Health Savers Initiative: Capping Hospital Prices

Over the next decade (2021-2030), capping commercial hospital prices at 200 percent of Medicare could:

• Reduce total national health expenditures, primarily through reduced commercial payments to hospitals, by just over one trillion dollars

• Reduce commercial premiums by $889 billion and cost-sharing by $99 billion

• Reduce the federal budget deficit by $216 billion

• If the cap were limited to highly concentrated markets, savings would shrink by about 30 percent. On the other hand, tightening the cap to 150 percent of Medicare prices would almost double the savings.

High hospital prices are a leading driver of high and rising costs in the U.S. health care system, resulting in insurance premium growth that outpaces the growth in wages and inflation. In particular, the cost of hospital care accounts for one-third of all U.S. health care expenditures. On average, hospitals command prices in the commercial market that are more than twice as high as Medicare, with some hospitals charging three or four times as much. High hospital prices have been fueled by a number of factors, including increasing market consolidation and “must-have” hospitals flexing their market power to negotiate significantly higher prices from commercial insurers.

As part of the Health Savers Initiative, this paper examines an option to address high prices and combat the effects of excess hospital market power by capping commercial prices at 200 percent of the Medicare rate. Given the high and rising costs of health care, a number of bold policy changes will be needed to assure long-term affordability and sustainability. In this context it is worth examining policies that place an upper boundary on the market failure of high hospital prices.

The Health Savers Initiative is a project of the Committee for a Responsible Federal Budget, Arnold Ventures, and West Health, which works to identify bold and concrete policy options to make health care more affordable for the federal government, businesses, and households. This brief presents an option meant to be just of many, but it incorporates specifications and savings estimates so policymakers can weigh costs and benefits, and gain a better understanding of whatever health savings policies they choose to pursue.