“For years, lawmakers in both parties have disproportionately focused on prescription drug prices,” says health expert Sally Pipes. “The latest inflation data suggest it’s time to shift that focus.”
Getty Images
Prescription drug prices fell 3.1% over the past year, the sharpest annual decline in more than six decades, according to new data from the federal Bureau of Labor Statistics. Hospital prices, meanwhile, rose 5.2%.
Yet the vast majority of Washington policymakers focus their time and attention on reducing drug prices, not hospital costs.
It’s easy to see why. Just like “Big Tobacco” in the 90s, “Big Pharma” has become a boogeyman in both parties. As research has shown, tobacco kills and drugs save lives. By contrast, voters tend to look favorably on their local hospitals.
But if lawmakers want to actually bring down healthcare costs, they’ll need to take on the hospital conglomerates that are disproportionately driving medical inflation. That won’t require statist price controls. But it will require redoubling efforts to cut red tape, boost transparency and promote the market competition that leads to lower prices.
Americans spent about $1.6 trillion on hospital care in 2024, according to the latest available federal data. That was about 31% of total healthcare spending of $5.7 trillion—considerably more than the $1.1 trillion spent on physician and clinical services, and nearly four times the $467 billion spent on prescription drugs.
Hospitals don’t merely account for the plurality of America’s healthcare spending. They’re also raising prices faster than almost anyone else in the healthcare industry. Between 2000 and 2022, hospital service prices rose by more than 220%, far outpacing the general inflation rate of 74% and the overall healthcare inflation rate of 130% over the same period, according to researchers at Rice University’s Baker Institute for Public Policy.
Hospitals are charging ever steeper prices, in large part, as a result of big health systems acquiring smaller facilities. Between 2016 and 2024, there were nearly 500 hospital mergers, acquisitions and other changes of ownership, according to a recent UnitedHealth Group analysis. By 2024, nearly half of metropolitan hospital markets were controlled by just one or two health systems.
This has left insurers and patients with fewer alternatives—and large hospital systems with enormous leverage when setting prices. It should come as little surprise, then, that hospital mergers within individual markets have been linked to price increases of 20% to 50%.
And according to a mounting body of research, consolidation hasn’t led to a consistent improvement in quality. In fact, a 2020 study in the New England Journal of Medicine found that hospital acquisitions were “associated with modestly worse patient experiences.”
Policymakers can improve the quality of care that patients receive—and slow the growth in spending—by working to restore competition to the hospital sector.
Price transparency is a good place to start. Patients need information about what hospitals charge so they can shop around for higher-value care. Federal hospital transparency rules have been in place since 2021, yet compliance has been uneven.
One recent review found that just 15.5% of hospitals disclosed actual prices for more than half of their negotiated charges, while 43.5% were posting fewer actual prices than they had the year before.
Better enforcement of these requirements would make it easier for patients and employers to identify more affordable providers—forcing hospitals to compete on price.
Federal payment policy also puts independent providers at a significant disadvantage. Medicare often pays more for the same outpatient service when it is delivered at a hospital-owned facility rather than an independent physician’s office or surgery center. At a recent congressional hearing, lawmakers noted that an ultrasound reimbursed at about $164 in a physician’s office could receive $339 in a hospital outpatient setting.
This has never made much sense. Medicare should not pay substantially different amounts for the same service simply because of the sign on the building. Site-neutral reforms—which ensure that Medicare pays comparable rates for comparable services—would eliminate this disparity and put independent providers on a more level playing field with large hospital systems.
States can also do their part by removing barriers that protect incumbent hospital systems from new competition. Certificate-of-need laws—which are currently in force in a majority of states—require healthcare providers to secure government approval before opening certain facilities or expanding services. Existing providers can use that process to keep potential competitors out of the market.
Repealing those laws would make it easier for new providers to challenge incumbents. Hospitals would have to work harder to attract patients on the basis of price and quality rather than benefiting from government restrictions that limit the number of competitors in their markets.
None of these reform efforts requires Washington to impose price controls. Policymakers just need to stop shielding incumbent health systems from the market competition that’d naturally drive down prices.
For years, lawmakers in both parties have disproportionately focused on prescription drug prices. The latest inflation data suggest it’s time to shift that focus. If Washington is serious about making healthcare more affordable, hospital prices—and the lack of competition that allows them to keep rising—deserve much more scrutiny and reform.
Leave a comment