National Daily Hospital News
Performance Playbook
CHAPTER 1
Rebuilding Hospital Financial Stability Under Medicare Pressure (2026–2028)
Two Budgets, One Reality: A Hospital Story
The finance committee room at North Valley Medical Center was silent enough to hear the HVAC cycle.
On one side of the long oak table sat CFO Elena, flanked by a stack of spreadsheets and a single slide showing the number everyone had been avoiding: “Projected Medicare Margin 2026–2028: –11% to –15%.”
Across from her sat the Board’s finance chair and two community trustees. All of them remembered an era, not so long ago, when a 3–4% operating margin felt uncomfortably thin, yet still manageable.
“We’ve hit every target you set,” Elena began. “Nonessential capital cuts, supply renegotiations, a new revenue cycle vendor, physician schedule controls. But the math has shifted under us.”
She clicked the remote.
“In 2023, the average U.S. hospital was reimbursed about 83 cents for every dollar in Medicare. That gap remains, and between 2026 and 2028, Medicare margins are projected to remain around –13%.
See Medicare Payment Advisory Commission (MedPAC) “Report to the Congress: Medicare Payment Policy” March 2025. (https://www.medpac.gov/document/march-2025-report-to-the-congress-medicare-payment-policy/) MedPAC+2MedPAC+2
At the same time, proposals coming out of Washington would cut Medicare bad-debt reimbursement from 65% to 45%, or even 25%.
She advanced to a waterfall chart. A thin all-payer margin—barely positive—plunged downward as Medicare underpayments, escalating labor costs, and declining bad-debt reimbursement layers stacked beneath it.
“And this,” she said, “is before we factor in Medicaid work-requirements. States that tested these policies—Arkansas most notably—saw double-digit drops in coverage, increases in uninsured adults, and no gains in employment. That combination—more uninsured patients with no ability to pay—hits us directly in the emergency department, inpatient medical floors, and obstetrics.”
See study: “Medicaid work requirements and hospital‐financial risk,” PMC NIH. (https://www.ncbi.nlm.nih.gov/articles/PMC7497731/) Texas Hospital Assn
“Are you telling us,” a trustee asked, “that even if we do everything right, Medicare will remain structurally negative?”
Elena nodded. “Exactly. We can’t cut our way out. But we can plan our way through.”
She moved to the next slide: a three-column strategy model.
Three Priorities for a Survivable 2026–2028 Operating Plan
Explicit modeling of Medicare margin and bad‐debt exposure
Preparations for Medicaid work-requirement–driven coverage shocks
Service-line alignment and payer-mix strategy tied to Board-level dashboards
For the first time that morning, the trustees leaned forward not with alarm, but with clarity.
The question had shifted from “How much do we cut?” to “What plays will we run, on purpose, to stay ahead of Medicare pressure?”
Why This Matters Now: The 2026–2028 Window
Between 2026 and 2028, hospitals will face a reality defined by:
Medicare margins fixed around –13%
Total Medicare underpayments exceeding $100 billion annually
See American Hospital Association (AHA) infographic “Medicare underpayments to hospitals nearly $100 billion in 2022”. (https://www.aha.org/news/headline/2024-01-10-aha-infographic-medicare-underpayments-hospitals-nearly-100-billion-2022) American Hospital Association+1Potential cuts to Medicare bad-debt reimbursement
State-level Medicaid work requirements increasing uninsured rates
Labor and supply inflation outpacing Medicare rate updates
See AHA “Costs of Caring 2024: America’s Hospitals and Health Systems Continue to Face Escalating Operational Costs and Economic Pressures”. (https://www.aha.org/guidesreports/2025-04-28-2024-costs-caring) American Hospital Association+1
These pressures mean that traditional budgeting is no longer safe. Hospitals must rebuild financial plans around:
Service-line level payer mix strategy
Scenario-based forecasting
Structured Board governance over Medicare/Medicaid exposure
This chapter argues that financial stability under Medicare pressure is not a finance problem—it is an enterprise strategy, clinical operations, and governance problem.
What the Evidence Shows (CMS, MedPAC, JAMA, AHA)
Medicare Margins and Underpayment
MedPAC’s March 2025 report shows Medicare margins at –13% for 2022–2023 and expected to remain deeply negative.
See MedPAC Chapter 3 “Hospital inpatient and outpatient services”. (https://www.medpac.gov/wp-content/uploads/2025/03/Mar25_Ch3_MedPAC_Report_To_Congress_SEC.pdf) MedPAC+1AHA reports 67% of hospitals operated with negative Medicare margins and $99.2 billion in Medicare underpayment in 2022.
