American hospitals provide essential medical care to people across the country. Yet, high and rising hospital prices increasingly threaten the affordability of care for American patients, families, employers, and taxpayers. A new Paragon research paper, The Hospital Cost Crisis: How Government Policies Drive Consolidation, Undermine Competition, and Fuel Soaring Prices, explores the perverse incentives shaping the decisions and influencing the behavior of U.S. hospitals. We also discussed these items in a virtual event on May 21.
Years of price inflation have attracted the eye of Congress. At a recent hearing, the House Ways and Means Committee examined the role of hospitals in driving up health care costs. Chairman Jason Smith stated:
Hospital prices have grown dramatically, and in many cases, far exceed the cost of providing care. Patients are often left with bills they cannot understand or cannot afford. Too many Americans delay or forgo care altogether because of cost.
In some cases, the prices charged by large hospital systems are simply indefensible. When patients are charged several times more than the actual cost of services, it raises serious questions about transparency, accountability, and fairness.
Paragon is not alone in raising concerns about rapidly rising hospital prices and structural inefficiencies in the hospital sector. Families USA, the Center for American Progress, and Yale University professor Zach Cooper have recent studies, too. While we do not agree on all the solutions to the problem, there is general agreement that high and rising hospital prices represent a major problem for Americans.
The American Hospital Association (AHA)—the leading lobbying organization for hospitals—has aggressively pushed back on these critiques while expanding its lobbying efforts. Here are the critiques of: Paragon’s study, the Families USA study, and Zach Cooper’s essay.
The industry is turning to the same lobbying tactics that have enriched it for decades and led to increasing costs and market consolidation. We address all four of AHA’s criticisms of our study below:
- AHA Claim: “Paragon Misdiagnoses the Cost Problem and Prescribes the Wrong Fix.”
The AHA claims that “Paragon treats hospital cost growth as a pricing problem disconnected from the reality hospitals operate in. In practice, hospital spending pressures are driven by input costs and care intensity.”
Throughout the research paper, we acknowledge that technology and input costs matter, as they do in any industry.
The key question hospitals must answer is why productivity growth has occurred across most major American industries over time while hospitals have largely failed to improve productivity.
Hospital prices have risen 281 percent since 2000—three times faster than general inflation. Hospitals consistently identify labor expenses as a driver of prices. The United States has relatively high wages because it is a highly productive economy. Excessive government subsidies and distorted payment incentives reduce pressure on hospitals to improve productivity, allowing rising labor costs to flow directly into higher prices rather than operational efficiencies.
The AHA correctly notes that our Bureau of Labor Statistics (BLS) source indicates that the productivity metric does not capture outcomes or quality of care. That is because the BLS cannot measure whether hospital treatment in aggregate improves or cures a condition. If the hospital industry were to propose measurements that captured aggregate improvements in output, that would be useful—but it has not. Until we develop such measurements, all we know is that Americans are paying substantially higher prices for hospital treatment. BLS also notes that comparing productivity between hospitals and other industries is challenging because “transactions are not conducted within a single-price, perfectly competitive market. Patients pay different prices based upon their payment methods and are generally unaware of the relevant pricing structures.” From hospitals’ perspective, opaque pricing structures and weak competitive pressures create political leverage for additional subsidies and payment increases.
As technology and practice improvements shift more procedures from inpatient to outpatient care, hospitals assert that their outpatient departments deal with more medically complex patients than independent practices can handle. However, if hospitals wanted to focus on treating more complex cases, then they would not increasingly acquire physician practices. Medicare’s Prospective Payments Systems pays higher rates for medically complex patients through Medicare Severity Diagnosis-Related Groups (MS-DRG, for inpatient care) and the Ambulatory Patient Classification system (APC, for outpatients). The problem our paper identifies is that too many government subsidies are functionally rewards for hospitals having high costs, not for treating more medically complex patients.
Finally, the AHA misquotes and cherry-picks an article indicating increased demand for and composition of care play a bigger role in health spending than price increases do. The article discussed only 2023 and 2024 and highlighted that demand grew significantly as the COVID-19 pandemic passed, and patients returned to hospitals for elective procedures postponed during the pandemic. That post-pandemic bump cannot be used as an excuse for decades of price inflation.
- AHA Claim: “Government Payments Are Not “Subsidies;” They Reimburse Hospitals Below the Cost of Care for Essential Services.”
