Hospital care · Medicare

How Medicare Pays Hospitals

Medicare pays for a hospital stay in one of three ways, depending on the kind of hospital. Follow one heart failure stay through each. Tap any part of an equation to learn what it means.

General Acute Care Hospitals

Most hospitals are paid a set amount for each stay, decided before the patient walks in. The amount depends on why the patient is there, sorted into a Medicare Severity Diagnosis-Related Group (MS-DRG), and on where the hospital is.

A heart failure stay with a major complication

The payment equation

×(×(×+)+)+=$9,371.61

Follow the payment, step by step

1
The patient is admitted with heart failure
A major complication, such as kidney failure, places the stay in MS-DRG 291, with a weight of 1.2685.
2
Start with the national operating base $6,848.00
The same starting number for every general hospital in the country.
3
Adjust the staff portion for local wages $4,245.76
The labor share (62%) is multiplied by the wage index. This hospital is average (1.0), so nothing changes. The other 38%, $2,602.24, is not adjusted.
4
Add the capital rate $7,387.95
Another $539.95 for buildings and equipment.
5
Multiply by the MS-DRG weight $9,371.61
1.2685 × $7,387.95. This is what Medicare owes the hospital for the stay.
6
Add any add-ons $0
A teaching hospital, a hospital with many low-income patients, or an extremely costly stay would get more. This example has none.
7
The patient pays a share
Part of the payment is the patient’s Part A deductible, which the hospital collects from the patient or their supplemental insurance. Medicare pays the rest.

One diagnosis, three payments

MS-DRG 293No complications

$4,035.30

MS-DRG 292With a complication

$6,365.46

MS-DRG 291With a major complication

$9,371.61

Same diagnosis, same hospital. The sicker the patient, the higher the weight, and the higher the payment.

The takeaway

Medicare pays the same amount for a stay whether the hospital spends more or less.

Hospitals have a reason to keep stays efficient and short, because they keep whatever they save.
Hospitals also have a reason to record every complication carefully, since a stay in MS-DRG 291 pays more than twice as much as one in MS-DRG 293. Medicare audits claims to catch coding that does not match the chart.
Hospitals in high-wage areas are paid more for the same stay, through the wage index.

Illustrative

The hospital has an average wage index and no add-ons, to keep the math simple.

Sole Community Hospitals

A Sole Community Hospital is often the only hospital for a large area. It is still paid by MS-DRG, but it can use its own past costs, brought up to date, in place of the national base rate.

A heart failure stay with a major complication

The payment equation

××+×=$10,832.93

Where the hospital-specific rate comes from

=××

Follow the payment, step by step

1
The patient is admitted with heart failure
The same stay as before: MS-DRG 291, weight 1.2685.
2
Look up the hospital-specific rate $8,000.00
Built from what this hospital spent per stay in its base year, raised by every yearly update since. $8,000 is an example.
3
Compare with the national rate $6,848.00
The hospital’s own rate is higher, so it wins. If it were lower, the hospital would get the national payment instead.
4
Multiply the operating rate by the weight $10,148.00
1.2685 × $8,000.
5
Add capital at the national rate $684.93
1.2685 × $539.95. Buildings and equipment are always paid at the national rate.
6
Apply quality adjustments $10,832.93
Here they come out even, with no bonus and no penalty.

One diagnosis, three payments

MS-DRG 293No complications

$4,664.52

MS-DRG 292With a complication

$7,358.02

MS-DRG 291With a major complication

$10,832.93

The same three stays as at a General Acute Care Hospital, each paid more because this hospital’s own rate is higher.

The takeaway

The hospital’s own history sets its payment, so a costly rural hospital is not held to the national average.

The payment is still set per stay, so the hospital still keeps what it saves and absorbs what it overspends.
The base year is fixed and never recalculated, so the rate reflects costs from long ago, brought forward by yearly updates.
For the patient, the stay works the same way. They pay the Part A deductible and Medicare pays the rest.

Illustrative

The $8,000 hospital-specific rate is an example. Each Sole Community Hospital has its own.

Critical Access Hospitals

Critical Access Hospitals are small rural hospitals. They are not paid by MS-DRG at all. Medicare pays them what it cost to care for Medicare patients, plus 1%.

A heart failure stay with a major complication

The payment equation

×=$11,110.00

Follow the payment, step by step

1
The patient is admitted with heart failure
The same illness as before. The hospital still codes the diagnosis, but the code does not set the payment.
2
The hospital cares for the patient $11,000.00
In this example, the stay costs the hospital $11,000 in staff, supplies, and its share of buildings and overhead.
3
Medicare pays during the year
Interim payments, based on the hospital’s recent costs, keep cash coming in.
4
The hospital files its cost report
After the year ends, it reports what it actually spent caring for Medicare patients.
5
Medicare settles up at cost plus 1% $11,110.00
101% × $11,000. If interim payments were too high or too low, the difference is paid back or paid out.

The payment follows the cost

Stay costs $5,000Example

$5,050.00

Stay costs $8,000Example

$8,080.00

Stay costs $11,000Example

$11,110.00

Each stay is paid its cost plus 1%. There is no set price to beat.

The takeaway

A Critical Access Hospital is protected whether a stay costs more or less, which keeps small rural hospitals open.

There is less pressure to cut costs, because a costlier stay is simply paid more.
The 1% on top is a small margin, so the hospital depends on getting its cost report right.
Patients still pay their Part A deductible. For outpatient care, their coinsurance is based on the hospital’s charges, so it can be higher than at other hospitals.

Illustrative

The $11,000 cost is an example. Real costs come from each hospital’s cost report.

One stay at three kinds of hospital

The same heart failure stay with a major complication (MS-DRG 291), which cost the hospital $11,000.

General Acute CareSet MS-DRG payment

$9,371.61

Sole CommunityIts own rate of $8,000

$10,832.93

Critical AccessCost of $11,000 plus 1%

$11,110.00

A MS-DRG hospital would lose $1,628.39 if this stay cost it $11,000. A Critical Access Hospital is paid its cost either way.

Sources

CMS, FY 2027 IPPS/LTCH PPS final rule, as corrected (CMS-1849-CN3), effective October 1, 2026: operating standardized amount $6,848.00, capital federal rate $539.95, labor share 62% where the wage index is 1.0 or less, outlier threshold $49,331
CMS, FY 2027 Table 5, MS-DRG relative weights (v44): 291 = 1.2685, 292 = 0.8616, 293 = 0.5462
CMS, Medicare Learning Network: Critical Access Hospital fact sheet (101% of reasonable cost; 25 beds; 96-hour average stay)
42 CFR 412.92 (Sole Community Hospital criteria and hospital-specific rate)
CMS, Hospital Value-Based Purchasing, Hospital Readmissions Reduction and Hospital-Acquired Condition Reduction programs