A stunner on Capitol Hill shows payment changes could be coming
Of all the segments of the healthcare system out there, hospitals over the years have weathered the rate and payment reforms the best.
Health plans had the minimum medical loss ratio (MLR) reforms implemented, which has constrained overall margins for most plans, save for how some very large conglomerates are able to move regulated money to unregulated areas of sister companies. And for sure, the poor primary care physicians have seen their real pay over decades shrink dramatically. That has caused an existential crisis in America for primary care.
While they have not always been happy, hospitals, however, have always been relatively insulated from political storms. After all, they have built a formidable bipartisan lobby that has kept most lawmakers sympathetic to hospitals’ positions.
But could things be changing for hospitals? We are now seeing some high-profile calls for reform – from Medicare site neutral payments to 340B reform to focus on the size of annual price hikes.
One thing that could drive reform this year is the standing of the Paragon Health Institute. The conservative think tank has many friends in the administration and on Capitol Hill. Its former staffers and fellows hold key government policy and agency leadership positions. Paragon has successfully made its mark on the One Big Beautiful Bill Act (OBBBA), arguing for major provider tax and intergovernmental transfer (IGT) changes in Medicaid. It, too, argued for no extension of the enhanced subsidies in the Exchanges, saying they have led to fraud and phantom enrollees.
Now, the think tank has issued a lengthy and hard-hitting white paper on hospital costs. It notes that about one third of over $5 trillion each year on healthcare is spent on hospital care. It says hospitals are a key factor in driving premiums given major cost hikes annually. Since 2000, hospital prices have risen three times faster than inflation and double wage growth.
Paragon ties the root cause to the fact that government policies inflate and distort hospital prices as well as encourage consolidations and physician acquisition. It sends a shot across the bow by saying that hospitals can make money at Medicare rates and hospitals have had strong positive margins recently. It calls attention to the success of some hospitals with large government program patient loads and argues for far-reaching reforms.
I have made the same arguments, citing other studies and analyses. My favorite news magazine, The Economist, had a great article on U.S. healthcare in its March 22, 2025 edition. The title said it all: “For all they care: How hospitals inflate America’s giant healthcare bill.” That echoes what Paragon is saying and The Economist says the public is misinformed when they blame health plans and drug companies.
As The Economist notes, hospitals continue to operate primarily on a fee-for-service (FFS) model, although both the Biden and Trump administrations have aggressively pursued value-based care (VBC) models to transform payment in the hospital world – a very good thing.
The Economist also says hospitals have incredibly opaque pricing and therefore prices across hospitals vary widely. It is difficult to compare prices, even with some reform already in place. This is perhaps true throughout the healthcare system.
And consolidation in the hospital industry has driven up prices, not lowered them. Also, quality has not improved. Over 1,600 consolidations occurred between 2000 and 2020. One or two providers now dominate in many American cities. Chains now control 81% of beds.
Paragon proposes a number of reforms as does The Economist. I have made a number of recommendations as well. They include site neutral payments, where the same services that are performed in any setting – all the way to a hospitals’ outpatient or other facilities – are paid the same regardless of site. That seems reasonable. Other changes recommended include expanding transparency, further tax and IGT restrictions in Medicaid, and more.
I have argued that the secret to lowering hospital costs – and for that matter all of healthcare – is to set prices nationally or regionally across lines of business. No more huge demands for rate multiples on Medicare for commercial lives. Hospitals say they could not make money at Medicare and Medicaid rates, but a number of studies say this is just not so. The Third Way has found that efficient hospitals can make money from both Medicaid and Medicare. If that is the case, commercial rates, which are dramatically higher than Medicare, could come down a great deal and save the employer coverage system. Even if we give in to hospitals’ argument that some money would be needed in government programs, it would be worth it to force efficiency and stop the gaming. It would mean long-term controls.
So, are things shifting in D.C.? I never count the powerful hospital lobbies out. They are formidable – perhaps the best in the business. But a recent Capitol Hill hearing was telling. Health system CEOs faced a grilling on a range of hospital issues today on Capitol Hill, but in a stunning turn of events the executives said that they are willing to discuss reasonable changes to their long-standing opposition to site neural payments in Medicare. That is a watershed – I have not seen it in my 30 years following healthcare and visiting Capitol Hill.
What emerged was some consensus on the necessity to begin moving to site neutrality in a way that would recognize hospital differences in some cases and changes that might be phased in so as not to undermine finances at health systems.
As a former board member of two hospitals, I am not unsympathetic to the unique loads and contributions hospitals carry. So, the consensus approach noted is not an unreasonable strategy – to phase in impacts to allow hospitals to adapt and lessen impact on patients, local economies, and so forth.
But my issue is that hospitals have become an entitled class based on those unique contributions they do make. That has led to unaccountability and inefficiency at most hospitals. Layer on the cost-plus nature of most government program payments and we find ourselves in a healthcare fiscal and quality mess.
After a long stall, the Trump administration is one of the few to have finalized a small step on site neutrality. Capitol Hill seems primed to do more. As I have said, price transformation is key. Trump is doing that on drugs and medical price needs to be dealt with as well. The CEOs’ signal the other day is a recognition that the status quo is no longer livable and that took courage.
The problem: hospitals and other providers face challenging times from the expected fallout from the OBBBA cuts. Whatever one’s views on what a cut does and does not mean, in excess of $1 trillion to support healthcare will go away over ten years in Medicaid and the Exchanges. While health plans are hurt, the vast majority of those dollars are pushed down the system to providers to serve people in need.
So, a drive for efficiency is good, but it must be tempered with the real-life impacts to Americans.
#hospitals #prices #margins #siteneutral #medicare
— Marc S. Ryan
