America’s hospitals: Our system lets big hospitals charge exorbitant prices. It’s time for change.

The Real Villains in the American Health Care System Are Our Outrageously Greedy Hospitals

The Real Villains in the American Health Care System Are Our Outrageously Greedy Hospitals

Who's winning, who's losing, and why.
March 23 2015 2:12 PM

Hospitals Are Robbing Us Blind

Forget Obamacare. The real villains in the American health care system are greedy hospitals and the politicians who protect them.

Hospital complex.
Hospitals that don’t face competition from other nearby hospitals have huge power in their local markets.

Photo illustration by Slate. Photo by Thinkstock.

Five years ago this week, Barack Obama signed the Affordable Care Act into law, and we’ve been debating it ever since. Like many Americans, I oppose Obamacare, and I think we ought to repeal it and replace it. Over the past few months, however, I’ve come to the conclusion that the fight over Obamacare is a distraction from a much deeper problem, which is that America’s hospitals are robbing us blind.

I realize that this is an impolitic thing to say. What kind of lousy ingrate doesn’t love hospitals? Go to any big American city, including cities like Cleveland and Pittsburgh that have been devastated by deindustrialization and joblessness, and you’ll find a mammoth hospital complex in the center of town, buzzing with activity. Forget about big cities—there is a hospital in every congressional district in America, and local hospitals are often among the largest employers in the district. One of the reasons President Clinton’s 1993 health reform effort failed is that he never won over the hospital lobby. President Obama learned from the Clinton debacle; hospitals were among his most important allies. Republicans get in on the act too. Right now, for example, a number of GOP lawmakers are pushing a Medicare “reform” that guarantees higher payments to doctors and hospitals today in exchange for the promise of spending reductions a decade or two from now. Good luck with that.

You can hardly blame them though. The health sector employs more than a tenth of all U.S. workers, most of whom are working- and middle-class people who serve as human shields for those who profit most from America’s obscenely high medical prices and an epidemic of overtreatment. If you aim for the crooks responsible for bleeding us dry, you risk hitting the nurses, technicians, and orderlies they employ. This is why politicians are so quick to bash insurers while catering to the powerful hospital systems, which dictate terms to insurers and have mastered the art of gaming Medicare and Medicaid to their advantage. Whether you’re for Obamacare or against it, you can’t afford to ignore the fact that America’s hospitals have become predatory monopolies. We have to break them before they break us.


What do I mean by that? Last fall, Mark Warshawsky and Andrew Biggs made a striking observation: From 1999 to 2013, the cost to employers of an average family health policy increased from $4,200 to $12,000 per year. In an alternative universe in which employer premiums had remained flat, salaries would have been $7,800 higher, a life-changing difference for most low- and middle-income families. To protect these families, many people want the government to pick up a bigger share of our hospital bills. But this just shifts the burden from employers to taxpayers. The Congressional Budget Office expects federal health spending to almost double as a share of GDP between now and 2039. With the exception of interest on the debt, all other federal spending will shrink. What this means in practice is that high medical prices charged by hospitals will gobble up taxpayer dollars that might otherwise have gone to giving poor people more cash assistance, welfare-to-work programs, and Pell grants; fixing potholes; sending missions to Mars; and who knows what else.

When you survey the health systems of other rich countries, you’ll find some that rely a bit more on private insurance markets than ours (like Switzerland) and others that rely a bit more on centralized bureaucracies (like Britain), but what you won’t find is a country where hospitals dare to charge such obscenely high prices. Avik Roy, a senior fellow at the Manhattan Institute and a conservative health reform guru, has observed that although the average hospital stay in the world’s rich countries is $6,222, it costs $18,142 in the U.S. Guess what? Spending three times as much doesn’t appear to yield three times the benefit. 

As for why hospitals charge such high prices, it’s fairly simple: They do it because they can. In a competitive market, a provider who jacks up prices risks losing customers to competitors who charge less. But what if incumbent providers have the political muscle to keep competitors out of the market? What if regulators look the other way when incumbent providers buy up the competition, or even help the process along? That, in a nutshell, is the situation with America’s hospitals, as Chris Pope outlines in a recent Heritage Foundation paper on consolidation in the health care market. Because most medical care is purchased not by consumers but by third parties, like Medicare and Medicaid or your insurance company, and because consumers rarely get access to reliable data on quality, they place an extremely high value on convenience. If you’re not saving money by shopping around for a better deal, and if you have no idea if you’re getting better care, you might as well go to the hospital closest to you. Hospitals that don’t face competition from other nearby hospitals thus have a huge amount of power in their local markets. If a private insurer refuses to pay a hospital’s exorbitant prices, a hospital can just walk and wait for the insurer’s customers to scream bloody murder over the fact that they can’t use their local hospital.