See AHA infographic. (https://www.aha.org/2024-01-10-infographic-medicare-significantly-underpays-hospitals-cost-patient-care) American Hospital Association+1Inflation from 2022–2024 rose ≈14%, while Medicare inpatient payment rates increased only ≈5.1%—resulting in effective payment decline.
See AHA “Costs of Caring 2024” report. (https://www.aha.org/guidesreports/2025-04-28-2024-costs-caring) American Hospital Association+1
Medicare Bad-Debt Reimbursement
CMS reimburses 65% of allowable Medicare bad debt (when provider meets collection effort requirements).
Reference: CMS Medicare Learning Network (MLN) bad debt reimbursement policies. (See official CMS MLN article)Budget proposals would cut the reimbursement to 45% initially and then 25%, shifting risk to hospitals.
See Congressional Budget Office (CBO) “Budget options” for Medicare. (https://www.cbo.gov/budget-options/60905) Texas Hospital AssnJAMA Network Open research: Cuts would disproportionately impact safety‐net hospitals and magnify closure risk in communities.
See JAMA article: “Impact of Medicare bad-debt reimbursement reductions on hospitals”.
Medicaid Work Requirements and Hospital Financial Risk
The Arkansas Medicaid work-requirement pilot resulted in a 13-point drop in adult Medicaid coverage, increased uninsured rates and no employment gains.
See NIH PMC article. (https://www.ncbi.nlm.nih.gov/articles/PMC7497731/) Texas Hospital AssnCoverage loss increases the hospital burden of uncompensated care and bad debt, particularly in rural settings and high Medicaid share states.
See Texas Hospital Association “2024 Value of Hospitals Whitepaper”. (https://www.tha.org/wp-content/uploads/2024/05/2024-Value-of-Hospitals-Whitepaper.pdf) Texas Hospital Assn
Payer Mix and Service-Line Strategy
All-payer margins improved into the 4–5% range in some systems, but Medicare margins remained structurally negative.
See GNYHA summary of MedPAC findings. (https://www.gnyha.org/news/medpac-recommends-3-5-hospital-rate-increase-in-2026-4b-in-new-safety-net-funding-highlights-support-for-site-neutral-payments/) GNYHAOutpatient revenue growth continues, but many inpatient lines remain Medicare-heavy and underwater.
See AHA “Costs of Caring” report. (https://www.aha.org/guidesreports/2025-04-28-2024-costs-caring) American Hospital Association+1
Implication: For 2026–2028, boards must assume ongoing negative Medicare margins, potential reductions in bad-debt reimbursement, and periodic Medicaid coverage shocks—and design operating plans robust to those conditions, not surprised by them.
Mid-Chapter Case Study: Riverbend Health System
This case is a composite drawn from multiple systems and NDHN case examples; identifying details are modified, but the core dynamics are real.
Context:
Riverbend Health System is a three-hospital regional system in a Medicaid-expansion state with:
45% Medicare, 23% Medicaid, 25% commercial, 7% self-pay/other
A large employed medical group and a growing ambulatory footprint
In 2023:
All-payer operating margin: +3.2%
Medicare margin: –12.5%
High exposure to bad-debt reimbursement risk and Medicaid coverage churn
The Problem
Riverbend lacked:
Medicare/Medicaid margin visibility at the service-line level
A risk model for bad-debt reimbursement
Medicaid coverage-churn forecasting
When leadership modeled:
Medicare bad-debt reimbursement dropping from 65% → 45%
Medicaid coverage dipping by 5%
They forecast a 2–3 margin point drop if no mitigations were applied.
The Actions
Riverbend launched a three-year Financial Stability Under Medicare Pressure initiative, consisting of:
Medicare margin modeling by service line
Bad-debt reimbursement risk scenarios
Medicaid work-requirement coverage modeling
Service-line alignment and selective growth
Board-level Medicare/Medicaid dashboard
The Results (36-Month Horizon)
All-payer operating margin increased from 3.2% → 4.1%
Medicare margin improved by 2–3 percentage points
Preventable bad debt fell
Board oversight improved with greater clarity
This case shows what “good” looks like when strategy aligns with structural reality.
Leadership Action Plan (Step-By-Step)
1. Build a Medicare/Medicaid Financial Baseline (0–60 days)
Compute Medicare and Medicaid margins by service line (inpatient, outpatient, ED, procedures, post-acute).
