The Impending End of Cross-Subsidization

Hospitals and health systems have long relied on cross-subsidies to sustain their operations. Higher payments from commercial insurers help offset losses from Medicare, Medicaid, and uninsured patients, while outpatient facility fees and profitable service lines help support employed physician practices and essential community services. Changes in reimbursement policy and growing pressure on commercial payments are threatening this financial model.

At the same time, losses in physician practices and community services remain a financial burden. Site-neutral payment proposals and state efforts to control commercial prices could further limit the revenues health systems have relied on to cover these shortfalls, increasing the need for a more sustainable economic and operating model.

Brian Fisher and Jeff Goldsmith explore the pressures on hospital cross-subsidization and the steps health systems can take to address them, including strengthening cost management, reducing physician-practice losses, and reassessing services, locations, and partnerships.