Administrative Costs

The costs of medical attention are so high due to administrative expenses represented in the health system budget. An example is the case of Duke University Hospital, which has 1,300 employees and only has 900 beds (^{Vargas - Bustamante, 2019}) but that have administrative staff whose function is to supervise compliance with insurance billing requirements, to avoid inappropriate resource management (^{Yabroff et al., 2019}).

Medication Costs

Another difference in healthcare costs between the US and all other developed nations is the cost of drugs. In most countries, the government negotiates drug prices with manufacturers, but when the US Congress created Medicare Part D, it denied Medicare the right to use its power to negotiate drug prices (^{Sharma et al., 2018}). The Veterans Administration Office and Medicaid, which can negotiate drug prices, pay lower prices (^{Cassel, 2018}). The Congressional Budget Office found that by giving low-income Medicare Part D beneficiaries the same discount as Medicaid beneficiaries, the federal government would save $116 billion over ten years (^{Ott & Olsen, 2019}).

Defensive Medicine

Another great driver of the high cost of health goods and services is that because doctors fear being sued, they request several prior diagnostic tests before performing invasive procedures. Therefore, patients and policyholders pay more for their insurance premiums and copayments, as well as taxes that are used to pay for government healthcare programs (^{Hogan, 2018}).

Various Treatments and Procedures that Increase Individual Spending

American doctors also tend to use a more expensive combination of treatments. According to a 2019 report by the Organization for Economic Cooperation and Development (OECD), 17.1% of the GDP of the United States was spent on health, in 2018 (^{Eisemberg, 2018}). Additionally, more patients in the US are treated by specialists, compared to other OECD countries, whose fees are higher than primary care physicians (^{Emanuel, 2018}).

Salaries and Labor Regulations

Salaries and staffing also increase costs in American healthcare. Specialists demand high reimbursements, and the overuse of specialists through the current referral decision-making process increases healthcare costs. The National Commission for the Reform of Medical Payments was the first step to solve this problem. A 2013 report stated that the entity adopted 12 recommendations to obtain control over physician payments (Sarpatwari, 2018; ^{de la Puente et al., 2019}). The Commission has continued to work with Congress to find a way to implement some of these recommendations, although tangible policy results have yet to be followed (^{Kumar, 2011}).

Marketing and Advertising

The vendors who can command the highest prices are the ones who create a brand that everyone wants. "In some markets, prestigious medical institutions can set their price," says ^{Allen (2018)}, from the Catalyst for Payment Reform program, a nonprofit organization that works with large employers to control healthcare costs (^{Allen, 2018}).

The Affordable Care Act (ACA) has somewhat delayed the high costs created by brands in central Florida, for example, Florida Hospital is one of the better-known brands in the area (^{Blattner & Holtkamp, 2018}; ^{Kirkland et al., 2018}), and in 2018, the ACA policies offered by Humana (an insurer) did not include the services provided by this brand.

Health systems in other countries do not have as many restrictions on specialist care, so the unit costs of care are lower than in the United States, due to a greater negotiation capacity between state entities compared to the United States for the setting of prices of medicines, medical equipment, and hospital services (^{Noone et al., 2019}; ^{Sasongko et al., 2019}).

Little political action in favor of greater regulation towards private intermediaries of the healthcare system has maintained the high costs for end customers. The Affordable Care Act focused on ensuring access to healthcare but maintained the status quo to encourage competition between insurers and healthcare providers, which means that there will be multiple payers for services, and less control over prices by healthcare service providers (Okpala et al., 2019).

High Prices for Hospital Care

The federal government estimates that health care spending per capita reached $17,000 in 2021, and those costs will continue to grow more than 6.7 percent annually over the next decade (^{Blattner et al., 2018}; ^{Switzer et al., 2013}).

