As the nation’s health care debate rages in the Washington, D.C. political hallways, it is a good idea to take a hard look at what could be the heart of the issue: Medicaid and Medicare. The large issue economically is what does Medicaid and Medicare pay to hospital and doctors who render services to the Federal Government’s health plans for the growing elderly population and those economically unable to afford traditional commercial health insurance.

At the end of last year, it was reported by the American Hospital Association (AHA) that Medicaid and Medicare reimbursement in 2015 was less than the actual hospital costs for treating beneficiaries by $57.8 billion. That is billion with a “B”.

According to the AHA report, Medicaid (Medi-Cal in California) and Medicare reimbursement did not cover $58.7 billion in actual hospital costs. The data from the AHA’s Annual Survey of U.S. hospitals showed Medicare reimbursement was below the actual costs by $41.6 billion, while Medicaid reimbursement was $16.2 billion short.

So why are these numbers so critical to the debate? The ACA survey results showed that Medicaid and Medicare payments do not cover the amounts hospitals pay for personnel, technology, and other goods and services required to provide care to Medicare and Medicaid beneficiaries. This is critical in areas where the population is largely covered by Medicare and Medicaid. It explains why private U.S. Hospitals in lower income zones are closing at historic rates.

“Payment rates for Medicare and Medicaid, with the exception of managed care plans, are set by law rather than through a negotiation process, as with private insurers,” the AHA report stated. “These payment rates are currently set below the costs of providing care, resulting in underpayment.”

In every day terms, it would be the same as if the price a restaurant customer paid for his meals were below the price the owner paid for the meal ingredients.  The only question is how long before the restaurant door has an “Out of Business” sign hanging.

The ACA study showed how much federal healthcare payments are below actual costs to the dollar. Medicare paid hospitals only 88 cents for every dollar spent by the hospital for a Medicare patient care in 2015. More troubling for providers is that Medicare underpayments may also be greater for hospitals in the near future.

The Congressional Budget Office (CBO) reported in September of 2016 that annual Medicare reimbursement updates under the Affordable Care Act (ACA) will decrease rates by an average of 0.8 percent points between 2012 and 2015. Mandated annual hospital payment reductions will also reduce reimbursement by 0.4 percentage points between 2010 and 2019.

Hospitals also experienced Medicaid reimbursement shortfalls, the AHA added. Hospitals received reimbursement of only 90 cents for every dollar spent by the hospital to treat Medicaid patients in the same period.

Dr. Donald Condit, a Michigan orthopedic surgeon who specializes in hand abnormalities, spoke to Michigan Capitol Confidential on the subject of Medicaid reimbursement when the ACA was expanding Uncle Sam’s plan in many states. The Michigan doctor was not opposed to accepting more Medicaid patients, but the business reality was that he could not because the service costs are too high and the reimbursements too low.

“Medicaid pays us way below what it costs us to take care of [patients],” Condit said.

He said Medicaid reimbursements are 22 cents to 25 cents on the dollar compared to what it costs to take care of a patient. Since a physician’s office overhead alone is 30 percent to 50 percent of every dollar charged, it puts a lot of pressure on doctors to stop accepting patients on Medicaid. If there is a shortage of doctors willing to accept Medicaid patients, the spillover to urgent care centers and hospital emergency rooms will only continue to grow.

What is not in dispute is that most hospitals reported that federal healthcare payments did not cover actual healthcare costs. In 2015, about 64 percent of hospitals reported receiving Medicare reimbursement less than actual costs and 60 percent of hospitals received Medicaid reimbursement less than actual costs.

Medicaid and Medicare underpayments also have not improved since 2012. Medicaid and Medicare shortfalls actually increased slightly in 2015. The 2014 Annual Survey of U.S. hospitals showed that hospitals were underpaid by $56 billion in 2012, with Medicare reimbursement accounting for $42.3 billion of the total.

Additionally, the AHA also recently reported that community hospitals faced high uncompensated care costs in 2015 in conjunction with Medicare and Medicaid shortfalls. Community hospitals provided more than $35.7 billion in uncompensated care to patients.

The Centers for Medicare and Medicaid Services (CMS) does assist U.S. hospitals with additional funding.  The Disproportionate Share Hospital payments help providers that treat large proportions of uninsured and Medicaid individuals. This monetary infusion assists hospitals facing the economic pressure of treating large volumes of uncompensated care costs.

However, the ACA mandated that CMS decrease certain uncompensated care payments by $2 billion by 2018 and by another $8 billion by 2025, making some hospitals particularly vulnerable.

A September 2016 Journal of the American Medical Association (JAMA) pediatrics study stated that pediatrics providers would face serious financial setbacks under upcoming uncompensated care payment reductions. Free-standing children’s hospitals would experience the largest financial losses compared to other pediatric facilities with more than $10 million in losses per hospital.

While physicians have more leeway in whether to accept Medicare and/or Medicaid patients, hospitals have little to no choice. Despite low Medicaid and Medicare reimbursement rates and high uncompensated care costs, the AHA report pointed out that few hospitals can elect not to participate in federal healthcare programs.

“Hospital participation in Medicare and Medicaid is voluntary,” noted the AHA. “However, as a condition for receiving federal tax exemption for providing healthcare to the community, not-for-profit hospitals are required to care for Medicare and Medicaid beneficiaries. Also, Medicare and Medicaid account for more than 60 percent of all care provided by hospitals.”

The AHA also noted that the recent reports only account for two services and programs that hospitals provide to meet community healthcare needs. While hospitals benefit their geographic areas by covering federal healthcare payment shortfalls and providing uncompensated care, they also implement other community programs that may strain hospital revenue cycles.