Relationships among Medicare inpatient, overall Medicare 

and total margins for hospitals 

The purpose of this memo is to describe various 

types of hospital margins, discuss the variation in 

hospitals’ Medicare margins, and explore the 

relationships among Medicare inpatient, overall 

Medicare, and total margins for hospitals. 

MedPAC uses hospitals’ Medicare margins, 

among other factors, to help assess whether 

Medicare’s payments to hospitals are adequate to 

ensure beneficiaries’ access to high quality care. 

 

• Medicare margins reflect the difference 

between hospitals’ Medicare payments 

and costs for services provided to 

Medicare beneficiaries, expressed as a 

percentage of payments. 

• Medicare inpatient margins include 

payments and costs for services covered 

by the inpatient prospective payment 

system (PPS). 

• Overall Medicare margins incorporate 

payments and costs for most services 

hospitals furnish to Medicare 

beneficiaries, including inpatient, 

outpatient, skilled nursing, home health, 

psychiatric, and rehabilitative services, as 

well as graduate medical education and 

bad debt. 

• Total margins include hospitals’ total 

revenues and costs for all activities from 

all sources (Medicare, Medicaid, other 

government, and private payers). 

 

Hospitals’ Medicare inpatient margins (10.8 

percent, on average, in 2000) are highly 

correlated with their overall Medicare margins 

(5.0 percent in 2000). Overall Medicare margins, 

however, are largely unrelated to hospitals’ total 

(all-payer) margins (3.4 percent in 2000). 

Variation in financial margins may have different 

implications for Medicare beneficiaries than for 

hospitals. The share of beneficiaries treated in 

hospitals with positive Medicare margins is 

greater than the share of hospitals with positive 

margins. For example, just over half of all 

hospitals had positive overall Medicare margins 

in 1999, but they accounted for 63 percent of 

Medicare discharges. Similarly, 69 percent of 

hospitals had positive Medicare inpatient margins 

in 1999, but they accounted for 78 percent of 

Medicare cases. This pattern occurs because 

hospitals with positive margins are more likely to 

be larger facilities that serve many patients. 

A recent MedPAC study using 1999 data found 

that Medicare inpatient margins vary widely at 

the hospital level. For example, the lowest 10 

percent of hospitals had Medicare inpatient 

margins below −13 percent and the highest 10 

percent had margins above +28 percent. We 

estimated that one-fourth of the variation in 

hospitals’ Medicare inpatient margins is 

associated with factors included in the hospital 

inpatient PPS. Most of this explained variation is 

attributable to three policy adjustments: payments 

for indirect medical education costs, payments for 

treating a disproportionate share of low-income 

patients, and additional payments for certain rural 

hospitals.1

 An additional 20 percent of the 

variance is explained by hospital operating 

characteristics at least partially under 

management control, such as occupancy rates and 

 1

A small portion of the explained variation is related to factors 

such as the case-mix and wage-index adjustments, which are designed 

to capture the influence of factors beyond hospitals’ control. 

601 New Jersey Avenue, N.W. • Suite 9000 

Washington, DC 20001 

202-220-3700 • Fax: 202-220-3759 

www.medpac.gov 

Glenn M. Hackbarth, J.D., Chairman 

Robert D. Reischauer, Ph.D., Vice Chairman 

Mark E. Miller, Ph.D., Executive Director

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length of stay (relative to expected length of stay 

based on national averages per diagnosis related 

group). Much of the impact of management 

effectiveness is probably unmeasured, however, 

and likely accounts for a substantial portion of the 

variation that remains unexplained. A fuller 

description of these findings is available in 

Chapter 3 of MedPAC’s June 2003 Report to the 

Congress 

(http://www.medpac.gov/publications/congressio

nal_reports/June03_Ch3.pdf). 

Figure 1 illustrates the strong correlation between 

inpatient and overall Medicare margins (R2 = 

0.82). Each data point on the figure represents an 

individual hospital. 

Figure 1: Relationship between hospitals’ Medicare 

inpatient and overall Medicare margins, 1999 

-80-70-60-50-40-30-20-10 0 10 20 30 40 50 60 70 80

Inpatient margin (percent)

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

Overall Med ci are margin (percent)

Hospital

Note: A margin is calculated as revenue minus costs, divided by 

revenue. The Medicare inpatient margin includes services covered by the 

inpatient prospective payment system (PPS). Overall Medicare margins 

cover the costs and payments of hospital inpatient, outpatient, 

psychiatric and rehabilitation (PPS-exempt), skilled nursing facility, and 

home health services, as well as graduate medical education and bad 

debts. 

