless, in 2008 31 percent of all hospitals managed to report profits on total Medicare services, including outpatient as well as inpatient care, with one-quarter showing margins of 2.5 percent or higher.




MYTH #5 If Medicare tries to rein in spending on hospital care, the quality of care will suffer. Most hospitals are already operating on tiny margins. And there just aren’t many ways for hospitals to cut the cost of caring for patients.

FACT: After adjusting for differences in patient mix, wages, outlier (extremely ill) patients, transfer cases, interest expense, the costs of teaching, and the effect of low-income Medicare patients, MedPac researchers have discovered that when hospitals are under financial pressure either because they have fewer patients, a larger share of Medicaid patients—or because private insurers are paying less—some hospitals manage to become more efficient, and turn a profit on Medicare patients.  (See table 7-20)

Hospitals that cannot make a profit on Medicare reimbursements tend to be  those that are under little financial pressure, enjoying profit margins of 5 percent or more on their non-Medicare patients.  (Note: most hospitals in the U.S. are non-profits; for a non-profit this is a very comfortable margin. Some , especially large academic medical centers, also boast huge endowments. )This shouldn’t come as a surprise. Like most other organizations, hospitals spend more lavishly when plenty of money is available. When money is tight, they are more likely to concentrate on avoiding waste.

As chart 7-21 reveals, how much it cost hospitals to care for Medicare patients rose and fell, from 1987 to 2007, depending on whether private insurers were paying more—or less. From 1987 to 1992, private insurers were generous, and hospital spending per patient rose by 8.3 percent a year during these three years. Then came managed care. In the 1990s, HMOs put hospitals under financial pressure, and hospitals managed to cap spending; during those years, hospitals costs when caring for Medicare patients rose by just 0.8% a year.

By 1999 insurers were scarred by the backlash against “manage care,” and they gave up. Meanwhile, thanks to a wave of consolidations, hospitals now had more clout in the marketplace and were able to demand higher reimbursements. They were no longer under so much pressure, and spending on Medicare patients rose.

There is no clear evidence that the overall quality of hospital care that Medicare patients received fell in the 1990s—or that  it rose along with spending, after 1999. To the contrary, many nurses, doctors and patients report that the quality of hospital care has been declining in this century, even though fewer patients are dying either while in the hospital or 30 days after discharge. (See chart 4-1). Perceptions of quality are highly subjective, but there is solid evidence that nurses are doing more and have less time to care for patients.  Meanwhile, the number of hospital patients who are injured while in the hospital is rising, and the rate of avoidable complications following surgery remains high at 10.75% (See chart 4-2 below)

Finally, if you include income from all sources including private insurers, out-of-pocket payments by patients, Medicare, Medicaid and other government payments as well as  investment income,  chart 7-16 reveals  that from 1994 to 2008, average hospital profit margins ranged from 6.4% to 3.6% dropping to 1.9% only in 2008 due to losses in investment income. These, of course, are only averages. During this time, some hospitals were operating in the red. 




16 thoughts on “5 Myths and Facts about Medicare — In Pictures

  1. Thanks for this article.It really concerns me that you use data from Medpac as if it were accurate. Personally, I think alot of their “statistics” are flawed. For one example, in the past, they’ve published so-called information on imaging utilization that has been debunked by several other organizations. While the Medpac report is really pretty with all of it’s charts & graphs, it just isn’t credible to me. Surely I’m not the only one that they have a predetermined agenda & the “data” they produce is designed to fit that need… & the politicians just salivate all over it.

  2. Excuse the omitted word: “surely I’m not the only one who thinks that they have…….”

  3. Maggie, many of these charts, particularly #’s 7-12 and 7-14 seem to indicate that hospitals have been experiencing increasing losses each year since 2003. Am I reading this wrong? Thanks, Pat Cook

  4. Jill & John Ballard
    While not everyone agrees with all of MedPac’s reserach, it is generally recognized, in Washingon and in Congress, as a Bi-partisan and pretty apolitical group.
    This is why MedPc’s reports garner so much respect in Congress.
    The only groups that have criticized MedPac
    s numbers on diagnostic imaging tend to be companies and lobbiest that represent companies that make diagnostic imaging equipment–and some health care providers (hospitals and certain specialists) who make a great deal of money on very lucrative, often unnecessary, diagnostic imaging. (See my most recent post.)
    Can you cite a source–and give me a link–to an expert group that questions MedPac’s numbers in this area — an expert group that makes no money from diagnostic imaging??
    John B.–
    Thank you so very much. The Century Foundation will be publishing my
    Myths & Facts series in a single print report.
    Please remind me and I will make sure that you get as many as you can use..
    I think we’ll probably also publish my series of replies to Cato in a separate report.

