Americans spend more than $1.6 trillion a year on hospital care — roughly one-third of all health spending — and a new paper from the nonprofit think tank Paragon Health Institute argues that government policy is the primary driver of why those costs keep climbing.

The paper, “The Hospital Cost Crisis: How Government Policies Drive Consolidation, Undermine Competition, and Fuel Soaring Prices,” was authored by John Graham, a visiting fellow at Paragon with nearly three decades of health policy experience.

Mr. Graham previously served as HHS acting assistant secretary for planning and evaluation and as HHS regional director for Washington, Oregon, Idaho and Alaska, and spent three years as a professional staff member on the Senate Special Committee on Aging and the House Committee on Ways and Means.

Ten takeaways from the paper:

1. Hospital prices have outpaced nearly every other sector of the economy. Since 2000, hospital prices have increased 281%, more than three times the rate of overall inflation and more than twice the rate of wage growth, according to data from economist Mark Perry cited in the report. By comparison, prices for medical services outside the hospital setting rose only 147% over the same period, and elective procedures like Lasik have declined in real price. The paper argues the divergence reflects how insulated hospitals are from normal competitive pressure.

2. Most hospitals are not operating in financial distress. The paper pushes back against the hospital industry’s frequent claims of financial strain. In 2024, hospital operating margins averaged 6.4%, total margins reached 6.5%, and investment income swung from $7 billion in losses in 2022 to $18 billion in gains in 2024, according to data from the Medicare Payment Advisory Commission. One-quarter of hospitals posted operating margins above 10% in 2023. The paper argues that the industry’s financial picture is far stronger than its lobbying posture suggests.

3. Medicare patients are typically profitable.The American Hospital Association has long argued hospitals lose money on Medicare patients. Mr. Graham argues that framing relies on a measure that allocates fixed costs — such as building maintenance and administrative staff — against Medicare revenue. When looking only at marginal profit, which compares Medicare payment to variable costs, hospitals have been consistently profitable on Medicare patients. MedPAC estimated Medicare marginal profit at 8% from 2016 through 2019, dropping to 5% in 2022 but remaining positive. More than one-quarter of hospitals earned a positive Medicare operating margin in 2023.

4. Medicaid is increasingly a strong payer for hospitals, according to the paper. State-directed payments — financing arrangements that allow states to route federal Medicaid dollars to hospitals through managed care plans — reached $110 billion in 2024. In many states, total Medicaid payments now approach average commercial rates, which themselves average roughly 2.5 times what Medicare pays. The paper notes that Medicaid patients have become the second most profitable patient segment for hospitals in many states, a reversal from prior years.

5. Government payment policy is driving physician acquisition. Medicare pays significantly more for the same service when it is delivered in a hospital-owned outpatient department than in an independent physician’s office or ambulatory surgery center. That differential has fueled aggressive hospital acquisition of physician practices: In 2012, 25.8% of physicians were hospital employees. By early 2024, that figure had climbed to 55.1%. Studies reviewed in the paper found that hospital-physician consolidation has increased commercial prices for office visits by 17%, hospital inpatient stays by 3% to 5%, and physician services for childbirths by 15%.

6. Two-thirds of hospital spending is not on direct patient care. A 2025 study by Trilliant Health estimated that management and administration, overhead, capital costs and other non-patient-care expenses accounted for roughly two-thirds of hospital spending in 2023. The paper notes that administrative and general expenses have not declined as a share of total costs in decades, indicating the sector has made no measurable productivity gains despite significant technology investment.

7. Hospital labor productivity has declined since 2001. Using a Bureau of Labor Statistics index that begins in 1993, the paper shows hospital labor productivity peaked in 2001 and has been essentially flat or declining since. Over the same period, the private nonfarm business sector increased productivity by 78%. The number of hospital employees per inpatient bed rose 39% between 2000 and 2023, from 4.56 to 6.32.

8. The 340B drug program has become a major profit center driving consolidation. Total 340B-discounted drug purchases reached $81.4 billion in 2024, up 23% from the prior year. The program, designed to help safety-net providers, now functions as an arbitrage mechanism: Eligible hospitals buy drugs at discounts of 25% to 50% below average wholesale price and bill Medicare and commercial insurers at standard rates. The Congressional Budget Office has concluded the program also incentivizes hospitals to acquire physician practices and clinics that are 340B-covered entities, extending their drug-pricing advantage.

9. Certificate-of-need laws and physician-owned hospital restrictions block competition. Twenty-six states and the District of Columbia still require government approval before new hospital facilities or services can be built. The paper argues these laws protect incumbent hospital systems from competition, contributing to higher prices and reduced access. Separately, the ACA effectively froze the growth of physician-owned hospitals — which research has shown to have lower or comparable costs and lower mortality than traditional hospitals — at about 250 facilities nationally by prohibiting new Medicare payment to physician-owned hospitals.

10. Policymakers have 12 specific reforms they could pursue. The paper’s recommendations include enacting site-neutral payment reform in Medicare and Medicaid, capping Medicaid state-directed payments at or near Medicare levels, repealing the ACA’s restrictions on physician-owned hospitals, tying hospital tax-exempt status to measurable charity care rather than broadly defined “community benefit,” reforming the 340B program to target dollars based on need, and eliminating graduate medical education funding by formula in favor of discretionary grants. Several of these align with provisions already included in the One Big Beautiful Bill Act, which the paper views as an important but partial step.

Click here to read the paper in full.

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