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.