Washington has spent years debating health care costs without confronting the biggest one. The single largest driver of America's health spending problem is hospitals. Not only does Washington largely ignore this fact, but government policies actively encourage these rising costs.
Since 2000, hospital service prices have climbed 281 percent – three times overall inflation and double wage growth. No other major sector, including the obvious ones like college tuition, childcare, and housing, has outpaced hospital care.
While national conversations leave many assuming our biggest problem is prescription drug prices, hospital care accounts for one third of our national health expenditures while retail prescription drugs account for just 9 percent. In fact, hospitals are now responsible for 40 percent of the growth in national health spending between 2022 and 2024. In comparison, physician services account for 22 percent of growth and prescription drugs, 11 percent.
When confronted with these rising costs, hospital lobbyists and associations make the same claim over and over again: these are hard times, hospitals are barely getting by.
As the Paragon Health Institute demonstrated in a recent report, this is far from reality.
In 2023, a quarter of hospitals posted operating margins above 10 percent. For context, car dealerships typically operate on margins of 1 to 4 percent, real estate developers average 5.8 percent, and aerospace and defense contractors average 7.4 percent.
More than half of hospitals made a profit on Medicare with at least a third turning a profit on Medicaid. Further, hospitals collectively pulled in $18 billion in investment income last year alone, up 40 percent from 2023. Tax-exempt hospitals, meanwhile, borrow at interest rates 1.66 percentage points below taxable corporations, a subsidy baked into their nonprofit status.
Even while most hospitals are legally classified as nonprofits, they are posting margins healthy for-profit industries would envy.
So, did patients see any meaningful improvement in their care? Did nurses, the people who hold hospitals together, see raises that reflected it? No and no.
National patient-experience scores improved steadily in the years after public reporting began, but that improvement slowed to almost nothing – just 0.1 percentage points a year – by the most recent period studied. Between 2012 and 2019, average hospital CEO pay rose by more than 30 percent while registered nurse wages crept up by just 2.3 percent.
Instead of improving the lives of patients or investing in their essential work force, two-thirds of hospital spending today goes to costs unrelated to direct patient care.
To be clear, high costs and stagnant quality aren’t “market failures.” These are the distortions that inevitably happen when federal and state governments shield hospitals from competition and reward consolidation.
Certificate-of-need laws in dozens of states let hospitals block new facilities from opening.
Next, the Affordable Care Act effectively banned physician-owned hospitals. Physician-owned hospitals delivered higher quality care at lower costs because doctors were the ones making clinical and operational decisions. By shutting them out of the market, the ACA insulated consolidated hospital systems from an arguably better competitor.
Medicare also pays more for an identical procedure when it's billed through a hospital-owned outpatient department rather than an independent physician's office. In 2023, physicians and hospitals received $1,015 for performing a colonoscopy in a hospital outpatient department while, at an independent office, a physician received $345 for the identical procedure. This discrepancy in billing has incentivized hospitals to buy up private practices, which is why 55 percent of physicians are now hospital employees.
Finally, the 340B drug program, originally designed to help safety-net providers serve low-income patients, now functions as a profit engine for hospitals. Under this program, hospitals buy drugs at 25 to 50 percent below wholesale price and bill Medicare at full price, pocketing the spread. This leads to further consolidation, as hospitals buying out independent physician practices allows them to extend 340B eligibility to more patients.
Each of these policies insulates hospitals from having to compete on price or quality, and each one rewards getting bigger over getting better. From 1998 to 2022 there were over 1,800 hospital mergers. Less competition and more consolidation, of course, leads to higher prices.
Fixing these distortions, thankfully, doesn’t require much creativity – we simply need to stop Washington from rigging the system in hospitals' favor.
First, enact site-neutral payment reform so Medicare and Medicaid pay the same rate for the same service regardless of where it's delivered. There's no reason hospital-owned facilities should be paid more for delivering the same care.
Second, reform the 340B program to close the loophole that rewards higher drug spending rather than patient need.
Third, repeal the ACA's ban on physician-owned hospitals. Letting doctor-led facilities open and compete would introduce the much-needed price and quality competition the current system was designed to block.
Fourth, states should repeal or scale back certificate-of-need laws, and Congress should use its leverage to encourage them to do it. No other industry requires a competitor's permission to open.
Fifth, require more transparency. Congress should direct the GAO to compile a full inventory of federal hospital payments and identify where subsidies are actually reaching safety-net providers as opposed to padding balance sheets. American taxpayers give a lot to hospitals in terms of advantages and subsidies – it’s not too much to ask hospitals to show where the money went.
Unsurprisingly, a health care system built on shielding providers from competition has not delivered lower costs or better care. Instead, it has produced bigger providers. Correcting some of these distortionary measures, by instituting site-neutral payments, 340B reform, and restoring competitors’ ability to enter the market, isn’t punitive. In fact, these measures are the bare minimum conditions for any semblance of a market to exist. Without these changes and ones like them, we should never expect costs to come down or care to get better.
Isabelle Marchese is the Director of Health Policy at Americans for Tax Reform.
