Medicare and Medicaid set their payment rates for medical services above marginal cost, but below average total cost. One major consequence of doing this is that hospitals and other providers are then

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When Medicare and Medicaid reimburse hospitals and providers at rates that do not cover the average total cost of providing services, these providers often compensate for the shortfall by charging higher rates to patients with private insurance. This practice helps them balance their finances by offsetting the lower payments received from government programs.

Medicare and Medicaid Set Their Payment Rates for Medical Services