Quantify Medicare bad-debt (gross, allowable, reimbursed) by service line.
Map Medicaid payer mix, coverage sources, and adult populations at risk of work-requirement impact.
2. Model Policy Scenarios (60–120 days)
Medicare bad-debt reimbursement: 65% (status quo), 45%, 25%.
Medicaid adult coverage loss: model 5–15% scenarios based on Arkansan experience. (https://www.ncbi.nlm.nih.gov/articles/PMC7497731/) Texas Hospital Assn
Translate each scenario into projected uncompensated care, bad debt, and operating-margin impact.
3. Align Service Lines & Payer Mix (90–180 days)
Identify service lines with high Medicare share and negative margins.
Design site-of-care optimization (inpatient → outpatient), throughput improvement, and selective growth in commercially favorable lines.
Set three-year targets for volume, payer mix, and margin for each service line, and roll up to system-level plan.
4. Strengthen Coverage Retention & Revenue Cycle (90–270 days)
Launch front-end eligibility verification and coverage-navigation workflows in ED, clinics, and pre-admission settings.
Deploy financial-counseling teams to help at-risk patients maintain Medicaid or shift to marketplace coverage.
Standardize bad-debt collection and documentation workflows to maximize Medicare reimbursement.
5. Build Board-Level Dashboard & Governance Rhythm (120–240 days)
Create a comprehensive Board dashboard including: Medicare margin by hospital/service line, total Medicare underpayment, bad debt metrics, Medicaid coverage and churn, uncompensated care exposure.
Schedule dashboard reviews in the finance committee quarterly and integrate into annual budget approval.
Educate Board members and executive team on Medicare & Medicaid policy trends so the focus shifts from “What happened?” to “What plays are we running?”
6. Monitor, Adjust & Communicate (Ongoing)
Track leading indicators (coverage churn, self-pay volumes, bad debt, payer mix) monthly.
Re-run scenario models at least annually or when major policy changes occur.
Communicate with physicians, staff and community leaders about why these changes matter, and how they protect access.
Key Metrics & Board-Level Dashboard Recommendations
Core Financial Metrics
Medicare FFS Margin (%) — system and by service line
Medicare margin by service line (%) — inpatient, outpatient, ED, procedural, post-acute
All-payer operating margin (%) — trend vs Medicare margin
Total Medicare underpayment ($) — difference between Medicare revenue and cost
Medicare bad debt ($) — gross, allowable, reimbursed
Bad-debt reimbursement rate (%) — actual vs policy baseline
Coverage & Safety-Net Metrics
Medicaid coverage rate in service area (%) — adults 19–64
Medicaid churn rate (%) — monthly or quarterly
Uninsured ED encounters (% of ED volume)
Uncompensated care ($ and % of gross revenue)
Payer Mix & Service-Line Metrics
Payer mix by service line (%) — Medicare, Medicaid, commercial, self-pay
Contribution margin by service line ($ and %)
Outpatient vs inpatient revenue ratio — trend over time
Dashboard Design Principles
Use simple visuals — waterfall charts, trend run-charts, heat maps with red/amber/green thresholds
Always display Medicare and Medicaid metrics side-by-side with total operating margin
Include scenario “shock test” panels: “If bad-debt reimbursement falls to 45%” and “If Medicaid coverage drops by X%,” with estimated margin impact
Closing Reflection
For many boards and executives, it is tempting to treat negative Medicare margins, bad-debt changes, and Medicaid work-requirements as a kind of weather — unpredictable, frustrating, and fundamentally outside the organization’s control.
But the data tell a different story. Medicare underpayment and Medicaid volatility are structural conditions, not temporary storms. They demand a mindset shift from “budget patching” to deliberate, scenario-based stewardship.
The organizations that will remain stable through 2026–2028 will not necessarily be those with the highest starting margins. They will be those whose leaders:
Name the risk clearly and show it transparently to their boards and medical staff.
Run plays on purpose — aligning service lines, payer mix and coverage strategy to realistic public-payer conditions.
Use dashboards not as decoration, but as a decision engine, revisiting assumptions and adjusting frequently when policy shifts.
Financial stability under Medicare pressure is not about winning the next payment update. It is about designing a hospital that can serve the community, even when Medicare never fully catches up. That work sits squarely in the boardroom, the C-suite and the daily management system, and it begins with the chapter you are reading now.
📍 Published at National Daily Hospital News
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