Hospital and pharmaceutical prices are smothering America’s businesses

Workers and employers are drowning in their health insurance premiums. The reason for that deluge: the health care industry’s high and inscrutable prices. Health insurers don’t set their premiums in a vacuum. The biggest factor is the care people receive. And the biggest factor driving the cost of that care, STAT has found, is not how often people are going to the hospital or doctor’s office, but the out-of-control prices charged by every part of the health care industry, which workers and businesses are often powerless to stop. For Gerard Anderson, America’s high prices are as obvious, yet unnoticeable, as the oxygen we breathe. He has studied health care spending and policy for the past four decades, even helping design Medicare’s hospital payment system in the 1980s. He co-wrote a seminal paper in 2003, and again in 2019, that blared the culprit of America’s outlier health spending figures: “It’s the prices, stupid.” “Some things don’t change,” Anderson, a professor at Johns Hopkins, told STAT. One thing is changing, however, Anderson said. He and others are working with state policymakers and employers, who are signaling an openness to government intervention to curb health care costs — an idea normally anathema in the private sector. High premium hikes are crushing the employer-based health insurance system, with more in store for 2027. STAT’s “Out of Pocket, Out of Reach” series is exploring the causes of this slow-moving catastrophe, and how it is threatening the viability of businesses and the livelihoods of employees like never before. American hospitals, physicians, drug companies, and others charge some of the highest prices in the world — a chief reason why health spending in the U.S. is on pace to top $6 trillion this year, or almost $16,500 per person. Hospitals and drug companies, in particular, have natural and human-made monopolies. Research shows this market power allows them to bill employers and workers more than double what Medicare pays, and frequently much more, for the same services and medicines. Health insurers, meanwhile, are tasked with being guardians of the health care dollar and master negotiators. Instead, insurers — themselves highly consolidated companies — operate like turnstiles. They know workers and employers ultimately pick up the tab, and are failing at their central job of making health care more affordable. Agreeing to bigger hospital payments has been an explicit strategy for some insurers in the past, as a way to protect their own market power. Citing incomplete data, industry lobbyists point to smaller price hikes in recent years and higher use of care. But researchers say even tiny increases to high prices still adds to the system’s cost. “If you’re thinking of it very simply as price times quantity equals health spending, the bigger thing we need to fix is the price component, not the quantity component,” said Irene Papanicolas, a health economist and researcher at Brown University. What makes this discussion even more complicated is that in U.S. health care, there’s almost never just one single price for a service or drug. When you go to an electronics store and buy a laptop, you know you’ll pay the price on the tag. But health care is nothing like that. Instead, there are billions of charges and negotiated rates among every hospital, drug company, health plan, employer, and government program. And the price that employees pay out of pocket may only have a tenuous connection, or none at all, to what their employer or health plan is actually paying behind the scenes. This structure cements a type of paralysis for employers, which until recently, had almost no access to prices or their own data — but have continued to write the checks anyway. “It never ceases to amaze me, and it still shocks me, the naivete that there is in the C-suites of many of the companies in America that don’t get how bad they’re being overcharged by some in the medical industrial complex and the payer industry,” said Dirk Visser, the retired founder of Allegiance Benefit Plan Management, a company that handles health insurance administration for employers. The biggest portion of an employer’s health spending has remained the same since the 1980s: hospitals. The hospital pricing machine A patient with health coverage from a car dealership was scheduled to get an outpatient knee surgery this August at a facility owned by Banner Health in Arizona. But the procedure had to be postponed because Banner refused to accept an $11,000 payment, close to what Medicare would pay for a similar procedure. The dealership was using a new kind of health plan that used Medicare as a reference-based price, a way that’s supposed to help control costs. The hospital told the employer the surgery would cost $232,000. “They will not negotiate,” a case management official wrote in an email viewed by STAT, on the condition that patient and employer names aren’t shared. Banner eventually budged after pushback from the employer, said Russ Carpel, CEO of RevampHealth, the brokerage for the employer. Banner said it made a “clerical error” by quoting three billing codes for the procedure instead of just one. The new price: just under $50,000, almost five times Medicare’s rate. The employer signed off on it. The patient got the procedure a week later than planned. The incident reveals not only how hospitals’ pricing power pressures employers’ bank accounts, but also how providers can still defeat employers when they try different payment arrangements. Few employers feel they are getting a good deal. Research confirms even the largest companies have no leverage to lower prices. “The bigger, more persistent, and pernicious problem is rising provider unit prices,” said Matt Veno, the executive director of the Group Insurance Commission, the government agency in Massachusetts that purchases health care for the state’s 460,000 workers, dependents, and retirees. “I can tell you some