Can we put a ceiling on hospital prices?

Hospital care makes up about a third of total health care expenditures in the US ($1 trillion!) so the prices that hospitals charge greatly impact overall health care spending. We know that hospital prices are out of control: Hospitals overall charge more than four times the cost of care, and commercial hospital prices are about twice Medicare prices nationally.

Hospital prices vary based on location and on market forces– the more power a hospital has in the market, the more they can charge. The new rule on hospital price transparency, put into place by the Centers for Medicare and Medicaid Services in January 2021, could help reduce hospital prices, but it will take some time.

Michael E. Chernew, Leonard D. Schaeffer Professor of Health Care Policy at Harvard Medical School, and Maximilian J. Pany, MD-PhD candidate in health policy at Harvard/MIT, have another potential solution. In a viewpoint piece in JAMA, Chernew and Pany make the case for “backstop” price caps — setting maximum prices for hospital services or growth of prices to stop price outliers from driving up health care costs.

They calculate that setting a cap at five times the 20th percentile of commercial prices could save more than 8.7% of commercial hospital spending, which is more than $38.1 billion per year. Besides saving monty, there are a few other benefits: Price caps are minimally disruptive, because they only apply to the highest prices (or highest rates of growth), and they can be easily adjusted if necessary. They can also be implemented alongside other hospital pricing policies, like the transparency rule and antitrust enforcement.

However, price caps are an incremental policy by design. The authors of the JAMA piece note that price caps would “allow market forces to act beneath the caps” and see price caps as a less-disruptive alternative to a public option. A more radical policy would be to create an all-payer system — reimburse all hospitals at Medicare rates. A recent analysis by the Kaiser Family Foundation found that if all insurers paid hospitals and other health care providers at Medicare rates, it would save the health care system about $350 billion in 2021. That would be 41% lower than $859 billion, which is the current estimate for this year’s health care spending. Maryland is the only state with such an “all-payer” system, allowing them to adopt global budgeting for hospitals in the state (paying hospitals a per-patient amount up front each year). This payment system has helped hospitals stay afloat financially during Covid-19, while keeping costs under control.

While a $350 billion reduction in spending certainly looks more attractive than a $38 billion one, putting any kind of limit on the outliers in hospital pricing would be a step forward in reducing health care costs for everyone.