Medicare and Medicaid, two programs foundational to American healthcare, insure more than 140 million Americans. Together, they represent the largest payers for hospital stays, physician visits, and long-term care in the United States. Yet despite their scope and spending power, a quiet crisis is playing out behind the scenes: the rates these programs pay to providers often fail to cover the true costs of care. This underfunding places enormous financial strain on hospitals, clinics, and physicians—especially those serving the nation’s most vulnerable patients.
The Basics of Government Reimbursement
To understand the challenge, consider how reimbursement works. When a doctor or hospital treats a patient insured by Medicare or Medicaid, they submit a bill for services. However, the government does not simply pay what is billed. Instead, the Centers for Medicare & Medicaid Services (CMS) sets fixed payment rates for thousands of procedures and services under Medicare. These rates are determined by a mix of expert input, complex formulas, and periodic Congressional updates. Medicaid, by contrast, is run by states within federal guidelines, allowing each state to set its own reimbursement rates for providers. This leads to substantial variation across the country, but one constant remains: Medicaid payments are often even lower than Medicare’s.
A Financial Shortfall for Providers
Despite steady increases in overall program spending, Medicare and Medicaid frequently pay less than what it actually costs providers to deliver care. Data from hospital associations reveal that Medicare reimburses hospitals at about 84 cents for every dollar of actual cost, while Medicaid averages around 89 cents, though some states pay even less. Private insurance companies, in comparison, generally pay between 145 and 200 percent of Medicare’s rates. For providers, the shortfall from public programs is often only offset by higher payments from privately insured patients. This “cross-subsidy” keeps the doors open for many hospitals, especially in communities with a mix of payers.
But in clinics and hospitals where Medicare and Medicaid patients dominate the roster, there simply aren’t enough privately insured patients to make up the difference. Safety-net hospitals—those committed to serving all patients, regardless of ability to pay—often run on razor-thin margins or operate at a loss. Rural hospitals face even greater pressures: limited populations, fixed costs, and a high share of government-insured patients have combined to force many rural facilities to close altogether, eroding access in already underserved areas. Primary care and pediatric practices, too, struggle under the weight of low government payments, often leading them to stop accepting new Medicare or Medicaid patients, or to scale back services.
How Underfunding Shapes Patient Access
For patients, the impacts of chronic underfunding can be subtle but significant. Longer waits for appointments, reduced access to specialty care, and fewer providers willing to accept public insurance all contribute to disparities in the health system. In some cases, entire communities become “care deserts” for Medicaid patients, with only a handful of doctors available. Even when care is available, the pressure on providers to do more with less can lead to understaffing and overwork, threatening both morale and the quality of care delivered.
Why the Government Continues to Underfund
The persistence of low reimbursement rates is not the result of oversight, but of deliberate political and fiscal choices. Raising Medicare and Medicaid payments would dramatically increase federal and state spending—by billions of dollars annually for even modest adjustments. Lawmakers, facing pressure to control deficits and balance budgets, often balk at such increases. Since the direct beneficiaries of higher rates—doctors, hospitals, and nurses—are politically diffuse, while taxpayers and budget hawks are highly organized and vocal, there is little immediate incentive to boost payments.
There is also a deeply embedded belief among some policymakers that low rates encourage efficiency and discipline among providers, discouraging unnecessary tests and procedures. While some efficiency gains may be possible, most providers argue that the limits have long since been reached. Further squeezing reimbursement, they contend, now threatens access and quality rather than driving meaningful improvements.
State governments, particularly those with tight fiscal constraints, have additional reasons to resist raising Medicaid rates. In many cases, healthcare must compete with education, infrastructure, and public safety for limited funds. Medicaid, as an entitlement program, automatically grows with enrollment and health costs—leaving states little flexibility to respond to rising provider costs or new medical technologies.
The Cost Shifting Cycle
A less visible but important consequence of underfunding is the way it shifts costs throughout the system. Because government programs pay less, providers must negotiate higher rates with private insurers to stay afloat. This practice, known as cost shifting, drives up premiums for employer-based health plans and individual coverage alike. As private insurance becomes more expensive, businesses and individuals are forced to make tough choices—potentially leading to a smaller pool of privately insured patients, which in turn puts even more pressure on providers who depend on those higher payments to subsidize Medicare and Medicaid shortfalls. The cycle is difficult to break.
Consequences for the Safety Net
The aggregate result is a slow erosion of the healthcare safety net. Hospitals close maternity wards, trauma centers, and other essential services when margins become unsustainable. Physician practices consolidate or shut their doors. Providers in low-income or rural communities, who can least afford it, are hit the hardest. In places where no private insurer is available to make up the difference, the loss of a hospital or clinic can mean the loss of local access to care altogether.
These impacts ripple outward. Hospitals and practices with negative margins cannot invest in technology, facilities, or quality initiatives. Communities lose jobs and economic stability. The disparities in access and outcomes that already plague the American healthcare system are exacerbated, falling hardest on the sickest and most vulnerable.
The Search for Solutions
Despite the profound challenges, there are efforts at the federal and state levels to narrow the gap between reimbursement and cost. Some states periodically review and adjust Medicaid rates for certain services, or provide supplemental payments to hospitals that care for large numbers of Medicaid patients. The federal government has experimented with “value-based” payment models, which aim to reward providers for quality and outcomes rather than sheer volume. These efforts have shown promise, but they remain exceptions rather than the rule, and often fail to address the fundamental mismatch between what government pays and what care actually costs.
What makes this problem particularly stubborn is that there is no single villain and no simple fix. The status quo reflects deeply rooted political calculations and the complexity of balancing access, quality, and fiscal responsibility. For many lawmakers, the consequences of underfunding only become urgent when local hospitals threaten to close or when constituents struggle to find care. Otherwise, the pressure to restrain government spending—combined with a lack of public understanding about the links between reimbursement and access—leads to inertia.
Looking Forward
As America’s population ages and healthcare demands increase, the tension between public promises and fiscal realities will only intensify. Medicare and Medicaid reimbursement rates will remain a central, if often hidden, battleground for the sustainability and equity of the health system. Providers will continue to face difficult choices, patients will continue to experience uneven access, and policymakers will be challenged to find solutions that honor the commitment to care without breaking the bank.
If there is a path forward, it likely lies in honest dialogue about what Americans want from their healthcare system and a willingness to pay the true costs of delivering on those promises. Until then, the silent squeeze of government underfunding will persist—shaping healthcare in ways that touch every community, even if most Americans never see the numbers behind the care they receive.