It is projected that around $1.9 billion will be spent on hospital care alone in 2022 (^{Callander et al., 2017}; ^{Crawford et al., 2009}). Hospitals have a profit margin of 8 percent, a level higher than the margins in the pharmaceutical industry, or in the insurance industry. In acute care hospitals, total revenues exceeded expenses by more than $71 billion in 2018, according to an analysis by the Center for American Progress (^{Fayet-Moore et al., 2018}).

It is estimated that commercial insurers pay about twice what Medicare does for hospital care. According to all payers, hospitals receive an average reimbursement of about 134 percent of what Medicare pays. High prices do not always indicate better quality; in fact, they often mask inefficiencies in the hospital business (^{Cainzos-Achirica et al., 2019}).

Some notable trends in the hospital business have occurred alongside earnings growth. One of the most important is that hospitals have shifted their growth strategy to expanded outpatient services. Hospital care now accounts for just over half of total health care centers (^{Kim et al., 2019}).

Additionally, with dozens of hospital mergers each year, competition continues to decline. The market for healthcare providers is becoming more established, resulting in higher prices for patients.

^{Kerr et al. (2019)} found that a higher concentration in the hospital market leads to higher costs. Compared to regions served by four or more competing hospitals, regions with three hospitals have prices that are 7 percent higher; those with two hospitals have prices that are 9 percent higher, and those with only one hospital have prices that are 15 percent higher.

For example, North Carolina is among the markets dominated by a small number of powerful healthcare systems. For example, Sutter Health (hospital services company) has an expanding network comprising 24 hospitals, 35 outpatient centers, and 5,500 member physicians. This reflects the increase in prices in several states where there is little supply of highly complex hospitals.

Type of Patient Coverage

Although public and private reimbursement rates have diverged over the study period, the precise payment rates depend on how supplemental government payments to hospitals are counted. According to the Medicaid Access and Payment Commission (2018), Medicaid reimbursement levels are higher than Medicare's if supplemental payments are counted toward Medicaid payments.

Cited studies have documented that private payment rates are much higher than Medicare's. Researchers at the Congressional Budget Office estimated that the price of a hospital stay was on average 189 percent the Medicare rate in 2013 (^{de la Puente et al., 2019}). More recently, a study by ^{Weng et al. (2018)} found that employer-sponsored plans pay hospitals 241 percent the Medicare levels on average, for inpatient and outpatient care, with some hospital systems receiving as little as 150 percent and up to 400 percent of Medicare fees. And a report on California hospitals found similar results, with private insurers paying 209 percent Medicare rates.

Another commonly cited measure of hospital profitability is the payment-cost ratio, which represents the average payment over the average cost per patient, representing both patient-specific clinical costs and fixed costs, such as equipment, buildings, or facilities. According to the American Hospital Association (^{Hunter, 2018}), private insurance payments average 144.8 percent of the cost, while Medicaid and Medicare payments are 88.1 and 86.8 percent of the cost, respectively.

Several studies suggest that Medicare reimbursements are well above the incremental cost. The Medicare Payment Advisory Commission (MedPAC) notes, in its March 2019 report to Congress, that Medicare payments exceed the marginal cost of caring for Medicare patients by 8 percent (^{Ouyang et al., 2018}; ^{Shortell et al., 2019}).

A persistent argument in the debate over hospital payment is that hospitals make cost changes, raising prices to private payers to compensate for the underpayment of public programs. There is little evidence that hospitals can change costs and much stronger empirical evidence that high prices for private payers result from the market power of hospitals.

An alternative explanation for the gap between public and private hospital fees is that the latter may demand high prices from private payers (either private or insured patients), enjoying a larger financial cushion and evading the pressure to reduce costs.

To End Abusive Hospital Billing Practices

Surprise bills generally come from medical companies associated with the hospital network and can also arise from emergencies where patients cannot be expected to find an in-network provider.

