W&M Zeroes in on Hospital Costs
Last week, the Committee on Ways and Means held a hearing on the high cost of hospital care with leaders of various health systems. Over the course of the hearing, Chair Jason Smith (R-MO) and other committee members highlighted the implications of high hospital prices for health care costs and federal spending, and discussed reforms to address site-of-service payments, the tax-exempt status of nonprofit hospitals, the 340B drug program, and other areas. As health care spending and federal deficits continue to rise, and with the Medicare Hospital Insurance trust fund less than seven years from insolvency, we welcome Congress’s focus on real reforms that could lower health care costs for consumers and the federal government alike.
Hospital spending represents the largest single category of health care spending in the United States, compromising roughly 31% of National Health Expenditures (NHEs) – or roughly 5.5% of Gross Domestic Product – including 37% of Medicare spending. Total hospital spending has also been growing rapidly, at a rate of 11% in 2023, 9% in 2024, and a projected average nearly 6% per year through 2033.
These costs are partly the result of the high prices of hospital care – Medicare pays hospitals an average of 2 to 4 times as much as it pays private clinics for similar services, and commercial insurance pays an average of 2.5 times as much as Medicare.
In the hearing, Members of Congress highlighted several policies that could lower these prices. The policies discussed included:
- Adopting Site-Neutral Payment Policy. Under current law, Medicare pays more for most services that are provided in a Hospital Outpatient Department (HOPD) as opposed to an independent physician’s office, even if the service and quality of care are the same. In 2021, we estimated that equalizing these payments in Medicare would save the program more than $150 billion over a decade (CBO agrees) – which would be $175 billion today – and reduce beneficiary costs by nearly $100 billion more. In 2023, we estimated that adopting site-neutral payments in commercial markets would reduce health care costs by more than $450 billion, netting the federal government nearly $120 billion of additional revenue.
- Reforming the Tax-Exempt Status of Nonprofit Hospitals. Nonprofit hospitals are currently exempt from paying most taxes, and further benefit from preferential tax treatment for their bonds and donations received. In exchange, nonprofit hospitals are supposed to provide a certain level of “community benefit.” However, research shows these community benefits provided are much smaller than perhaps intended, and many have questioned whether the non-profit status is appropriate. Based on our 2024 estimates, the tax exemption for nonprofit hospitals will cost the federal government nearly $300 billion in lost revenue over the next decade.
- Addressing the 340B Drug Program. The 340B drug program requires drug manufacturers to sell prescription drugs at a lower cost to certain hospitals – but little to none of those savings flow through to patients or public insurers. Furthermore, the program has seen significant growth in spending over the past decade. Reducing Medicare reimbursements to reflect the discount certain hospitals receive on drugs would save the federal government at least $85 billion over a decade, as well as lower costs for beneficiaries.
In addition to the many important reforms highlighted in the hearing, policymakers have a number of other options to lower hospital prices. We’ve written about reference pricing for the Federal Employees Health Benefits program, capping commercial hospital prices as a multiple of Medicare, shrinking Disproportionate Share Hospital (DSH) payments, reducing bad debt reimbursements, reforming Graduate Medical Education (GME) payments, rebasing payments to hospitals and other providers at current sequester levels, and increasing price transparency. Other experts on the left, right, and center have put forward many of their own ideas to lower hospital costs.
Policy Options to Lower Hospital Costs
| Policy Options | 10-Year Federal Budget Savings |
|---|---|
| Cap Hospital Prices at 2x Medicare | ~$300 billion* |
| Repeal or Reform Tax-Exempt Status of "Nonprofit" Hospitals | Up to $300 billion |
| Adopt Site-Neutral Payments in Medicare | $175 billion |
| Adopt Site-Neutral Payments in Commercial Market | $120 billion^ |
| Replace Graduate Medical Education with Block Grant | $110 billion |
| Reduce 340B Hospital Drug Payments to Previous Level | $85 billion |
| Extend Medicare Sequester by Rebasing Payment Rates | $75 billion |
| Make Scheduled DSH Cuts Permanent | $65 billion |
| Eliminate Medicare Coverage of Bad Debt | $60 billion |
| Implement Reference Pricing at 2x Medicare for FEHB | $60 billion |
| Require Price Transparency and Establish Claims Database |
~$20 billion |
Source: Committee for a Responsible Federal Budget.
*Would reduce premiums and cost-sharing by almost $1 trillion.
^Would reduce premiums and cost-sharing by over $450 billion.
Of course, lowering health care costs will require looking beyond hospital pricing – including to Medicare Advantage, prescription drug costs, cost-sharing, Medicaid, the Affordable Care Act and other areas.
With health costs rising, debt exploding, and hospitals accounting for one-third of all health spending, lawmakers must seriously consider policy options that bring hospital costs down. We appreciate the Committee on Ways and Means focusing on the critical issue of how to reduce the cost of health care.
