With the midterm elections just around the corner, healthcare and affordability will likely once again dominate the airwaves. There’s no shortage of ambitious reforms out there, yet Congress should start by focusing its attention on the biggest drivers of health spending in recent years: hospital systems.
Between 2022 and 2024, hospital services represented 40% of the overall growth in national health expenditures, a surge that outpaced every other source of medical spending, including prescription drugs. The federal government already spends more than $1.8 trillion annually on healthcare, and as the American population continues to age, the burden hospital spending imposes on taxpayers will only worsen.
What is truly galling is that current federal policies actually encourage hospital consolidation, which increases upward pressure on prices. Before trying to reinvent the healthcare system with new federal mandates, lawmakers should first address the perverse government incentives fueling the soaring spending they claim to oppose.
Consider Medicare, the government’s insurance program for seniors. Medicare reimburses hospitals at higher rates for the same medical service simply because the care is delivered in a hospital setting. For example, in 2021, the average reimbursement for drug administration services was up to 211% higher in hospitals than in independent physician offices.
Or take 340B, a drug discount program for hospitals that serve low-income and uninsured patients. This program requires pharmaceutical companies to sell their treatments to qualifying hospitals at steeply reduced prices, typically 25% to 50% below wholesale rates. Yet, because insurers and government health programs continue to reimburse hospitals for these drugs at non-discounted market prices, providers get to pocket this spread as pure profit.
These distortions create powerful incentives for hospital systems to acquire physician practices. Qualifying hospitals can boost their 340B revenue by buying up clinics that administer outpatient drugs. After these medical practices are folded into a 340B-eligible hospital system, the treatments they provide become far more lucrative.
A similar dynamic exists with Medicare’s site-based payment rules. By acquiring freestanding medical practices and turning them into outpatient departments, hospital systems can collect higher Medicare reimbursements for the same services. Today, nearly 80% of all physicians across the country are employed by hospitals or other corporate entities.
Most hospital markets already suffer from a profound lack of competition, and the fact that federal policies actively encourage this is a disservice to patients and taxpayers. In 2024, nearly half of all metropolitan areas had just one or two hospital systems controlling the market for inpatient care. In fact, 97% of metropolitan areas across the country are considered highly concentrated according to federal guidelines.
The Department of Health and Human Services reckons that hospital mergers in concentrated markets can raise prices by as much as 65%. And when hospitals buy up independent physician practices, prices for identical medical services rise by an average of 14%.
Consolidation is not inherently harmful. Mergers and acquisitions can be the result of market forces driving firms and industries to sizes that maximize economies of scale and consumer welfare. The problem arises when government policies distort market signals by artificially manipulating incentives for consolidation. Instead of being guided by consumer preferences or efficiency, firms begin deploying capital in response to artificial advantages created by government policy.
Lawmakers don’t need to search far and wide for solutions. State legislatures have successfully enacted restrictions on the use of hospital facility fees for outpatient care, which are leading drivers of consolidation. Congress needs to build on these efforts. Sensible reforms have already been introduced, including several with bipartisan support. For example, in 2023, the House of Representatives passed a bill that would have saved taxpayers billions of dollars by mandating “site-neutral” Medicare reimbursements for drug infusions.
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A comprehensive 340B reform effort is also underway in the Senate. Members of the bipartisan 340B working group recently unveiled legislation that would address the drug discount program’s incentives for provider consolidation and create basic transparency requirements. Meanwhile, a bipartisan group of legislators in the House is championing the SECURE 340B Act, which would address something Congress forgot to do when it created the program: actually defining who counts as a 340B patient.
Lawmakers are often eager to enact sweeping new mandates to address the endless rise in healthcare spending. But when it comes to hospitals, the record is clear — distortionary federal policies have helped artificially inflate spending. Congress should stop rewarding hospitals for buying up the competition and instead foster a regulatory environment that incentivizes hospitals to compete on value and price.
Alexander Ciccone is the policy and government affairs manager for National Taxpayers Union.
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[ H/T Washington Examiner ]
