The healthcare landscape in the United States is fraught with complexities, particularly concerning hospital pricing. For many, the experience of receiving a hospital bill—especially if uninsured—can provoke shock and disbelief. I experienced this firsthand four years ago when I underwent a bilateral hip replacement. Covered by a traditional major medical plan with Cigna, I faced hefty charges for my procedure. Though I can only speculate on the final costs after negotiation, the initial hospital charges totaled around $144,000. This amount covered my five-night stay and operating room fees, while my anesthesiology charges were discussed to be somewhere between $32,000 and $35,000. Both the surgeon’s fees and the anesthesiologist’s rates highlighted a stark potential for overpricing within the healthcare system.
For those familiar with the realities of major hospital charges, your insights are welcome.
By David Introcaso, a former Agency for Healthcare Research and Quality Evaluation Officer, Senior Health Policy Adviser to the House Majority Leader, and co-founder of Sylk Health, alongside Adam Cunningham, a physician and founder of Sylk Health, a company that provides procedure pricing from accredited hospitals and clinics outside the United States. Originally published at the Institute for New Economic Thinking website.
In late July, the Senate Finance Committee Democrats, led by Ranking Member Ron Wyden, unveiled an ambitious 86-page Request for Information (RFI) titled “Health Coverage That Works for Everyone.” This document, modeled after the 2008 white paper that laid the groundwork for the Affordable Care Act (ACA), introduces 71 comprehensive proposals across five key pillars. It aims to serve as a guiding framework for forthcoming federal healthcare legislation.
Our new INET Working Paper reveals a critical flaw within the Senate Finance Democrats’ proposal: it concentrates predominantly on commercial health insurers and Pharmacy Benefit Managers (PBMs), neglecting hospital unit prices—the primary driver of healthcare cost inflation. By painting “Big Insurance” as the sole culprit, lawmakers are focusing on financial intermediaries while leaving the root cause of escalating healthcare costs insufficiently addressed.
The Senate Democrats’ Blueprint
The Senate Democrats’ proposed reforms are structured around five pillars aimed at enhancing the affordability, operation, and regulation of commercial health plans:
- Establishing a Federal Public Option & Market Competition: This outlines a federally administered health plan to compete with private insurers, considering reimbursement methods such as direct negotiations, Medicare benchmarking, and CMS fee schedules.
- Restricting Corporate Consolidation & Vertical Integration: This pillar addresses the integration of health plans with PBMs, specialty pharmacies, and physician practices. It also proposes limitations on executive compensation, stock buybacks, and undisclosed Third-Party Administrator (TPA) fees.
- Dismantling Utilization Management & Coverage Barriers: It seeks to impose strict limits on prior authorization requirements by insurers, along with automated claim rejections and unreasonably high initial denial rates.
- Enhancing Consumer Affordability & Premium Protections: This initiative aims to cap deductibles and coinsurance, eliminate the ACA “employer firewall,” and bolster premium tax credit subsidies.
- PBM Transparency & Pharmacy Market Reforms: This includes the elimination of “spread pricing,” mandates for full pass-through of manufacturer rebates to consumers, and regulations against steering to insurer-owned specialty pharmacies.
While these proposed reforms target critical friction points in healthcare, they deliberately overlook the fundamental economic cause behind unaffordability: the escalating prices of hospital services.
Prices Are Policy Canon: The Economic Reality of Hospital Pricing
Health economics research has demonstrated that excessive healthcare spending does not stem from over-utilization compared to other countries, but arises from exorbitant unit prices. Building on Kenneth Arrow’s 1959 article and Gerard Anderson’s influential study, “It’s the Prices, Stupid,” hospital care serves as the clearest evidence of systemic market failure. Data from the Kaiser Family Foundation indicates that hospital care alone contributed $277 billion, or 40%, to the $692 billion total increase in national health spending from 2022 to 2024.
Years of uncontrolled hospital mergers and acquisitions have produced geographic monopolies nationwide. As John McDonough highlights in his book, “America’s Wrong Turn, US Health Care in the Neoliberal Era,” over 90% of metropolitan hospital markets are now classified as highly concentrated monopolies or tight oligopolies according to Herfindahl-Hirschman Index (HHI) scores. Phil Longman of the Open Markets Institute bluntly states that “America’s health care crisis is brought to you by monopoly.”
With regional market power, dominant health systems command commercial prices detached from actual production costs and clinical quality. Research from RAND reveals that private commercial health plans often pay hospitals between 250% and 500% of Medicare rates for the same inpatient and outpatient procedures, with staggering intra-market price variations exceeding 600% for identical services within the same city.
