Decades of CMS underpayment breaks healthcare’s financial model: CFO

NEW YORK, UNITED STATES — Medicare has paid below actual provider cost since the 1997 Balanced Budget Act. For James Lee, CFO of MultiCare Health System, the math that held the healthcare system together is now breaking down — and the consequences for Medicare and Medicaid patients are growing impossible to ignore, MedCity News reports.

Underpayment forces providers into cross-subsidy model

Speaking at HFMA’s 2026 annual conference in National Harbor, Maryland, Lee walked attendees through what he called an unsustainable structural arrangement. Medicare currently pays approximately 80% of MultiCare’s actual costs.

Medicaid, depending on the state, pays between 50% and 70%.

Lee called the arrangement ‘unfair’ — pointing out that no other government contractor in the United States is required to operate at a sustained loss on its core government contracts.

Health systems have absorbed that gap by cross-subsidizing CMS underpayments with commercial insurance revenues — but employers are increasingly resistant to higher premiums that effectively fund public program shortfalls.

MultiCare operates 13 hospitals and more than 300 care locations across the Pacific Northwest, serving a predominantly Washington state footprint built over 140 years. Unlike national payers, Lee noted, health systems cannot easily exit markets when margins erode — leaving them structurally exposed to reimbursement decisions they did not negotiate.

Two-tier system looms for Medicare patients

The long-term consequence Lee is most concerned about is not hospital closures or reduced services. It is access stratification — the quiet sorting of patients by coverage type.

“If this continues, my guess is that we’re going to end up creating a two-tier system: one for commercial payers and those who can afford to pay out of pocket, and a different system for Medicare and Medicaid patients,” Lee said.

Health systems will begin prioritizing commercially-insured patients — not out of intent but out of financial necessity — as CMS reimbursement gaps widen and the Medicare Hospital Insurance Trust Fund approaches its projected 2033 depletion date.

The cross-subsidy model was always imperfect. As employer pushback on commercial premium increases grows and federal underpayment persists, the mechanism that kept CMS-covered patients in the same queue as commercial patients is eroding.

For the healthcare outsourcing sector — which supports revenue cycle management, Medicaid eligibility, coding, and claims operations across CMS-governed payer systems — Lee’s warning signals a shift in the administrative landscape. As health systems face tighter margins, the pressure to outsource non-clinical operations accelerates.

Reimbursement is a policy problem. Operational efficiency is where health systems respond to it.