Earlier this week, hospital executives faced tough questioning in Washington during a House Ways and Means Committee hearing on the impact of rising health care costs on patients and families by examining the role of health systems. In response, hospital CEOs claimed that prices are being driven up by two major factors: underpayment by Medicare and Medicaid and the high quality of care that is delivered. But what are the facts? We took a look at the research and found that the data tells a very different story.
Medicare and Medicaid Do Not Drive Up Health Care Prices
For years, hospital executives have been claiming that they are forced to inflate prices for private payers to make up for losses incurred due to underpayment by Medicare and Medicaid. Hospital CEOs defended charging facility fees for outpatient care saying that,
“the higher fees are because hospitals are often reimbursed below the cost of providing the care, particularly by government programs like Medicare and Medicaid.”
While it’s true that both employer-sponsored insurance and ACA plans pay higher rates than Medicare and Medicaid, it’s not those programs that are influencing prices.
John Graham, a visiting fellow at the Paragon Institute, published analysis earlier this month that traces the origins of “the myth of hospital cost shift” and what hard data says about the impact of government programs on hospital prices:
“A 2011 article concluded that changes in market power between health insurers and hospitals explained changes in rates far better than the cost shift theory. The 2025 review updated the evidence that rates fluctuate based on market power shifting between payers and hospitals, not the behavior of government plans. For example, the rise of HMOs in the 1980s and 1990s increased payers’ market power and drove payment rates to hospitals down. Subsequent waves of consolidation among both hospitals and insurers have led to market power shifting back and forth in subsequent decades.”
Based on available data, Graham concludes that,
“Policymakers who accept the myth of cost shift condemn Americans to more decades of spiraling health costs. Hospital affordability problems are better addressed through increased competition, site-neutral and other payment reforms, and repealing Certificate of Need laws, than by accepting a flawed cost-shift narrative.”
High Prices Are Not Connected To Quality of Care
Hospital executives also testified that higher prices reflect a higher quality of care. This, too, sounds intuitive. But when it comes to health care, you don’t always get what you pay for.
Here in Texas, prices have been increasing without a proportional improvement in the quality of care.
“Part of this problem is Texas does not have enough competition. Over the past 20 years, hospital, insurer and private investor mergers and acquisitions have fundamentally reshaped the market. Texas has one of the highest shares of residents in highly concentrated hospital markets among peer states. Texas has nine metropolitan areas that have only one or two hospital systems. In these areas, competition for inpatient care is limited by definition; patients have fewer or no choices among providers.
“Research on the effects of this consolidation points in a consistent direction. Prices tend to go up, consumer choice narrows, and quality of care does not necessarily improve. Hospital mergers have been associated with price increases of 6-18% without improvements to care quality. Hospitals that acquire physician practices tend to charge more for the same services, often adding “facility fees” that were not there before. That is happening right here in Texas.”
So, why is health care so expensive? It’s the prices.
As The Hill noted following the hearing,
“Hospitals are one of the primary drivers of increased health spending, accounting for about 31 percent of all health care costs, according to the most recent federal data. [House Ways and Means Chairman Rep. Jason Smith (R–MI)] noted that hospital prices have skyrocketed 300 percent in just over two decades.
“When hospitals have no competition, it’s no wonder that the sky seems to be the limit for prices,” Rep. Smith said.
Hospitals have been operating in a dysfunctional market for decades, one ruled by anti-competitive practices that have driven prices up without improving quality or outcomes.
The good news is that by identifying the underlying problem, we can come together to develop workable solutions.