It's The Hospitals

The Real Reason Healthcare Costs are So High

Why are your health insurance premiums so high?

Lawmakers keep using a band-aid to cover a gaping wound. Discussions of tax credits and shifting funding is just covering up the real cost of healthcare to the American people.

The popular narrative targets health insurance companies as the villain in this story. These faceless, profit-seeking, bloated companies make for easy criticism. Between 1999 and 2024, the cost of employer-sponsored family health insurance premiums rose by a staggering 342%. During this same period, the average worker’s contribution to those premiums increased by 308%. In stark contrast, average worker earnings increased by only 119%, and overall inflation (CPI-U) rose by 64%.

However, it’s not insurance company greed driving these prices. A rigorous decomposition of the Consumer Price Index (CPI) and employer benefit data reveals that the true driver of affordability erosion lies deeper in the supply chain: the hospital systems themselves. By 2024, the cumulative price index for hospital services had nearly doubled relative to 2006, whereas insurance administrative costs remained comparatively flatter. This suggests that premiums are acting largely as a pass-through mechanism, reflecting the soaring unit prices demanded by consolidated hospital systems rather than merely insurer profit expansion.

The Consolidation Problem

What was once a decentralized market of independent community hospitals, physician-owned private practices, and standalone diagnostic facilities has coalesced into a rigid landscape of massive, vertically integrated regional health systems.

By 2026, virtually all markets are considered “highly concentrated” by Federal Trade Commission Standards. Of the 389 metropolitan areas in the country, only 5 markets are not highly concentrated. In a competitive market, an insurer can exclude a high-priced hospital from its network, steering patients to a lower-cost, high-quality competitor. In a concentrated market, however, an insurer cannot sell a viable policy to employers if the only hospital in town is out of that insurance network. Consequently, the hospital holds the leverage to dictate prices irrespective of their underlying costs.

This works across markets as well. Imagine two cities, 100 miles away. Traditionally, if Hospital System X in City #1 bought a hospital in City #2, that merger wouldn’t be scrutinized as anti-competitive, because patients don’t travel that far for care. Yet, the conventional anti-trust wisdom has been challenged by research showing that these mergers still raise prices by up to 10%. This is because the customer is employer, not the patient. Since large employers often cover employees across multiple cities, a hospital which is dominant in both City #1 and City #2 can bundle negotiations. They demand rate hikes in both cities, threatening to exclude insurance plans from both hospitals, even if one city is actually competitive.

Hospitals argue that by consolidating they can form integrated systems which can invest in better technology, standardize practices, and improve outcomes. Yet, contrary to the industry’s efficiency narratives, studies have found that patient outcomes are worse in concentrated markets. Other research has found worse satisfaction scores for patients without any improvement in readmission rates or mortality. Patients are captured, so the system has no incentive to improve the patient experience. Why would hospitals invest in “soft” aspects of patient care if there’s no competition.

The Policy Engines Behind Consolidation

Financial Arbitrage

The extinction of independent clinical practice is not the natural evolution of the market. Federal and state policies have driven this, not the invisible hand.

One of the biggest policies is the site of service differential. This refers to the disparity in reimbursement rates based on where a medical procedure is performed. An independent physician gets paid out of the physician fee schedule. Their global fee covers the professional work, the equipment, the office space, and the staff. If a hospital then buys that practice, suddenly, without anything else changing, that practice becomes a hospital outpatient department, and payment comes from the hospital fee schedule. The physician, now an employee, still bills a fee for the professional work, but the hospital drops a separate facility fee.

The facility fee charged by the hospital is often two or three times the global fee of the independent doctor. This financial arbitrage allows hospitals to buy a practice and instantly increase revenue by double or triple without changing anything.

The magnitude of this arbitrage is enormous. For procedures, the US healthcare system pays an extra $38B a year on these hospital-based facility fees. The hospital industry generates $6 billion a year on facility fees from standard office visits in Medicare patients alone. Because seniors pay a 20% coinsurance, this is also a huge tax on the patients themselves.

Another revenue stream is a little known drug discount program called 340B. It allows large hospital systems to purchase pharmaceuticals at a 50% discount. Then when those drugs are given to patients, either in clinic or through the pharmacy, the hospital can charge full price and pocket the difference.

This program has exploded in recent years, growing from $6 billion in 2010 to over $80 billion by 2025. This money isn’t going to charity care, as 85% of hospitals spent less on caring for the poor than they received in 340B revenue.

This drives consolidation because 340B discounts aren’t available to independent doctors. For example, consider that an independent oncologist, who gives expensive chemotherapy treatments to patients, must pay full price for those infusions. If the hospital buys the practice, suddenly the medications are 50% cheaper. That spread alone can exceed the professional fees generated by the physician and has decimated independent practices which give infusions, such as oncology, rheumatology, and neurology.

Hospitals also receive several other revenue streams unavailable to independent physician practices. These include supplemental money from both state and federal government for treating poor patients and federal money for training resident physicians.

Frozen Physician Payments

Medicare pays physicians based on a dollar per relative-value unit (RVU). Each procedure has an RVU value assigned to it, and that is multiplied by the conversion factor to determine the payment. In 1992, when the system was implemented, Medicare paid $31.00 per RVU. In 2024, Medicare pays $32.74 per RVU. In real terms, that’s a 50% cut.

Since the costs of clinic space, utilities, staff, supplies and technology are increasing, physicians see smaller margins for Medicare patients. Meanwhile, hospitals receive annual inflation increases for their facility fees, along with the added revenues described above. This makes independent physician practice financially unsustainable, leaving them ripe for acquisition by the cash-flush hospital systems.

Regulatory Burdens

Finally, there are several regulatory requirements that both increase the cost of providing healthcare and impede new entrants.

The most glaring are Certificate of Need (CON) laws. In 35 states, new healthcare facilities, such as imaging centers or surgery centers, require a CON. The state boards which control these certificates are lobbied by large hospital systems. A large body of research shows that these always are associated with higher costs and lower quality.

Even in states without CON laws, physicians are banned form owning hospitals. Section 6001 of the Affordable Care Act (ACA) prohibited the construction or expansion of new physician-owned hospitals participating in Medicare. This removed a key competitor for large hospital systems.

Other self-referral bans under Stark Law restrict the ability of physicians to own their own downstream services, such as imaging or physical therapy. A physician clinic that owns an MRI scanner cannot send its own Medicare patients to that scanner unless strict conditions are met. However, large hospital systems may internally refer to their own services without restriction.

Other regulatory burdens, such as purchasing Medicare-compliant electronic health record systems, data collection, and reporting quality metrics favor large hospital systems. These systems have capital reserves and economies of scale to meet the federal requirements while many smaller independent practices cannot. For example, quality metric reporting alone requires 15 hours of labor per doctor per week.

Conclusion

These policies have crafted a healthcare system where rent extraction is rewarded instead of true patient care. With 99% of markets highly concentrated, insurers lack the leverage to negotiate. The premium increases felt by American workers are the direct result of monopoly pricing power form large health systems. Unless federal policies address the drivers of consolidation, this wealth extraction will continue to devour any wage growth of the American workforce.