Profiting from inflated hospital prices

Today's CPI report shows hospital prices continue to race ahead of price increases in other health care sectors. In the past year, so have hospital profits.

The Bureau of Labor Statistics reported this morning that consumer prices are racing ahead at an annual rate of 3.8%, led by a nearly 30% increase in the price of fuel. Medical inflation trailed the national average, rising at a 3.2% clip.

Don’t let that composite number for health care fool you. If you dig into the numbers, you’ll find that rising hospital prices are mostly to blame for current medical cost inflation, as they have been for the past decade (see the chart below). Every other sector — pharmaceuticals, physician services, medical commodities — are rising on average at or below 2% or what Federal Reserve Board chairman Jerome Powell and previous Fed chairs have considered the ideal target for price growth.

A slight caveat: The prescription drug price increases reported by the BLS may understate its contribution to overall medical inflation. The agency calculates its year-over-year increase mostly from the price increases on existing products, which is usually modest.

The most significant factor driving increased drug spending is the price placed on new products entering the market, which these days can range into hundreds of thousands of dollars per year for new cancer drugs and over $2,000 a year for the latest weight-loss GLP-1s. One in 12 Americans are already taking those drugs to lose weight, according to a Kaiser Family Foundation survey, while a third of adults say they are interested in taking them.

I’ll do the math for you. Current usage translates into a total cost of about $44 billion a year (that’s calculated at the low price for the pill forms now entering the market; many people and/or their insurers are still paying over $10,000 a year for the first-generation GLP-1s, which are injected). Tripling uptake, which surveys suggest could happen, will cost nearly as much money as the Pentagon says it needs to fight President Trump’s war against Iran.

But even that level of new drug spending will pale besides the rapidly rising cost of hospital care. Average prices for hospital care today are more than 50% higher than where they stood a decade ago, according to the BLS. Since hospitals account for a third of all health care spending (more than twice what is spent on drugs), hospitals now generate about 40% of the year-over-year increase in the total health care tab.

Higher prices lead to higher profits

Those rapid price increases are now showing up as outsized profits for major hospital chains, which last year dwarfed the profits made by insurers. We don’t hear much about the profits generated by hospital systems because more than three-quarters of all hospital beds in this country are controlled by non-profit systems, which don’t report to the Securities and Exchange Commission. They include religiously affiliated systems, major academic medical centers and high-prestige outfits like the Mayo and Cleveland clinics.

Their executives invariably repeat a slogan I heard for the first time at a conference I attended shortly after becoming editor of Modern Healthcare in 2012. “No margin, no mission,” they’d say when questioned about the “surpluses” reported on the income statements that they send to bond rating agencies.

Their missions varied depending on the locations of their hospitals and background of the system. They included healing the sick, research, providing free care, and helping the community. They are required to report those “community benefits” to the Internal Revenue Service each year to maintain their non-profit status. (Most systems inflate their community benefits by including the difference between Medicaid reimbursement and what they claim is the actual cost of care; but that’s a different story.)

There have been years when average hospital surpluses have been quite narrow, close or even less than the 5% target used by most for-profit insurance companies. But when I pulled the 2025 annual filings for 17 large hospital systems (accounting for over a half trillion dollars in revenue), I was stunned to see they earned an average of an 8.5% return last year.

As you can see from the next chart, margins at eight of the non-profits surpassed the most profitable publicly-traded company, which is HCA. All reported dollar amounts are in billions:

Meanwhile, health insurers’ after-tax profits dipped well below their 5% target:

Source: SEC and company reports (purple are for-profit; green is a non-profit)

What is to be done?

The policy wonk world has largely turned to antitrust as the solution to rapidly rising hospital prices. Recent studies conducted by the KFF and Families U.S.A. show that nearly every hospital referral region is dominated by one or two major hospital systems. (There are over 3,400 cities and towns with at least one hospital, but only 306 major hospital referral regions, defined by their ability to offer comprehensive medical services.)

There has been a tremendous amount of consolidation over the past two decades, with major chains gobbling up struggling independent hospitals or merging with other major chains. They’ve also scooped up independent physician practices, ambulatory surgical centers, and established numerous satellite clinics that feed patients into their hospitals when in need of surgeries, tests and chronic disease care.

After passage of the Affordable Care Act, such consolidation was rationalized as necessary to create vertically integrated delivery systems capable of providing greater care coordination that could deliver higher quality care and better outcomes at a lower price. The Centers for Medicare and Medicaid Services launched numerous pilot projects aimed at training health care systems to deliver what became known as accountable care.

Alas, most of those pilot projects failed to save money. Those that did never led to widespread adoption. Hospitals resisted moving away from a fee-for-service model where the more services they delivered, the more revenue they generated, and the more margin they earned to invest in fancier facilities or store in their growing endowments.

Insurers, most of which are now for-profit, saw no reason to tamper with the system since the more hospitals charged them, the more they could charge their employer and individual customers. Since their profits depended on total revenue, the more they were charged, the more they could turn around and charge in premiums, and the more they could make.

Insurers also talked about using population health management techniques to lower costs for the patients. Yet their primary tools turned out to be abusive prior authorization techniques and rampant claims denials, which only served to alienate patients, physicians and hospital administrators without improving health. Indeed, it may have made outcomes worse, even as it increased profits in the short run. When those tools drew massive resistance (they are now being scaled back), it led to rising utilization and a profit collapse, suggesting all their talk about population health management was precisely that — talk.

Many political leaders — ranging from single-payer advocates on the left to the White House on the right — still blame insurance companies for rising costs, and see eliminating them or reining them in as the solution. Given insurer’ abuse of prior authorization, narrow networks and their high overhead, it’s not an unreasonable position, as Larry Levitt pointed out in a commentary published in JAMA Health Forum on Monday. “Removing health insurance companies from the equation—for example, in a Medicare for all system—would reduce administrative costs and profits,” he wrote.

“But the biggest drivers of health spending growth—hospital prices, care that is not always grounded in evidence, and new drugs and medical technologies—would remain,” he concluded. “Some entity must address what health care needs to be covered and at what price. The question is, who do we trust to do that most effectively and fairly?”

As I’ve written repeatedly in recent months (see here, here and here), doctors who work in and within hospitals are best positioned to make decisions about what needs to be done to treat their patients. Couple that with putting hospital administrators under government-run price regulation tied to annual budgets, and you have a recipe for the short-run cost control and long-run affordability that will make universal coverage, which is necessary to eliminate uncompensated care from the system and deliver better population health, possible.