Hospital Medicare Profits Told, Disputed

Times Medical Writer

More than 200 hospitals, mostly large urban teaching hospitals, earned more than $3 million each in profits on Medicare services in 1984, including one California hospital that made $22 million in profits on $55 million in Medicare revenues, a U.S. Department of Health and Human Services report says.

The findings are the latest and most detailed in a series of reports that show many hospitals increased their profits during the first full year of the prospective payment system, which was introduced in October, 1983, and designed to control Medicare costs.

Fixed Rate

The new system called for Medicare to pay hospitals a fixed rate for each patient admission for a particular disease, instead of an individual rate based on each hospital’s regular charges.


The report by Richard P. Kusserow, the department’s inspector general, said the average hospital profit was 15%, about triple the average profit margin for all patients in recent years. Total profits for the 5,405 participating hospitals were estimated at $5.5 billion.

Hospital officials have disputed Kusserow’s figures, saying that they vastly overestimate true profits while ignoring cost-cutting measures taken in anticipation of the program. These officials also maintain that profit margins have dropped in subsequent years, when Medicare reimbursement rates have been nearly frozen.

Nonetheless, Health Secretary Otis Bowen proposed new limits under which Medicare payments to hospitals for in-patient care would rise only 0.5% in fiscal 1987, a figure far below the 2% rise proposed by President Reagan. Bowen’s plan would also eliminate capital reimbursements under which Medicare had paid a share of the hospital’s capital outlay for new buildings, major reconstruction and large equipment.

These changes, Bowen said, will make certain that “our rates provide for the efficient and effective delivery of medically necessary services.”


In the latest study, Kusserow surveyed more than 2,000 hospitals in 18 states, including 214 in California.

Teaching hospitals, which are affiliated with medical schools, led the list with 18.28% profits, followed by investor-owned hospitals, which averaged 17.89% in profits. The teaching hospitals were aided by special payments for medical education costs, and the for-profit hospitals were helped by special payments for return on equity capital.

Largest Profit

In total, 82% of the hospitals surveyed earned profits averaging $1.3 million and 18% sustained losses averaging $155,000, the report said.


The largest profit was earned by an Ohio teaching hospital that made $24 million on $88 million of Medicare revenue. A hospital in rural Georgia had the largest loss--$2.6 million on $6.5 million of revenue. Individual hospitals were not named.