You’d think this would be a strong argument against allowing hospitals to merge, so that we could at least avoid reducing competition. Yet from 1998 to 2012, the 5,000 or so hospitals in the United States saw 1,133 mergers and acquisitions. The bigger, more dominant you are in a local market, the more you can extract from private insurers and taxpayers.


There are differences between how private insurers and Medicare deal with the power of hospitals. When insurers have tried to play hardball with the hospitals that gouge them, as in the 1990s, when managed-care organizations kept rising health care costs in check for a few short years, hospitals pressured state legislatures to enact “selective contracting” and “any willing provider” laws that impeded MCOs from steering patients to facilities where they could negotiate good rates. Moreover, MCOs can’t do much if a local hospital buys up all of the nearby medical providers.

But wait a second. How is it that hospitals are also gouging Medicare? Medicare alone accounts for 20 percent of all national health expenditures, a number that, if anything, understates the extent of its influence. Shouldn’t Medicare be able to use its pricing power to get hospitals to play ball? Medicare offers standardized reimbursement rates for different services, which hospitals always insist are far too low. Yet for some routine medical procedures, the reimbursement rate is higher than the cost of performing the procedure (which, once you already have the equipment and the personnel, can be pretty low), meaning the hospital makes money off of the procedures. For other services, like giving a patient personal attention, the reimbursement rate is lower than the cost of providing the service, so this is where hospitals skimp. The unsurprising result is that we have a health system that is increasingly devoid of personal attention while at the same time generating an ever-higher volume of the medical procedures for which Medicare is willing to overcompensate.

To make things even more maddening, Medicare pays hospitals more than other sites of service for the same medical procedures, on the grounds that hospitals perform several unique and valuable functions, like providing uncompensated care for people who turn up at emergency rooms. This has led to a number of hilariously perverse outcomes. For example, as Margot Sanger-Katz has reported in the New York Times, hospitals have been buying up doctors’ offices, because doing so allows the exact same offices to charge Medicare higher prices for performing the exact same services, because the government has decided that hospital-based care is intrinsically more expensive than office care.

While we can all agree that emergency care is important and that hospitals should be paid for providing it, it’s not at all obvious that we should compensate hospitals more generously for all procedures, including elective procedures for run-of-the-mill insured patients. These higher reimbursement rates make it hard for independent providers of medical services—those that aren’t part of existing hospitals—to compete with hospitals, even when they’re capable of performing procedures for less. In short, higher reimbursement rates for hospitals entrench the monopoly power of hospitals. It’s funny how that works out.

There are steps we can take to curb the power of our monopolistic hospitals. The Obama administration, to its great credit, is seeking to rein in the practice of paying hospitals more for the same medical services. But that’s just the tip of the iceberg. Barak Richman, a law professor at Duke, a leading expert on concentration in health care markets, and, for the record, a fan of Obamacare, has identified two paths forward. Our government can simply accept that the market power of hospitals will continue to increase while making more of an effort to force them to accept low reimbursement rates. This approach is certainly worth trying, yet it ignores the fact that because hospitals are big employers, they wield a great deal of political influence. Whenever bureaucrats try to tame hospitals, lawmakers ride to the rescue of the big medical providers.

The second path is to rely on antitrust enforcement to crack down on hospital mergers and acquisitions and, more importantly in the long run, to make it easier for new medical providers to enter the business and to compete with hospitals. Naturally, hospitals hate this kind of competition, particularly from specialized providers that focus exclusively on providing one or two medical services inexpensively. To the hospitals, these providers “cherry-pick” and “cannibalize” their most profitable business lines without ever having to take on the larger burdens of running hospitals. There’s some truth to these complaints, which is why governments should compensate hospitals directly for care that it wishes to subsidize. But we need smaller, more efficient competitors to keep the big hospitals in check and to drive down medical costs for society as a whole.

Curbing the power of the big hospitals isn’t a left-wing or a right-wing issue. Getting this right will make solving all of our health care woes much easier, regardless of where you fall on the wisdom of Obamacare. Let’s get to it.