On January 22, both the House Committee on Energy and Commerce and the House Committee on Ways and Means will meet to discuss the rising costs of healthcare. The individuals who will be called to the carpet to explain themselves and their employers during these hearings all represent insurers.
While the jury is out on Wall Street as to the relative profitability of the insurance industry today, and millions of Americans have fewer choices today because insurers are exiting the market, President Trump is calling on Congress to rein in healthcare spending. The question is, where else should Congress be looking to find waste, fraud, and abuse in the system, beyond just insurers?
The answer lies in the opaque world of medical pricing controlled by hospitals. Economic research shows that consolidation among hospitals and health systems has given providers unprecedented market power to set prices above competitive levels. Where a regional market in years past might have supported multiple hospitals vying for patients and insurer contracts, today a handful of mega-systems dominate most local markets and can demand outsized payment rates.
Obviously, hospitals set the prices for their services, and when hospitals face little competition, their leverage increases dramatically. Meanwhile, America’s non-profit hospitals are failing to act like charities, despite their tax designation. They are still charging exorbitant amounts for routine procedures, raking in millions in donations, speculating on real estate, paying lobbyists, and giving back very little in charity care.
Nearly half of the American hospitals are non-profit entities, which makes them legally charities, and which shields them from paying federal, state, and local taxes. Instead of giving back to the community, however, many non-profit hospitals are raking in far more money in tax breaks than they give back to the community.
Nationally, nearly 80% of nonprofit hospitals spend less on community benefits than the value of their tax breaks, creating what researchers call a $25.7 billion “fair share deficit.” Additionally, for every $100 of incurred expenses, non-profit hospitals spent just $2.30 on charity care. By comparison, for-profit hospitals spent $3.80—a 65% increase.
Despite this failure to give back hospital prices have increased by more than 250% since the year 2000, outpacing inflation three times over. In other words, these “non-profit” hospitals aren’t even using their tax breaks to charge, let’s say, $350 for a routine diagnostic colonoscopy, they’re still charging $19,333.71.
Today, hospital care accounts for roughly one-third of all U.S. healthcare spending and hospital prices have been the primary driver of cost growth over the past two decades. Since the mid-1990s, thousands of hospital mergers have left most metropolitan areas dominated by one or two health systems. Economic studies consistently show that when hospitals consolidate, prices for commercially insured patients rise often by up to 15 percent with no corresponding improvement in quality or outcomes.
Estimates from economists and federal watchdogs routinely place wasteful healthcare spending in the hundreds of billions of dollars annually with hospitals accounting for a substantial share through unnecessary admissions, duplicative testing, inflated facility fees, and aggressive billing practices.
The reality is that healthcare in America is often priced far above competitive levels and policies to promote competition and enhance price transparency are essential for slowing the relentless rise of healthcare spending that burdens families, employers, and all taxpayers.
To fulfill the President’s mandate to Congress on healthcare costs, Congress must examine the price-setters as well as the bill-payers. While insurance premiums have climbed sharply for consumers, working to reduce premiums without tackling underlying input prices from hospitals is putting the cart before the horse.
All actors in the healthcare space deserve scrutiny for the role they have played in elevated costs, but the regulatory action should follow the logical sequence of healthcare pricing chain. If we truly want affordable healthcare, we must look at the entities that set the prices in the first place, and in many parts of this country today, it’s the hospital systems operating with monopoly power.
Dave Brat is a PhD economist and former U.S. congressman, having represented the 7th Congressional District of Virginia from 2014 to 2019.