The AHA’s central claim is that Medicare and Medicaid “routinely pay below the cost of care,” despite the fact that hospitals’ marginal profit on government programs is positive. The AHA routinely tries to shift the focus onto the measure of profitability that includes hospitals’ overhead and other indirect costs—which our paper demonstrates are way too high. The AHA’s argument effectively defines hospital “costs” using spending levels inflated by decades of subsidy-driven inefficiency, administrative expansion, consolidation, and weak competitive pressure.
Meanwhile, Medicare base payment rates for hospitals have increased substantially. The inpatient operating base rate rose 30 percent, and the outpatient conversion factor 26 percent since 2016, while the conversion factors that determine physician rates declined 7 percent. By convincing policymakers that Medicaid payments are too low, hospitals have induced lawmakers to give them supplemental subsidies. One of these subsidies—state-directed payments—amounted to more than $150 billion in 2025. These payments are corporate welfare for hospitals and bring effective Medicaid rates well above Medicare levels in most states and approaching average commercial rates in some. Hospitals also benefit from numerous supplemental subsidies and preferential financial arrangements outside standard Medicare and Medicaid reimbursement meant to address non-fixed operational, care intensity, and uncompensated service costs:
Hospitals frequently invoke obligations to care for vulnerable patients when seeking additional public subsidies and regulatory protections. It is also, for many health care systems, an obligation only selectively fulfilled, while the billing department aggressively sends bills to the vulnerable.
- AHA Claim: “The Report’s Cross‑Sector Comparisons Are Deeply Misleading.”
The AHA claims that “comparing hospitals to cars, TVs, or clothing may look clever in a chart, but it tells policymakers nothing meaningful……. Airlines and hotels provide no better analogy.”
On the contrary, vocal defenders of the hospital industry have compared its cost structure to the airline industry. Both have high fixed costs. The difference is that hospital prices have increased 3.5 times faster than airline fares in the 21st century.
The AHA contends that airlines “can cancel routes, shrink capacity, raise prices based on demand, and turn away unprofitable customers.” However, this is not how airline travel has developed. Since 2000, passenger load within the U.S. increased almost 40 percent from 2000 to 2019, despite two recessions. As with airlines, the way to make hospital care more available to more people is by reducing costs through competition.
The point is that nearly every major American industry faces pressure to improve productivity, reduce costs, and expand output over time. Hospitals operate under unusually distorted payment incentives and weak competitive pressures that blunt those forces.
- AHA Claim: “The Report Gets Rural Health Care Wrong and Communities Pay the Price.”
One of the most important points of our paper is that the current system overwhelmingly benefits large, wealthy urban health care systems, not rural communities. As data from the Center for Healthcare Quality and Payment Reform (CHQPR) shows, small rural hospitals—defined as those with less than the median amount of annual expenditures for rural hospitals ($45 million in 2024)—represent approximately one-fourth of total acute care hospitals but comprise only about 2 percent of hospital spending. CHQPR estimates that eliminating the financial losses of all at-risk rural hospitals would cost $3.2 billion annually—less than 0.1 percent of total national health expenditures. Targeted support for vulnerable facilities is fiscally achievable and more defensible than the blanket subsidies the AHA is protecting.
Even rural hospitals at high risk of financial distress have low closure rates, partly because many already receive substantial rural-specific subsidies. Sixty-one percent of rural hospitals are critical access hospitals (CAHs), which Medicare reimburses on a cost basis. Another 29 percent of rural hospitals receive some form of cost-based reimbursement.
These subsidies come on top of the DSH payments, 340B discounts (albeit the vast majority of 340B assistance does flow to wealthier hospital systems), geographic adjustments, and other plus-ups and subsidies that many rural hospitals receive.
Federal programs designed to support safety-net hospitals have drifted systematically from their intended beneficiaries. The Medicaid and CHIP Payment and Access Commission (MACPAC) found no meaningful relationship between DSH allotments and uninsured rates, uncompensated care costs, or hospital need. Paragon has found that states with hospital provider taxes show lower rural hospital employment than those without, and that Medicaid-financing gimmicks disproportionately favor non-rural entities.
Through the Rural Health Transformation Program, Congress provided $50 billion over five years to improve rural health care delivery. These investments must be carefully targeted to avoid propping up inefficient hospitals while sustaining facilities that provide essential services.
Rural providers deserve targeted and sustainable support, not to be used as political shields for policies that fuel consolidation, rising prices, and worsening unaffordability throughout the health sector.
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