Are Medicare Payments Adequate? MedPAC’s Report and Recommendations

An advisory commission to the Congress — Medicare Payment Advisory Commission (MedPAC) — released an annual report to Congress on Medicare payment adequacy. In analyzing access to care, quality of care, access to capital, and fee-for-service payments and input costs, MedPAC makes recommendations on payments and policy changes each year for all types of care and settings — hospitals, physicians, nursing homes, hospice, home health and more. They even have recommendations on Medicare Advantage.

While MedPAC provides analysis and recommendations on Medicare, Congress still needs to pass any statutory change, and the Administration determines annual payment updates. However, these policymakers and regulations are always interested in what MedPAC thinks.

Here’s what MedPAC recommends for 2026 Medicare payments.

Medicare spending in focus

First things first, understanding how Medicare is funded is necessary. Part A Medicare — covering hospitals and skilled nursing facilities, for example — is funded through employees paying Medicare payroll taxes. Parts B and D Medicare — covering physicians, clinicians, prescription drugs, etc. — are paid through general tax revenues (roughly 75%) and beneficiary premiums (25%).

MedPAC analysis shows Medicare spending overall is projected to grow faster than spending by all other types of payers over the next decade. By the 2030s, Medicare spending will grow by 7 – 8% per year — growing from $1.0 trillion in 2023 to $1.9 trillion in 2032. Spending increases are due to more beneficiaries, higher volumes, higher utilization, and higher prices.

By 2029, 75 million individuals will be eligible for Medicare — but the corresponding numbers of workers paying Medicare payroll taxes has been declining for decades. As such, both the Medicare Trustees and the Congressional Budget Office project the Part A trust fund will become insolvent after 2035. At that time, the Medicare Trustees indicate the Fund will be able to pay about 89% of scheduled Medicare benefits. [If you’re curious about these two Medicare trust funds, see my post about the Medicare Trustees 2024 report for more details.]

Another caution from MedPAC about the future is that federal spending on four items — Medicare, Medicaid, Social Security, and net interest on debt — will exceed all federal revenues by 2044.

Hospitals face mixed outlook

MedPAC analyzed hospital FFS margins in Medicare and found they were at negative 13%. All-payer total margins were up to 6.4% in 2023 with all all-payer operating margins at 5.1%. MedPAC found for-profit hospital margins were 10% higher than others and rural hospital margins were at negative 3.2%.

In making its recommendation for 2026, MedPAC suggests a full current law update plus an additional 1%. MedPAC also recommends addressing hospitals that see larger numbers of lower-income Medicare patients by redistributing existing disproportionate share hospitals payments via a new Medicare Safety-Net Index.

Physician payments need reform

Physicians continue to face low to no annual updates due to prior laws that have been enacted and other policy changes within the physician fee schedule. The result has been that Congress has needed to pass legislation each year to increase the Medicare physician update. For 2025, Congress has yet to act, and physicians are faced with a payment cut.

MedPAC recommends Congress replace current law with an annual update based on the Medicare Economic Index minus 1%. The commission also continues to recommend Congress enact early recommendations to establish safety-net add-on payments for services delivered to low-income Medicare beneficiaries.

Post-acute payments are too high

For skilled nursing facilities, MedPAC found occupancy reached 84% by October 2024 even with a small, 1% decline in the number of SNFs. However, FFS margins for freestanding SNFs was 22%. All payor total margins were 0.4% and non-FFS Medicare margins were negative 4.1%. MedPAC found the share of FFS Medicare covered days in 2023 declined from 10% in 2022 to 8%, in part due to the continued growth of Medicare Advantage (MA) enrollment and an increase in the share of Medicaid days. As FFS Medicare’s share of covered days declined, so did its share of facility revenue, which fell from 17% in 2022 to 14% in 2023. Even so, MedPAC makes recommendations on FFS and, therefore, recommends a negative 3% rate cut for SNFs in 2026 due to ongoing high FFS margins.

For home health agencies (HHAs), MedPAC found FFS Medicare margins for freestanding HHAs averaged 20.2% in 2023. These margins indicate FFS Medicare payments far exceeded costs in 2023. Further, in aggregate, Medicare’s payments have been substantially greater than costs for more than 20 years, per MedPAC. Therefore, the commission recommends a 7% cut to rates in 2026.

For hospice, MedPAC indicates FFS Medicare margins for 2022 were 9.8%, down from 13.3% in 2021. Hospice costs per day across all levels of care with cost-report data averaged about $167, rising 3% in 2023 from 2022. For 2025, MedPAC projects an FFS Medicare margin for hospices of about 8%. Taken together, MedPAC recommends a 0% hospice increase for 2026.

Medicare Advantage is overpaid compared to traditional Medicare

What you may have noticed is that MedPAC focuses largely on FFS payment adequacy. This is sometimes to the consternation of providers in various settings who are facing growing volumes of MA beneficiaries. So, what does MedPAC think about MA?

In this year’s report to Congress, MedPAC found that between 2018 – 2024, Medicare beneficiaries enrolling in MA rose from 37% to 54%, and in 2025 the average Medicare beneficiary had a choice of 42 plans offered by an average of eight organizations.

However, MedPAC continues to be concerned by overspending in MA. The commission estimates that Medicare will spend 20% more for MA enrollees in 2025 than it would spend if those beneficiaries were enrolled in FFS Medicare, a difference that translates into a projected $84 billion. MedPAC surmises the higher payments to MA plans stem from favorable selection and coding intensity related to the underlying payment mechanisms in MA (i.e., capitation, risk adjustments).

MedPAC found that MA risk scores were about 17% higher than scores for similar FFS beneficiaries due to higher coding intensity in 2023. Further, of all the mechanisms to document more diagnosis codes, MedPAC suggests that the evidence continues to highlight MA plans’ use of health risk assessments and chart reviews as major sources of plan revenue from coding intensity.

MedPAC has made numerous recommendations for MA payments, including addressing and adjusting for coding intensity, replacing the quality bonus program, establishing more equitable benchmarks, and improving encounter data accuracy and completeness.

How CLA can help

Any MedPAC recommendation must still be acted upon by Congress or the Administration; however, it’s important to know what information is being put forth to these regulators and legislators related to the future of your Medicare payments. There is plenty more to digest with Medicare and Medicare Advantage payments. If you have questions about your reimbursements, how recommendations or Congressional activities could impact you, or how to strategize for your future, reach out today. Our reimbursement, digital, strategic planning, succession planning, transaction services, and more can help you chart your path forward.