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WASHINGTON, March 11 — An influential federal advisory commission says the financial condition of the nation's hospitals has significantly improved, so there is no need for Congress to increase their Medicare payments, despite insistent pleas from the industry.

If Congress accepts the advice, as it often does, lawmakers will have more money available for new Medicare benefits like prescription drug coverage. In the last 18 months, elderly people seeking drug benefits have found themselves competing with hospitals, nursing homes and other providers for a limited pot of federal money.

Tricia Smith, chief federal health lobbyist at AARP, the nation's largest organization of older Americans, welcomed the panel's conclusion. "We have dedicated enough of the budget surplus to health care providers," Ms. Smith said. "We now need to focus on prescription drugs and the concerns of beneficiaries."

Congress cut back Medicare payments to health care providers in 1997, under a law intended to balance the federal budget. But in November 1999 and in December of last year, Congress restored some of the money, increasing Medicare payments to almost all types of providers.

The panel that advises Congress, the Medicare Payment Advisory Commission, said in its new report that "there was no compelling reason" for another round of increases.

The panel's position is significant for two reasons. Congress often heeds its advice, and the panel has usually been receptive to concerns of the health care industry. Half of the 16 commission members work for hospitals, physician groups, managed care companies or home health agencies.
Members of Congress from each party have told lobbyists that this was not the year for further Medicare givebacks. But the industry, undeterred, is preparing another lobbying campaign because it still views Medicare payments as inadequate.

"More than one-third of hospitals are losing money on Medicare," said Thomas P. Nickels, senior vice president of the American Hospital Association.

The commission said that the financial condition of the nation's hospitals had improved significantly, thanks in part to the laws passed in the last two years. Hospital profit margins — the ratio of net income to total revenues — "appear to have improved substantially in 2000," the commission said.
In the last decade, it said, hospitals have controlled their costs, mostly by reducing how long patients stay. The average length of stay for Medicare patients has dropped more than 32 percent since the early 1990's, the panel said.

Under current law, Medicare payments to hospitals are scheduled to rise next year somewhat less than the cost of the goods and services they use. The commission said that such payments were reasonable and adequate, in view of hospitals' proven ability to control costs and increase productivity.
Hospital executives took issue with the findings and said they would lobby for more generous Medicare payments.

Kenneth E. Raske, president of the Greater New York Hospital Association, said: "There's absolutely no doubt that we will seek more money from Congress this year. The commission's analysis inherently overstates the profitability of teaching hospitals."

Hospital care is the largest category of health spending in the nation, accounting for one-third of the total. Medicare is the single largest purchaser of hospital services, spending $74 billion for people admitted to hospitals and more than $17 billion for outpatient services last year.

Health care lobbyists said the 1997 cuts had saved much more money than Congress expected or intended.

Medicare payments to hospitals fell in 1998 and 1999, and total Medicare spending declined in 1999 for the first time since the program was created in 1965. In the last two years, Congress has restored some of the money, softening the impact of the cuts on teaching hospitals, rural hospitals and those that serve large numbers of poor people.

Nursing homes have complained for several years that inadequate Medicare payments were forcing homes into bankruptcy. In its new report, the commission said total Medicare payments to the industry were adequate, but it acknowledged that the government might have underpaid some homes, creating an incentive for them to avoid the sickest patients.

The panel discovered anomalies in Medicare payments to health maintenance organizations, which serve 6 million of the 39 million beneficiaries. In some places, especially rural areas, it said, Medicare pays H.M.O.'s twice as much as it would spend for the same patients in Medicare's traditional fee-for-service program. But the H.M.O.'s typically offer prescription drug coverage and other benefits not available in the fee-for-service program. 

Congress recently increased Medicare payments to health plans in rural areas in hopes of persuading H.M.O.'s to enter those markets and serve Medicare beneficiaries. The commission said Congress should now try to minimize the disparities in payments to H.M.O.'s and the fee- for-service program, so Medicare would not favor one over the other in any particular market.

In an effort to justify a further increase in Medicare payments, Mr. Nickels of the American Hospital Association said hospitals had to spend large sums to comply with new federal standards for the privacy of medical records.
Herb Kuhn, a lobbyist for Premier Inc., a group purchasing agent for nonprofit hospitals, cited other expenses. Hospitals, he said, must cope with the rising cost of prescription drugs and must install new technology to reduce the frequency of medical errors.

In general, Medicare pays hospitals a fixed amount of money, set in advance, for each patient. But in 1999, Congress authorized special extra payments to cover the costs of certain drugs and medical devices provided in hospital outpatient departments.

The commission said these payments could significantly increase Medicare spending by stimulating the use of costly medical technology and by encouraging manufacturers to raise prices.

Pamela G. Bailey, president of the Advanced Medical Technology Association, a lobby for makers of medical devices, disagreed. Without the special payments, Ms. Bailey said, elderly patients would be denied access to promising new technology that could save lives and reduce costs in the long run.