Reference Prices

In the absence of broad-based government action on hospital fees, individual taxpayers can take steps to lower the cost of hospital care through reforms such as benchmark pricing. Based on the reference price, a payer sets the maximum they will pay for a service or set of services, which could be tied to a percentile in commercial claims or Medicare rates. Providers who refuse to accept the reference price are excluded from the payer's network, or patients who choose that provider are responsible for paying the difference out of pocket. The reference price incentivizes patients to visit lower-cost providers and puts pressure on providers to cut costs to maintain their business.

Various states have implemented benchmark pricing forms for public plans. The California Public Employees Retirement System was one of the first payers to adopt reference prices for a limited set of scheduled procedures (Makhele et al., 2019; ^{De la Puente et al., 2015c}).

Rates Regulation

By capping all payers' rates closer to cost, state or federal regulators could lower current hospital prices. For example, former Obama administration officials Robert Kocher and Donald M. Berwick suggest capping hospital prices to 120 percent of current Medicare rates (^{Branfield et al., 2019}). Others have suggested 125 percent of Medicare fees as a starting point.

Even with rates set to reach the current average and allow efficient hospitals to make some profit, rate regulation could generate savings by simplifying hospital administration and eliminating the need for rate negotiations between hospitals and payers. Alternatively, assuming hospitals can reduce costs by operating more efficiently, all payers' rates could be set below current levels to increase savings.

Using data from the AHA, ^{Huang et al. (2018)} calculated that reimbursing all hospital care at Medicare rates, as proposed in Senator Bernie Sanders' Medicare for All (I-VT) bill, would reduce total payments by 15.9 percent, or $151 billion among hospitals across the country.

The overall budget can control overall hospital costs by limiting the total amount spent on services, rather than just the price at which care is provided. One of the most successful examples of state rate reform took place in Maryland, which has used rate setting for all payers to regulate cost growth since the 1970s, and, more recently, adopted global budgets for hospitals.

Transparency in Hospital Prices

A popular response to the opacity and variation in hospital prices has been to request more public information on the rates of procedures. Pricing transparency can be more helpful to insurers and employers who want to steer patients toward lower-cost care. Patients cannot compare emergency room prices after a bicycle accident or switch to a lower-priced anesthesiologist in the middle of surgery. Furthermore, the most prominent price for patients is not the insurer's negotiated charge, but the out-of-pocket cost, which is a fixed amount.

In 2018, the Center for Medicare and Medicaid Services (CMS) began enforcing the provision of the Affordable Care Act that requires each hospital to post their list prices online (^{Shaik et al., 2018}; ^{Wang et al., 2018}). Price lists typically name services using billing code jargon rather than simple English descriptions, and the information is not standardized or centralized, making parallel comparisons difficult. Another limitation of published pricing information is that charge managers only have a relaxed relationship with the negotiated rates that insurers pay. The Trump administration is considering forcing hospitals to disclose the rates they negotiate for providers, medical devices, and drugs - information providers generally consider proprietary.

More Application of Antitrust Actions in the Hospital Industry

While mergers between nearby hospitals have the greatest effect on prices, economic research shows that mergers between markets can also lead to higher hospital prices by weakening the bargaining power of insurers. Given the large body of evidence that market power raises hospital costs without commensurate improvements in the quality of care, antitrust authorities should set a higher bar for hospital mergers and monitor anti-competitive behavior by healthcare systems.

Rising hospital prices, in turn, continue to increase premiums and cost-sharing for patients, hitting people who have commercial insurance the most. Serious efforts to control healthcare costs will require addressing the largest sources of health spending in the US. Hospital payment reform is necessary to lower costs and improve equity among patients and payers.

Final Considerations

Oligopolistic actions and deregulation of the health system have led operators to condition access to medical services, generating very little room for maneuver for patients to access medical services that they can pay for. This situation has encouraged the medical tourism sector or the movement of patients seeking access to quality procedures with lower costs. Although this situation generates access to new financial resources in developing countries like Colombia, the moral dilemma is so evident that there are already voices that advocate greater intervention in hospitals and medical practices that dignify patients.