Escalating healthcare costs have been problematic in the U.S. for a long time. A range of proposals have been presented in an effort to undertake the issue, including single-payer healthcare and more free market solutions with a goal of boosting competition. RAND Corporation recently analyzed hospital costs and what could be done to limit them. They found that regulating hospital prices by setting (or capping) what private health plans pay could cut hospital spending by $61.9 billion to $236.6 billion per year. However, researchers found that this method has the most political resistance.
The Study
Using nationwide data from the federal Hospital Cost Report Information System, RAND’s study compared three policy options to determine which one would have the most influence on cutting costs:
- Regulating hospital prices
- Improving price transparency
- Increasing competition among hospitals
The study found that although improving price transparency and increasing competition among hospitals could reduce costs, neither option would have as dramatic an outcome as price regulation. They estimate that price transparency could reduce costs by $8.7 billion and increasing competition—depending on the size of the change and market price sensitivity—could reduce spending by $6.2 billion annually.
Policy Challenges
All three policy options present challenges and are heavily reliant on several factors:
- Price transparency: Success would vary in patient-driven scenarios (patients utilizing the information to research lower process) and employer-driven scenarios (employers establishing health plans that guide patients toward lower-cost hospitals).
- Price regulation: Researchers tested this by switching average commercial plan costs to an amount similar to Medicare costs for a given hospital. Despite evidence of significant cost-saving potentials, researchers found major barriers to price regulations, including hospital closures, erosion of quality, and discouraging political hurdles.
- Competition: Because current hospital markets are so concentrated, policymakers would need to thoroughly restructure hospital markets over and above what the study modeled for prices to reach competitive levels.
Political Pushback and Moving Forward
As reported by the Centers for Medicare and Medical Services, U.S. healthcare costs amounted to $3.8 trillion in 2019. Hospital spending accounted for the majority of that at 31% and increased to $1.2 trillion later that year. Although the study shows price regulation would have the most direct effect on reducing hospital spending, researchers pointed out that this approach routinely encounters the most political pushback, and the hospital community has decisively lobbied against price regulation, especially at prices comparable to Medicare. Moving forward, policymakers will need to consider the possible impact of various policies on hospital earnings and the quality of care as they examine alternatives for slashing hospital prices. They will also need to consider the political and administrative workability of all options.