  5. Jill & John Ballard
    While not everyone agrees with all of MedPac’s reserach, it is generally recognized, in Washingon and in Congress, as a Bi-partisan and pretty apolitical group.
    This is why MedPc’s reports garner so much respect in Congress.
    The only groups that have criticized MedPac
    s numbers on diagnostic imaging tend to be companies and lobbiest that represent companies that make diagnostic imaging equipment–and some health care providers (hospitals and certain specialists) who make a great deal of money on very lucrative, often unnecessary, diagnostic imaging. (See my most recent post.)
    Can you cite a source–and give me a link–to an expert group that questions MedPac’s numbers in this area — an expert group that makes no money from diagnostic imaging??
    John B.–
    Thank you so very much. The Century Foundation will be publishing my
    Myths & Facts series in a single print report.
    Please remind me and I will make sure that you get as many as you can use..
    I think we’ll probably also publish my series of replies to Cato in a separate report.

  6. Here is a huge link: http://medilinkgroup.com/Documents/Articles/A%20Review%20of%20MedPAC's%20Recommendation%20to%20Reduce%20Reimbursement%20for%20MRI%20and%20CT%20Imaging%20Services.pdf
    Of course, there are few that currently write about health related situations that have no financial interest. There are also articles by ACR & Aunt Minnie writers, & can’t tell you if they make any money from imaging or not. Like you, they make money writing about it. It may be possible that the groups that criticize Medpac are on the media forefront because they have a “dog in the fight”. I’m a nobody that forms my opinions from my own family’s experiences with healthcare and insurance. The members of Medpac have other jobs and responsibilities outside of the committee. It’s hard for me to believe that they do every bit of research all by themselves. They most likely have a fairly large staff for this. Just like you and me, each of these people has an opinion. Thanks for letting me express mine.

  7. Pat–
    First, look at the final chart, 7-16. That’s the one that tells you how the average hospital has been doing when you include not just Medicare payments, but payments from all sources (private insurers, out-of-pocket payments by patients and investment income.)
    As you see the average hospital was doing nicely from 2003 to 2007, hitting a profit margin of 6.1% in 2006 (very high for a non-profit). Margins fell to 1.9% in 2008 almost entirely becuase of poor returns on investments. Like almost everyone else, hospitals lost money when investing in the markets in 2008.
    What the charts that you refer to show is that the average hospital was losing money on Medicare patients from 2003 to 2008–after making nice profits on Medicare patients prior to 2003.
    But the important point here is that the idea of the “average hospital” is misleading. There is, in fact, huge variation in how much money hospitals have been making –or losing–on Medicare patients in recent years.
    For example, in 2008 the mythical “average hospital” lost 7.1 percent on Medicare patients. Yet 37% of all hospitals made money on Medicare patients that year.
    The “average” was pulled down to 7.1 percent because one-fourth of all hospitals saw negative margins of -19.1 or lower on Medicare patients.
    How did 37% of hospitals manage to make money on Medicare patients the same year that 25% lost so much money on Medicare patients?
    Chart 7-20 and the tables below that chart suggest that when they are under financial pressure, some hospitals learn how to become more efficient and so make money on Medicare patients. Other hospitals, that are not under financial pressure, are more extravagant, and then, if reimbursements from private insurers fall, or their investment income plummets, their inefficiency catches up with them and they lose money.
    Let me add that some hospitals that are under financial pressure can’t make money, no matter how hard they try to become efficient–typically these are public hospitals located in very poor areas that see a high number of Medicaid patients, as well as uninsured patietns, don’t have a big endowment to invest, are understaffed and are located in crumbling buildings that need constant repair and maintenance.
    But other hospitals (usually private non-profits) that are losing money on Medicare could make money on those Medicare patients if hosptial management decided to change its priorities and focus on efficiency, reducing costly errors and infections, putting patient safety and evidence-based medicine ahead of expensive construction projects that are not absolutely necessary.
    Finally, when setting reimbursements in different places, Medicare takes into account differences in the local cost of labor, real-estate, etc. as well as whether the hospital has extra expenses because it is a teaching hospital, and whether it is a seeing a high proportion of uninsured and Medicaid patients.
    These adjustments are complicated, and some hospitals wind up being underpaid while others are over-paid with politics playing a role in the final numbers. I’ve been told that large teaching hosptials in Manhattan are paid handsomely becasse of a deal Patrick Moynihan struck years ago. (I have no way of knowing if this is true, though my source is knowledgable.) If memory servies, hospitals in Dade County, Florida receive some of the highest reimbursements. . .
    That said, chart 21 is pretty persuasvie in suggesting that when they’re under financial pressure, many hospitals can become more efficient, and cut their costs.
    And there is no evidence showing that the overall quality of care in U.S. hospitals was worse in the 1990s than it has been in the past decade. Anecdotal evidence (based on rising complaints from doctors, nurses and patients) suggests the opposite: as our hosptials become more hectic, with more people “doing more” to more patients care becomes less well-cooridinated and the rate of errors rises unless management is making patient safety a top priority.

