Roughly 1 in 5 Americans get their health insurance through Medicare — the federal government’s health insurance program for Americans who are 65 or older or have certain disabilities — making it the single largest payer in the U.S. healthcare system. Because of this massive market share, the federal government can effectively address challenges in the healthcare system by changing how Medicare pays providers.
For hospitals, Medicare operates three basic payment models for different services and facility types, each with its own beneficial effects and structural challenges. This fact sheet, the first in a series, describes these payment models and explores how they impact hospital finances, provider behavior, and Medicare spending.
Medicare also makes a variety of payment adjustments to address issues with the models or specific challenges in the healthcare system. These will be explored in the next installment in this series.
References
1 Center for Medicare and Medicaid Services. Medicare monthly enrollment. Data.CMS.gov. Accessed January 26, 2026. https://data.cms.gov/summary-statistics-on-beneficiary-enrollment/medicare-and-medicaid-reports/medicare-monthly-enrollment
2 Rural healthcare payment and reimbursement. Rural Health Information Hub. Accessed January 26, 2026. https://www.ruralhealthinfo.org/topics/healthcare-payment
3 Altman SH. The lessons of Medicare’s prospective payment system show that the bundled payment program faces challenges. Health Affairs. 2012;31(9): 1923-1930. https://www.healthaffairs.org/doi/10.1377/hlthaff.2012.0323
4 Crespin D, Dworsky M, Levin J, Ruder T, Christopher M, Whaley CM. Upcoding linked to up to two-thirds of growth in highest-intensity hospital discharges in 5 states, 2011–19. Health Affairs. 2024;43(12):1619-1627. https://doi.org/10.1377/hlthaff.2024.00596
5Anumula N, Sanelli PC. Hospital Outpatient Prospective Payment System. AJNR Am J Neuroradiol. 2012;33(4):616-617. doi:10.3174/ajnr.A3050
6 Smith R, Whorley M, Creavin I. Site-neutral payment: 5 considerations for hospitals and health systems. Milliman. September 29, 2025. Accessed January 26, 2026. https://www.milliman.com/en/insight/site-neutral-payment-5-considerations-hospitals
7 Cost-based payment. Saving Rural Hospitals. Accessed January 26, 2026. https://ruralhospitals.chqpr.org/Cost-Based_Payment.html
8 Critical Access Hospitals (CAHs). Rural Health Information Hub. Accessed January 26, 2026. https://www.ruralhealthinfo.org/topics/critical-access-hospitals
9 Parduhn RP. CMS should tweak wage index adjustment to help rural hospitals, OIG says. Healthcare Dive. January 4, 2021. Accessed January 5, 2026. https://www.healthcaredive.com/news/cms-should-tweak-wage-index-adjustment-to-help-rural-hospitals-oig-says/592754/
10 U.S. Government Accountability Office. Medicare physician payments: Fees could better reflect efficiencies achieved when services are provided together. July 31, 2009. Accessed January 5, 2026. https://www.gao.gov/products/gao-09-647
11 Medicare and Budget Sequestration. Congress.gov. Accessed January 5, 2026. https://www.congress.gov/crs-product/R45106