Source: MedPAC analysis of Medicare cost report data from CMS. 

____________________________________________________ _

Hospitals with positive inpatient margins were 

highly likely to have had positive overall 

Medicare margins in 1999 and vice-versa. This 

relationship is not surprising because inpatient 

payments make up about three-quarters of total 

Medicare payments to PPS hospitals. Over time, 

national average Medicare inpatient margins and 

overall Medicare margins have followed similar 

trends (Figure 2). 

Figure 2: Trend in Medicare inpatient and overall 

Medicare margin, 1990- 2000

Note: Overall Medicare margin covers the costs and payments of hospital 

inpatient, outpatient, psychiatric and rehabilitation (prospective payment 

system-exempt), skilled nursing facility, and home health services, as well as 

graduate medical education and bad debt. The data required to calculate 

overall Medicare margins were not available prior to 1996. 

Source: MedPAC analysis of Medicare cost report data from CMS. 

____________________________________________________ _

Figure 3 shows that there is no consistent 

relationship between hospitals’ overall Medicare 

margins and total (all-payer) margins (R2

 = 0.06). 

Hospitals in the upper right quadrant of the graph 

had positive overall Medicare margins and 

positive total margins in 1999, while hospitals in 

the lower right quadrant had negative overall 

Medicare margins but positive total margins. 

Hospitals with negative Medicare margins and 

those with positive Medicare margins were 

almost equally likely to have had positive total 

margins: 65 percent of hospitals with negative 

overall Medicare margins had positive total 

margins, while 69 percent of hospitals with 

positive Medicare margins had positive total 

margins. 

-5

0

5

10

15

20

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Percent

Overall Medicare

Medicare inpatient
Figure 3: Relationship between hospitals’ overall 

Medicare and total margins, 1999 

-60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60

Total hospital margin (percent)

-60

-50

-40

-30

-20

-10

0

10

20

30

40

50

60

Overall Medicare marg ni (percent)

Hospital

Note: A margin is calculated as revenue minus costs, divided by 

revenue. Overall Medicare margins cover the costs and payments of 

hospital inpatient, outpatient, psychiatric and rehabilitation (prospective 

payment system-exempt), skilled nursing facility, and home health 

services, as well as graduate medical education and bad debts. Total 

margins include all patient care services funded by all payers, plus 

nonpatient revenues. 

Source: MedPAC analysis of Medicare cost report data from CMS. 

____________________________________________________ _

What explains the lack of a consistent 

relationship between Medicare margins and total 

(all-payer) margins? Medicare is the largest 

single purchaser of hospital services, on average 

accounting for 30 percent of hospital revenues in 

2001 (Figure 4). 

Figure 4: Distribution of hospital care expenditures, 

by source of funds, 2001

Source: CMS, Office of the Actuary.

However, the majority of hospital revenues—70 

percent—comes from other government payers 

(such as Medicaid) and private sources (primarily 

private health insurance). Because these 

purchasers account for most of hospitals’ 

revenues, they have a more significant impact on 

total hospital margins than Medicare alone. 

Thus, hospitals with positive Medicare margins 

may have negative total margins if payments for 

non-Medicare patients do not cover their costs. 

Payments by non-Medicare payers may not cover 

costs because the payment level is inadequate, the 

hospital provides a substantial amount of 

uncompensated care, or because the hospital does 

not operate efficiently. Conversely, hospitals 

with negative Medicare margins may achieve 

positive total margins if payments for nonMedicare patients exceed their costs. 

The lack of a consistent relationship between 

Medicare margins and total (all-payer) margins 

suggests that changes in Medicare’s payment 

policies may not provide a targeted or reliable 

tool for addressing total hospital financial 

performance. For example, increasing payments 

for hospitals with low Medicare margins would 

help those hospitals with low total margins but 

also would help hospitals with high total margins. 

Further, the increased payments received by a 

hospital would be proportionate to its Medicare 

volume; e.g., hospitals with low Medicare volume 

would not receive much assistance. Finally, 

additional Medicare payments might induce 

private payers to reduce their payments, with 

little net benefit for hospitals. 

Staff Contacts 

Ariel Winter 

Julian Pettengill 

(202) 220-3700 

August 7, 2003 

Other government

11%

Medicaid

17%

Medicare

30%

Other private 

funds

5%

Private health 

insurance

34%

Out of pocket

3%