Are medicare rates lower than actual cost of care?

Yes, Medicare reimbursement rates are consistently lower than the actual cost hospitals and physicians incur to provide that care.

This is not an accidental shortfall; it is a structural reality of the U.S. healthcare system that is widely acknowledged by both hospital industry groups and the federal government.

Here is how the numbers break down and why the shortfall exists.

The Financial Reality of Medicare Underpayment

The exact size of the shortfall depends on who is analyzing the data, but both industry advocates and independent government auditors agree that Medicare margins are deeply negative.

1. The Hospital Industry Perspective (AHA) According to data from the American Hospital Association (AHA), Medicare typically pays between 82 and 84 cents for every dollar a hospital spends caring for a Medicare patient.

• In 2022 (the most recent finalized AHA data), this resulted in a shortfall of nearly $100 billion in Medicare underpayments to U.S. hospitals.

2. The Government Auditor Perspective (MedPAC) The Medicare Payment Advisory Commission (MedPAC) is the independent congressional agency that audits Medicare finances. They also confirm that base Medicare rates do not cover total costs.

• In their March 2026 report to Congress, MedPAC noted that the overall aggregate hospital margin for Medicare patients in 2024 was -12.1%.
• MedPAC projects that this margin will remain negative, hovering around -10% for 2026.

Why Doesn't Medicare Just Pay the Full Cost?

If hospitals are losing money on Medicare patients, why doesn't Congress just raise the rates to cover 100% of the cost? There are two main reasons:

The Efficiency Argument MedPAC argues that Medicare should not simply write a blank check to cover whatever a hospital claims its costs are, because that removes any incentive for the hospital to operate efficiently. MedPAC tracks a subset of hospitals they classify as "relatively efficient" (hospitals that deliver high-quality care at lower costs). While the average hospital has a -12% Medicare margin, MedPAC notes that efficient hospitals have Medicare margins closer to -1% or -2%. The government's philosophy is that base rates should push hospitals to operate as efficiently as possible.

The Federal Budget With roughly 65 million Americans on Medicare, even a 1% increase in base rates costs the federal government billions of dollars. Policymakers frequently rely on keeping Medicare rates tight to help control the massive federal deficit.

The Consequence: The "Cost-Shift"

Because Medicare (and Medicaid) systematically pays less than the cost of care, hospitals have to make up those financial losses somewhere else in order to keep their doors open.

They do this by charging substantially higher rates to patients with private, commercial insurance (typically obtained through an employer). This dynamic is known as "cost-shifting." If a hospital loses 15% on a hip replacement for a Medicare patient, they will negotiate with a private insurer to pay 200% or 250% of the Medicare rate for that exact same surgery to balance their overall budget.