  8. Good stuff, Maggie. There are two things I would say from the perspective of a PCP accepting Medicare:
    1. Patient satisfaction is difficult as people on private plans are younger and, in my experience, much more likely to be rushed, complain, or otherwise be dissatisfied. This may be that people who pay for their care feel more right to complain than do those who don’t directly pay, or it may be generational. It’s just my opinion, not scientific, but data can be clouded by things like this.
    2. The slow rise in E/M is a huge problem. That is actually part of what is creating more problems in our system. Why would the payments for procedures outstrip that of a regular office visit? That curve (chart 8-4) is probably the best insight into where the system has failed.
    Overall, however, I think this is useful info.

  9. Rob —
    Thank you.
    Interesting what you say about younger vs. older patients.
    I do think many younger patients are probably irritable because they are rushed–trying to do so many things, especially women who are raising children and have a demanding career. (I did both–children now grown–greatly enjoyed both, but looking back, I’m certainly much less stressed now.)
    The other possibilty is simply that younger people are ruder. The “Me Decade” followed by the “Greed Decade” had a less than salutary effect on a generation growing up at that time. (Some obviously, not all).
    Finally, I think that as people mature (and I mean in our 50s) we become more accepting of the fact that life isn’t perfect.
    One of the few nice things about aging. I’m no longer such a perfectionist. (Note the typos in my posts and comments.)

  10. Jill–
    Thank you for the link.
    What you sent me was written by Medilink; they provide servcices for and are paid by radiologists.
    So, yes, they have an axe to grind.
    A great many organizations that write about healthcare don’t have a financial interest: the Institute for Health Care Improvement, for instance, MedPac; some patient advocacy groups that don’t take money from anyone; the National Physician’s Alliance (they don’t even accept lunch from anyone) and are outspoken about over-treatment . . . I could go on.
    The fact that Medilink doesn’t disclose its conflict of interest on the piece you sent me tells me that something’s wrong.
    This blog doesn’t accept ads and I would never take money from any sector of the medical industry.
    The blog does have a political point of view, which I make clear: The Century Foundation is progressive. But neither I nor TCF has any financial interest in health care or health care reform.
    And this is true of a great many health care bloggers.
    Finally, the people on the MedPAC committee do have a large staff, but they are also extremely knowledgable themselves. I don’t know of anyone who has questioned the objectivity of their research except the people who would lose money if Medicare actually begins to rein in health care inflation.

  11. I did not intend to imply that you or this blog were paid directly by any special interest. However, you cannot deny that if the state of healthcare were not in it’s current condition, and your opinions were not what so many wanted to hear right now, your book wouldn’t be doing so well.($$$)I still think that there are several members off Medpac that are not unbiased. I don’t think it’s wrong, just that we should tell it like it is. For instance, remember “co-ops”? and Scott Armstrong is the CEO of the GHC. He also makes political contributions to the AHIP. He’s an insurance guy. Bruce Stewart was provided with an endowment by Parke Davis for his academic work in 1997, so he could be a Pharma guy. Ronald Castellanos, M.D. is my favorite, and I mean I really like him because he doesn’t hide behind anything. He is quoted saying, in reference to physician fees, that the SGR “doesn’t keep up with costs” and that we shouldn’t “throw the baby out with the bathwater”. He has admitted to imaging self-referral in his practice. My point is that in the current health care debate, our opinions are formed by our financial experiences and nobody is immune to it.

  12. Jill–
    I don’t think you quite understand conflict of interest.
    If I were paid more because I favor health reform, that would consitute conflict of interest. But I am probably paid less than I would be if I opposed reform. (The conservative think tanks are far wealthier than a place like The Century Foundation, so the pay is likely to be much better.)
    I haven’t made a dime on my book. It’s done very well for a long book on a complicated subject, but books like this don’t normally make money.
    If the members of MedPAC were making recommendations that favored Pharma or insurance companies, then one could accuse them of conflict of interest if they also received money from Pharma or insurers.
    But the fact is most of their recommendations do not favor the health care industry; nor are they recieving money from the industry, so there is no conflict of interest.