Twenty-five years and 2,000 hospital mergers later, concentrated economic and political power in the American healthcare system rests not in the hands of doctors, but those of hospital executives strategizing in marble-lined offices amongst Picassos and Warhols vetted by their corporate board. When not flying on tax-exempt corporate jets to their Florida vacation condos, hospital executives have continued to exploit loopholes in Medicare payment rules to extract over $153 billion dollars from taxpayers and patients.
Due to the arcane Medicare payment rules, when hospitals purchase outpatient clinics, they can designate it a “hospital outpatient department” and charge up to 60% more, despite no change in clinical care or operations. Hospitals responded rationally, driving a semi-truck through this regulatory loophole in search of easy profits, with over three-quarters of physicians now employed by hospitals and corporate entities.
But where did the additional money go?
These newfound profits went to the growth of the hospital administrative class. One study of hospital staff in Pennsylvania notes that over the past 30 years the administrator class grew by 102% while nursing staff increased by only 24% over the same period. When hospital administrators use taxpayer dollars to invest in themselves instead of improving clinical operations, patients suffer. Nurses are burned out and quitting at record rates, doctors are demoralized, and patients face deteriorating clinical operational performance – with the average emergency room wait time now exceeding over 2 hours and in some large hospitals exceeding 6 hours.
The arrival of Elon Musk and transformation of the U.S. Digital Service into the Department of Government Efficiency (DOGE) brings both hope and focused political energy on an area historically relegated to white papers and think tank policy panels: eliminating waste, fraud, and abuse to save taxpayers money.
Congress last tackled so-called “site neutral payment” in 2015 as part of the Bipartisan Budget Act, requiring hospitals to bill and the Centers for Medicare & Medicaid Services to pay hospitals’ newly acquired physician practices at the same rate as independent practices. Unfortunately, this left thousands of hospital-owned clinics or “hospital outpatient departments” grandfathered under the old system.
This is crony capitalism at its best: abusing regulations to gain increased payment for no improvement in service. According to the Committee for a Responsible Federal Budget, closing this loophole and implementing site neutral payment would save Medicare an estimated $153 billion over 10 years.
Moreover, this does not only affect the Medicare program. Hospitals have inordinate pricing power in the private market, with over 90% of metropolitan markets recognized as concentrated. Employers who cover over 150 million Americans are often powerless in the face of their local hospital monopoly, which uses its market power to increase prices for self-insured employers, costing employers and employees together an extra $58 billion annually.
We have only ourselves to blame. Hospital administrators make rational choices and improving clinical operations is challenging. It’s much easier to fight to protect industry regulatory turf and subsidies. Crony capitalism further harms medical care by redirecting hospital industry economic capital into political activity, administrative waste such as bloated tax-exempt hospital CEO salaries, and lavish lifestyles – such as tropical mansions for executives to flee to during global pandemics; all instead of improving medical care. Feeding the hospital administrative class with taxpayer and employee dollars does not support patients nor the front-line workers who care for them.
Implementing site neutral payment is not a political issue, it is a hospital industry issue. The entire political spectrum agrees that, as former Governor Bobby Jindal and health policy analyst Charlie Katebi said, “doctor’s office care at hospital prices” is a bad deal for taxpayers, employers, and patients.
Hospital executives have turned into the robber barons of the 21st century. Congress must correct this and remove what has become a handout to hospital administrators. Reconciliation presents an opportunity: policymakers must harness this newly found political energy to combat waste and close payment loopholes in Medicare. Let’s drive private market competition and force hospital leaders to improve patient care instead of paying themselves more.
James Gelfand is the President and CEO of The ERISA Industry Committee.
Brian J. Miller, MD, MBA, MPH is a Nonresident Fellow at the American Enterprise Institute and an Associate Professor of Medicine at the Johns Hopkins University School of Medicine, his views are his own and do not necessarily reflect those of his employers or affiliations.