The ACA’s Historic Legacy: Subsidized Indifference and the ERISA Chokehold
The neglect of hospital pricing in the Senate Democrats’ RFI reflects a significant misjudgment from the ACA era. Instead of curbing provider pricing power, federal policy historically relied on tax credits and premium subsidies to accommodate inflated hospital rates. Legal and economic scholars have shown that the ACA’s consolidation incentives—like Accountable Care Organizations (ACOs)—have accelerated hospital acquisitions of physician practices, entrenching market power further. Such federal policy established a regime of “subsidized indifference,” where government subsidies shielded consumers from high costs while enabling hospital monopolies to raise unit prices unchecked.
This dynamic of price inflation places employer-sponsored insurance (ESI) and self-insured health plans, governed by the Employee Retirement Income Security Act (ERISA), in a precarious position. ERISA imposes a statutory fiduciary duty on plan sponsors to manage plan assets wisely for their employees. When negotiating with powerful regional health systems, self-insured employers face severe bargaining imbalances, as hospital monopolies often impose anti-competitive contract provisions, including:
- “All-or-Nothing” Network Clauses: Requiring insurers to include every facility in a network, regardless of price or quality.
- Anti-Tiering and Anti-Steering Provisions: Preventing employers from encouraging employees to choose lower-cost, higher-quality providers.
- Gag Clauses: Keeping negotiated contract prices confidential and hindering transparency.
Given that a dominant hospital system can threaten to withdraw from a network, making an employer’s health plan unappealing to local employees, ERISA plan sponsors are often compelled to accept unreasonably high prices. The resulting consequences include escalating premiums, soaring deductibles, and stagnant wages, which in turn harm household budgets and worsen health disparities. Nobel Prize-winning economist Angus Deaton articulated this concern in 2020, stating, “the [healthcare] industry is a cancer at the heart of the economy.”
Simple mandates for price transparency or disclosure will not rectify this structural failure. Without market discipline or viable alternatives, self-insured plans remain captive to regional monopolistic power.
The Political Economy of Healthcare Reform
Why would lawmakers craft a 71-page reform blueprint that entirely overlooks hospital pricing? The answer likely resides in the political economy surrounding health policy.
Critiquing commercial health insurers, PBMs, and pharmaceutical companies is politically advantageous. Corporations operating out of state provide convenient political targets. Conversely, hospital systems are often the largest private employers in their congressional districts and wield significant political influence. Local hospital executives, trustees, and board members hold considerable sway, making lawmakers reluctant to confront the revenue structures of hospitals or impose pricing regulations. By sidestepping the hospital sector, any legislative reform risks failing to deliver real affordability. Adjusting insurer administrative margins or capping PBM rebates, while allowing hospital unit prices to continue soaring far beyond inflation, merely rearranges financial resources in a flawed framework.
Core Recommendations: Restoring Market Discipline and Structural Price Control
To attain genuine healthcare affordability, federal legislative proposals must confront hospital pricing head-on. Our response to the Finance Democrats’ RFI outlines pivotal legal and market-based reforms necessary for establishing price discipline and fostering a functioning hospital market:
- Establish External Reference Pricing (ERP) Benchmarks: Implement upper price limits connected to international reference prices, similar to CMS’ Global Benchmark for Efficient Drug Pricing model, leveraging data from 19 comparable nations.
- Leverage ERISA Fiduciary Duties: Reinforce statutory enforcement under ERISA to empower plan sponsors and beneficiaries to challenge exorbitant, uncompetitive hospital bills as breaches of fiduciary responsibility.
- Target Anticompetitive Hospital Contracting: Introduce federal prohibitions on “all-or-nothing” clauses, anti-steering/anti-tiering restrictions, and data gag clauses in contracts to empower self-insured ERISA plans during rate negotiations.
- Leverage Public Option Rate Setting: Use federal public option rate-setting mechanisms to enforce payment ceilings for hospitals, indexed to Medicare rates, thereby preventing dominant health systems from offloading costs to private payers.
- State Innovation Waivers (Section 1332): Enable states to use ACA Section 1332 waivers for implementing reference pricing frameworks and global budgeting options for hospitals.
Conclusion
The Senate Finance Democrats’ proposal presents a significant opportunity to redefine federal healthcare policy. However, true reform will remain elusive as long as the focus remains solely on insurance intermediaries while allowing consolidated hospital systems to evade scrutiny regarding pricing. For meaningful affordability reform to succeed, we must confront hospital prices directly by integrating external reference benchmarks with enforceable price discipline. Only through these measures can we hope to mitigate the principal driver of cost inflation in the healthcare provider-payer continuum.
