Hospital add-on payments are associated with variation in Medicare and commercial payments

Medicare is the largest payer of hospital services in the United States. Under the inpatient prospective payment system, hospitals receive "base" and "add-on" payments that are adjusted for geographic and hospital-specific factors to reflect differences in costs. Variation in Medicare payments has received little attention, as research has primarily focused on commercial price variation. The relationship between Medicare and commercial payment variation is also not well understood and a topic of considerable controversy.

We used 2023 data from the Centers for Medicare and Medicaid Services' Inpatient Prospective Payment System Impact File to estimate standardized Medicare base and final payments to inpatient prospective payment system hospitals in the United States.

We found that Medicare final payments vary more than base rates across both hospitals and states due largely to add-on payments. Commercial prices are positively correlated with Medicare add-on payments.

Our study highlights the importance of add-ons in driving variation in Medicare payments, potentially influencing variation in commercial prices.