Of the many problems in American healthcare, the sheer cost of medical care is perhaps the thorniest. American per capita spending on healthcare is approximately $12,000 per person, over $4,000 more than the second-place finisher, Switzerland.
The implications of our enormous healthcare spend are significant. More spending on healthcare means less money for schools, for infrastructure, for law enforcement, for clean energy. The oft-repeated refrain that the U.S. government is a military with a health insurance business is not far from the truth; healthcare comprises about 20% of government expenditures. And with the Medicare trust fund set to run out in 2028, the urgency to curb healthcare costs increases every year.
Why do we spend so much more than other countries? This problem has plagued health policy experts for the last several decades. Some argued that Americans use healthcare services more than citizens of other countries, thereby driving up costs — but this theory turned out not to be true. Instead, a simpler explanation exists: American healthcare is so expensive because the prices are higher. Or as the refrain goes, “it’s the prices stupid.”
The reasons for high healthcare prices are myriad, and too much to cover in one column, but one driver of costs is consolidation of hospitals and healthcare systems. Consolidation leads to a lack of competition that gives healthcare systems greater bargaining power with insurers. When there are multiple hospitals and health systems in a region, hospitals are incentivized to offer insurers lower prices, which result in lower premiums for consumers and lower healthcare spend overall. But with a single dominant health system in a region, given the lack of competition, the health system may charge insurance companies higher prices. These higher prices charged to insurers are passed down to consumers in the form of higher premiums, and overall costs rise.
The role of health system consolidation, anticompetitive behavior, and corresponding price increases is a well-documented trend over the last decade. It’s also a thorny issue; while big hospitals may behave like bullies in negotiations with insurers, they are often a region’s biggest, most beloved employer, responsible for caring for your loved ones in their most vulnerable moments.
Nonetheless, state governments can and should take more aggressive action to regulate hospital rates. They should do so by following the lead of Maryland, where hospital price schedules are set by an independent state commission each year. Under Maryland’s unique arrangement, rates for healthcare services are fixed across insurers, placing a cap on prices. To ensure that hospitals are fairly compensated under these price limitations, Maryland has implemented a “global budget” for hospitals, which grants hospitals a yearly lump-sum payment for patient care, incentivizing hospitals to provide care in as cost-efficient manner as possible.
Maryland’s model has many advantages, most notably that price regulation caps the growth in healthcare costs. Even with Medicare rates pegged higher than the national average, Maryland’s per capita Medicare spend declined from above the national average to below the national average from 2015-2019. Remarkably, of all the experimental payment models launched with Medicare in the past decade, Maryland’s state all-payer model is the single most successful in producing cost savings — over $1 billion between 2015 and 2019.
It’s easy to see why patients and insurers would look favorably upon this model given its potential to curtail costs, but what about hospitals? Large hospitals might be reluctant to cede their considerable rate-setting power to a state commission. Indeed, Maryland’s largest health systems tend to have slightly narrower profit margins than comparable systems across the country. On the other hand, Maryland’s global budget program ensures hospital finance stability, particularly important for smaller or struggling health systems.
Delaware should become the second state, behind our neighbor Maryland, to experiment with hospital price controls and global budgets. Delaware is uniquely suited to implement such a program given that our small size permits collaboration amongst relevant stakeholders and policymakers. As a first step, the State Legislature should provide funding for the Delaware Health Care Commission, made up of representatives from hospitals, insurers, and health policymakers, to study Delaware’s healthcare spend and propose global budgets for Delaware’s hospitals. Subsequent steps would include empowering the Department of Health and Human Services to obtain a waiver from Medicare, as Maryland has, to implement global hospital budgets and rate fixing.
These moves would represent a seismic shift in healthcare business in Delaware — but would perhaps place us on a road, finally, towards healthcare cost containment.
John Connolly, a native Delawarean, is a medical student at the University of Pennsylvania, whose research focuses on healthcare quality and outcomes.