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What's really driving hospital price increases

The Wall Street Journal article on 6/23/24 titled When Hospital Prices Go Up, Local Economies Take a Hit illustrates a fundamental misunderstanding of how healthcare operates economically. 


The article suggests that health system mergers cause rising hospital prices. This analysis confuses correlation with cause and effect. The fundamental question of the article is why hospital prices are rising. The answer is the growing problem of cross-subsidization in healthcare. 


Hospitals receive 70-80% of their payments from Medicare and Medicaid. These government payments are not based on hospital prices but based on regulation. These regulatory payments have been declining over the past two decades. Recent studies document that today, Medicare only pays for 82% of hospital costs. Medicaid is even worse, paying only 50-70% of hospital costs depending on the state. So hospitals must recover 20-25% of their costs from private insurance carriers to break even. 


As these government payments decline, hospitals are forced to raise prices; otherwise, they will go bankrupt. This pattern of cross-subsidization, not health system mergers, is the cause of higher hospital prices. 


In addition, cross-subsidization has been a driving force that encourages hospital mergers as an opportunity for health systems to lower costs and raise prices. This analysis's proof is demonstrated in declining hospital margins despite higher prices.


We need fundamental reform of the healthcare payment model. Potential solutions exist. Visit https://www.thejourneys-end.org/ to learn more.



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