Payment Cross-Subsidization Makes Pricing Transparency Irrational

In U.S. healthcare, payor mix and service mix—not posted “prices”—determine whether hospitals and physicians stay financially viable.

Payor Mix: The Real Driver

Different insurers pay providers wildly different margins:

• Medicare: ~90% of costs (negative margin)

• Medicaid: ~70% of costs (even more negative)

• Uninsured: ~25% of costs (catastrophically negative)

If a provider relied solely on these groups, it would go out of business. Because prices cannot be negotiated with government programs—and uninsured patients often can’t pay—providers depend on commercial insurers to subsidize those losses.

That’s why commercial insurers are charged 20–30% above cost and why providers strive to increase their commercial patient base. In practice, that means:

• Locating in more affluent communities

• Avoiding areas dominated by Medicaid and uninsured patients

• Creating increasingly complex pricing tactics to manage dozens of commercial payment formulas

  
  

This is not “bad behavior.” It is baked into the economics of the system.

Service Mix: Profitable vs. Undervalued Care

Margins vary just as widely by service line:

• Profitable: surgeries, cancer care, dialysis, and procedural services—because they are easy to measure and code

• Underpaid: primary care, mental health, palliative care, geriatrics—services built on conversation, coordination, and prevention

These undervalued services suffer because coding systems reward what is measurable, not what is most beneficial to long-term patient health. The result? A nationwide shortage in the very services that improve outcomes and reduce costs.

Why Pricing Transparency Fails

The idea that consumers can “shop” for care based on published prices ignores how the system actually works:

• 65–85% of care is paid by government programs, which do not use prices at all—they set payment rates unilaterally.

• Providers’ margins vary dramatically by payor and service line

• Patient complexity and unexpected complications make “pricing” nearly meaningless

Cutting commercial prices through transparency simply deepens the cross-subsidy problem and accelerates provider instability—especially in poorer communities.

The Real Solution: Payment Reform

Payment reform—not price transparency—is the path to controlling healthcare costs.

Until we rebalance payments across payors and fix coding inequities across service lines, transparency reforms will continue to miss the core problem: a system structurally dependent on cross-subsidies and distorted incentives.

Go to www.thejourneys-end.org for more details on how to reform provider payments to achieve success.

Healthcare Costs Have Finally Become Unbearable

The latest KFF Employer Health Benefits Survey shows the average U.S. family premium has soared past $27,000 a year. That’s the cost of a new car—just to stay insured.

The recent government shutdown over ACA subsidies misses the real issue. Americans across the board—whether covered by ACA, Medicare, or employer plans—can no longer afford healthcare. The crisis isn’t who pays the bill; it’s why the bill is so high.

We know the causes:

 • Overtreatment and waste.

 • Fragmented care that drives duplication and error.

 • The collapse of primary care, worsening outcomes and cost.

 • End-of-life overtreatment that prolongs suffering.

 • A trillion dollars a year lost to administrative complexity.

The solution isn’t spending more on insurance. It’s redesigning the system itself—simplifying administration, restoring primary care, and aligning payment with better health and humane outcomes.

We can fix this—but not by doing things the old way.

Learn more at www.thejourneys-end.org.

👉 Join the conversation on healthcare reform—your ideas matter.

Private Equity and the Damage Done

“Hospices owned by private equity firms yield higher profit margins and spend fewer dollars on direct patient care," a new study in Health Affairs found. For the study, researchers examined revenue and expense data among providers using four types of ownership models: PE-backed, publicly traded companies, other for-profit entities, and nonprofits. PE-owned agencies reported the highest profits and lowest spending on patient care. 

"Our findings suggest that PE-owned hospices may follow distinct operational strategies, emphasizing nursing facility-based care and administrative efficiency while limiting direct patient-care investments,” the study indicated. "Reduced spending on patient care may compromise hospice quality and shift costs to other areas of the healthcare system."

Health Affairs is absolutely correct that PE-owned hospices are hurting end-of-life care. The report goes on to suggest that policymakers should consider revising the hospice payment model to address this inequity in payments. Unfortunately, the report merely suggests tweaking the existing per diem model - this solution will not work. The manipulation of coding and cherry-picking patients while skimping on care is the for-profit operating strategy.

We need a payment model that doesn’t reward cherry-picking patients or encourage coding manipulation for payment. The entire payment model for hospice is designed to create these outcomes, and tweaking it will not solve the problem. The fact is that hospice services are neither complex nor that expensive.

In this sector of healthcare services, a simple cost-based reimbursement model would be ideal. It would also eliminate any difference in profit margin and focus competition on the quality of care. Go to my book, The Journey’s End, to learn more about how and why this payment model should be adopted by policymakers. www.thejourneys-end.org.