Hospitals' Perverse Economic Incentives

Drug companies, pharmacy benefit managers, and insurance companies have rightfully been blamed for the explosion in U.S. health care costs.  Hospitals have faced far less scrutiny, probably due to their high level of well paid employment in every community across the country.  Alexander Ciccone, the Policy and Government Affairs Manager of the National Taxpayers Union, believes that hospitals deserve far more scrutiny:

https://www.realclearhealth.com/articles/2026/04/01/hospitals_perverse_incentives_are_inflating_healthcare_costs_1174043.html

Hospitals’ Perverse Incentives Are Inflating Healthcare Costs
Congress Should End Them
By Alexander Ciccone - April 1, 2026

There’s no shortage of politicians in Washington ready to blame insurance companies and drug manufacturers for the crushing cost of health care. Yet the single largest driver of health care costs in recent years isn’t pharmaceutical stock-buy backs or opaque insurance practices–it’s hospital systems.

What makes this so frustrating is that rising prices for hospital services aren’t the result of a functioning free market, but rather of perverse incentives created by the government that reward hospitals for their size instead of the value they provide patients.

Between 2022 and 2024, spending on hospital care alone amounted to an eye-watering $277 billion, representing 40% of the overall growth in national health expenditures. This surge outpaced every other source of medical spending, including physician services and prescription drugs. According to the Centers for Medicare and Medicaid Services, in 2024, hospital prices rose at their sharpest rate since 2007.

As a result of distortive policies that encourage hospitals to merge and consolidate, nearly half of all metropolitan areas across the country had just one or two hospital systems controlling the market for inpatient care in 2022. This lack of competition raises prices. According to the Department of Health and Human Services, hospital-to-hospital mergers in concentrated markets can raise prices anywhere from 6% to 65%. Even when hospitals acquire smaller independent physician practices, prices for identical medical services from those doctors rise on average by 14%.

By 2024, nearly 80% of all doctors across the country were employed by hospitals or other corporate entities. The surge in hospitals buying up independent physician practices is the predictable result of flawed Medicare reimbursement policies that pay hospitals more for the same medical service simply because the care is delivered in a hospital-owned facility. In 2021, the average Medicare reimbursement for drug administration services was 129% to 211% higher in hospitals than in independent doctors’ offices.

The nonpartisan Medicare Payment Advisory Commission has repeatedly urged Congress to enact “site-neutral” payments that would reimburse the same service at the same rate regardless of where it is performed. Bipartisan legislation passed by the House of Representatives in 2023 would have saved taxpayers roughly $4 billion over the next decade solely through its reforms to Medicare’s reimbursement rules.

Federal mandates have also buried the health care system in red tape, forcing hospitals to build sprawling bureaucracies instead of focusing on treating patients. A 2022 study found that administrative spending accounted for a whopping 15% to 30% of total health care expenditures. Much of this stems from complicated billing rules that keep hospitals busy tracking paperwork rather than patient outcomes.

Few problems illustrate the costs of burdensome regulations more clearly than unexpected medical bills. Despite Obamacare’s promise to streamline access to care, the legislation’s convoluted insurance mandates have become so confusing that many patients get hit with surprise bills after unknowingly receiving treatment from an out-of-network doctor even if they are at an in-network hospital.

Between 2010 and 2016, out-of-network billing at in-network hospitals rose from 32.3% to 42.8% for emergency room visits. Public outcry over this spike led to the enactment of the No Surprises Act in 2020. Despite addressing out-of-network charges for emergency room visits, the law contains glaring exemptions. For example, ground ambulances are largely excluded from the law’s protections against balance billing.

It’s not just the federal government reducing competition in hospital markets. State-level certificate of need laws require health care providers to obtain government approval before expanding facilities or offering new services. While these laws aim to reduce waste, in effect they let local bureaucrats shield established hospitals from new competition. A study found that overall health care costs were approximately 11% higher in states with certificate of need laws versus those without them.

Hospitals are not the villains of America’s health care system. They are simply responding to incentives created by Washington. Before drafting their next grand plan to address the crisis of affordable medical care, lawmakers should pause and take a hard look at how current government policies fuel the relentless rise in health spending they claim to oppose. A good place for Congress to start would be ending government incentives that reward hospitals for buying up the competition instead of outperforming it.