Controlling Healthcare Costs: Will Shaming and Coercing Hospitals Work?

The fight to contain healthcare costs requires more than coercion.

“It’s the Prices, Stupid!” says the title of a famous 2003 article by the late Uwe Reinhardt and his co-authors, on why healthcare in the US costs so much more than in other rich countries. Prices paid in hospitals, especially for in-patient services, are the biggest drivers of high healthcare costs. Not much has changed since then. It doesn’t help that hospital prices for the same services vary so widely, and the wave of consolidation, particularly the acquisition of small physician practices by larger hospitals, precipitated by the Affordable Care Act, has further increased the power of hospitals to set prices and further undermined the effectiveness of any price competition. In addition, the reimbursement rules issued by both the government through CMS and even private insurers have higher rates paid for some services rendered in hospitals than in free-standing practices.

Anybody remotely familiar with health policy knows the usual spiel about why we in the US pay so much more for healthcare for mostly “okay” health outcomes but also some exceptional outcomes. All attempts to control rising healthcare costs have failed. Typically, such a catastrophic failure would warrant a pause and a review. For example, the fee-for-service reimbursement mechanism has been largely blamed for incentivizing over-consumption of healthcare. However, research shows that healthcare utilization in the US is no different from other countries. The government and other policy experts believe that alternatives such as pay-for-performance, value-based purchasing, or a host of other payment models can help reduce the cost of providing healthcare.

The average annual premium paid by employees for health insurance offered by their employers has increased from $6,438 in 2000 to $22,500 in 2022: a stunning 250% increase. During that same period, the median income has increased by 70%. Healthcare inflation for this same period was 114% compared to 81% for all other goods and services. The possibility of dying prematurely from non-communicable diseases was 22% in 2000 and 18.1% in 2019 for the US. This is a simplistic comparison, of course, but it is still illuminating. As a high-income country, healthcare prices and costs are generally going to be high, but should they be this high? Will efforts to control costs through prices work?

Many free-market advocates believe that price transparency in healthcare, particularly in hospitals, will trigger the market process that would lead to more competitive pricing. That it had to take government regulation to ensure price transparency is a problem, but even worse, are the inadequate incentives to ensure compliance (or, put differently, low cost of non-compliance). Non-compliant hospitals have been issued paltry fines. The jury is still out on whether price transparency will affect the cost of healthcare but there is considerable evidence that it will not be the magic bullet.

So, what will?

A recent Wall Street Journal article explores what businesses in Indiana are doing to bring down healthcare prices: shaming hospitals, raising public awareness about high prices, and lobbying for laws that limit facility fees. Others are using the courts, arguing that hospital systems are stifling competition and inflating prices. Realizing that employers in Indiana often paid the highest prices among a select group of states, the business lobby group mounted a public campaign, including targeted ads to highlight the high prices in Indiana hospitals. This year, Indiana passed several laws aimed at hospitals. Key among them is a requirement for the state to collect data on when a hospital’s charge for a service exceeds 285% of Medicare’s rate for the same service. The effect of this law might be that hospitals will bill for services at 284.9% of what Medicare charges. This could even backfire because hospitals that currently charge significantly below Medicare rates would have room to raise prices. Original proposals included fines for exceeding 260% of Medicare rates. Other aspects of the law encourage the adoption of health reimbursement plans, establish a healthcare cost task force, and mandate sharing of drug rebates with patients.

I doubt shaming hospitals or even antitrust actions against healthcare providers will make a difference in healthcare costs. If Americans continue to be insulated from the actual prices they pay for healthcare, no policy short of brute government price controls can reduce costs. Employer-sponsored insurance remains the primary financing mechanism for healthcare in America, covering more than half of the population. In lieu of higher cash payrolls, employers purchase health insurance for their employees. However, this market power is severely underutilized in driving market changes. If employers want to control healthcare costs, adopting and encouraging health reimbursement arrangements (HRAs) would be a better option. HRAs provide for more flexibility for employers to make decisions about purchasing healthcare. For example, employees can choose their own health insurance and pay the premiums from their HRA. They could also use the accounts to fund other medical services. Unlike insurance premiums that are “lost” if no healthcare services are used, HRA funds, although controlled by the employer, can rollover into subsequent years. Ideally, I would love to see some of the restrictions on HRA removed, including the requirement to be enrolled in a health plan, and perhaps most importantly, they should be portable; employer-paid health insurance premiums and HRA funds are compensation to employees, not the benevolence of the employer.