Last month, the White House Council of Economic Advisors (CEA) published an analysis of the cost reductions which would occur if policymakers banned three abusive and common contracting terms used by hospitals to inflate their revenue. For elected leaders who profess to want to make healthcare more affordable, taking up this cause would be a good place to start.
Large hospital systems have strong incentives to prevent insurers, and the employers sponsoring most private-sector coverage, from directing plan enrollees to lower-priced care settings. Legacy facilities are typically capital-intensive and expensive to maintain and run. As ambulatory care options proliferate, hospitals have bought up some of their potential competitors. They then use the availability of their hospital-owned outpatient options to require insurers and employers to buy care from their entire service delivery networks or else risk losing access to the inpatient services all plans must include in their terms.
The strategy works because many of these systems have long existed in their communities and have loyal followings. Hospital leaders know that companies are reluctant to exclude these systems altogether from their preferred networks because doing so might displease some employees. Thus, those hospitals that can claim to offer a full range of inpatient and outpatient services can try to use the goodwill they enjoy in their markets to block a more a la carte approach to purchasing services. The result is needlessly high prices for many services that could be purchased less expensively from non-system providers, such as independent physician groups and free-standing surgical centers.
The most common contracting terms used by hospitals to block competition are:
- Anti-steering provisions. These contractual requirements restrict the use of financial incentives to direct patients toward lower-priced care options. For instance, insurers cannot offer lower cost-sharing to patients who opt to receive services from less expensive care providers. Creative insurance design strategies, such as reference-based pricing, are blocked by anti-steering terms.
- Anti-tiering provisions. Dominant hospital systems frequently insist that insurers designate them as preferred for all of the services they provide. These stipulations amplify the effects of anti-steering strategies and prevent insurers from favoring independent clinics and physician groups over hospital-owned options.
- All-or-nothing terms. These provisions prevent insurers and employers from contracting with dominant hospitals for inpatient services and independent entities for other services. Instead, insurers are forced to buy services from the full delivery networks owned by hospitals even when less expensive options are available.
CEA’s research complements the efforts of the Department of Justice (DOJ) to curtail healthcare contracting abuses through anti-trust litigation. OhioHealth, a large not-for-profit hospital system, recently settled a case with the DOJ by agreeing to remove provisions designed to suffocate its competitors from all current and future insurer contracts. DOJ is pursuing a similar case against New York-Presbyterian., which owns the largest not-for-profit hospital system in New York City. A second successful case would send a strong signal to other hospital systems that continuing with these practices is no longer risk-free.
The CEA study provides a range for the potential cost savings from applying the remedy imposed on OhioHealth in every jurisdiction.
- The estimates assume, based on hospital consolidation data in major market areas, that about 40 percent of enrollees in employer-sponsored insurance (ESI) live in areas which should allow plan design to achieve lower total costs, and that about 60 percent of the contracts in those markets restrict the ability of plan sponsors from gaining access to those providers charging lower prices. Thus, about one-quarter of the ESI market would be expected to see substantial cost reductions from a ban on abusive hospital contracting practices.
- Hospital prices are estimated to fall in the relevant markets by an average of 11 to 26 percent. The related premium savings for ESI would be about 6.5 percent annually. Lower ESI premiums would produce an increase in federal tax revenue as firms moved compensation out of tax-exempt health coverage and into taxable wages and salaries.
The provision of many services which used to require an inpatient stay, such as certain cancer treatments and common surgeries, are offered increasingly in less costly outpatient settings. Aggregate national health expenditure (NHE) data reflect the trend away from hospital-based care, with 31 percent of the total bill going to hospitals in 2024 compared to 40 percent in 1980. The downward trend in the reliance on hospitals is expected to continue in the coming years.
With less need for inpatient care, it should be possible to build insurance around service delivery in lightly-capitalized settings. That high-cost hospital systems are still dominant in many cities reflects the effectiveness of the strategies they developed to protect their positions. It is long past time to set patients free and relieve them of the burden of financing legacy institutions that were built for a different era.