of the prices that have been demanded have been pretty shockingly high.” Some hospitals have commanded increases that are several multiples higher than Massachusetts’ 3.6% cost-growth benchmark, Veno said. One hospital system, which Veno declined to name, started a recent negotiation by demanding a 50% increase in prices over a three-year period. “They didn’t land there, but that’s where they started,” he said. There also are more subtle changes that influence the prices that are paid. For years, hospitals have been buying and building outpatient centers, and then funneling more care to them. Those facilities are less expensive than a hospitalization. But they charge higher prices, for the same services and drugs, than independent clinics. For example, in 2023, commercial insurers paid more than $2,500 on average for colonoscopies performed in a hospital outpatient department in Massachusetts, according to state data. If those colonoscopies were done in an independent surgery center or physician’s office, insurers would have paid almost two-thirds less. Hospitals have said they need to charge commercial insurers and employers more to make up for lower payments from Medicare and Medicaid — an economic theory known as “cost-shifting” that experts say has almost no merit. Instead, economic theory suggests hospitals simply are trying to extract the highest prices they can from every party. Sentara Health, a hospital system in Virginia with more than $14 billion of revenue, recently went through a contract dispute with Anthem, the health plan owned by Elevance Health. Aubrey Layne, Sentara’s chief administrative officer, said lower payment rates from government programs — and impending cuts to Medicaid — are forcing the hospital to play hardball with the insurers that are representing employers. “There’s only a few places where you can push some of those costs, and that is into the commercial area,” he said. The system’s own data suggest it already secures commercial prices that are several times what Medicare pays for common services. At Sentara Norfolk General Hospital, its flagship, Anthem’s broad-network plan pays almost $100,000 for a major joint replacement, compared with $28,000 from Medicare. A pneumonia hospitalization will fetch nearly $43,000 from Anthem’s broad-network plan, compared with a little less than $14,000 from Medicare. Layne said it’s possible Anthem pays less for other services. “To think that, based on our margins, we could take a decrease [from Anthem] would be very difficult,” he said. But Medicare payments are not always as dismal as hospitals suggest. In fact, many hospitals could potentially make small profit margins on Medicare patients. The Medicare Payment Advisory Commission has studied “relatively efficient” hospitals — those that have lower costs but maintain higher quality — and compared them to higher-cost facilities. These efficient hospitals had a negative 1% margin from Medicare in 2024 and are expected to make money on Medicare this year, according to MedPAC. The problem with inefficient hospitals, Johns Hopkins’ Anderson said, is they have no incentive to bring down their costs. “I’m going to spend every dollar you give me,” Anderson said. “I’m going to raise my costs because I can always justify a higher cost. I can hire another nurse. I can buy a new piece of equipment that might work. I can do all sorts of things with an extra dollar.” The American Hospital Association declined to make anyone available for an interview. In a statement, Lisa Kidder Hrobsky, a senior vice president at the AHA, said “rising health care costs are a major challenge for patients, employers, and hospitals alike.” She said hospitals also are “caring for sicker patients with more complex needs.” Kidder Hrobsky also pointed to a federal report, contending that the volume of care — not price — is the main reason spending has risen in recent years. In that same report, federal officials explained the rise in hospital spending in 2024 was also due to a 3.4% increase in prices, “the highest rate of increase since 2007.” The drug dilemma Don Moulds sounds exasperated when talking about prescription drugs, which have been political fuel for more than a decade. Moulds is responsible for buying health care for the California Public Employees’ Retirement System, the second-largest health care purchaser, behind only the federal government. Hospitals are the primary strain on his budget, but he sees “gratuitous overcharging” by pharmaceutical companies. “When you look at what we pay for drugs compared to other comparably situated nations, it is insane,” Moulds said. The U.S. pays, on average, anywhere from three to four times as much for brand-name drugs compared with other wealthy countries, research shows. In 2022, the Congressional Budget Office reported that prices for brand-name prescription drugs more than doubled in Medicare from 2009 through 2018, citing “higher launch prices for new drugs and growth in the prices of individual drugs already on the market.” The effects from Medicare’s drug price negotiation program, which sets prices for a handful of drugs every year, are not fully known yet. President Trump’s secretive “most-favored nation” deals also don’t apply to commercial insurance. Even though the vast majority of prescriptions are written for generic drugs, drug spending is surging faster than any other category — and drugs have been eating more of the employer’s premium for multiple years now. Prescription drugs filled at a pharmacy represented 18% of a worker’s health care premium in 2021, after factoring in any rebates paid out by manufacturers, according to the consulting and actuarial firm Milliman. By 2026, that figure jumped to 23%, driven in large part by the surge of people getting GLP-1s for weight loss. Drugs also explain some of the growth in hospital spending. Hospital outpatient costs among workers and employers has increased by 8% in each of the past two years, which has been heavily influenced by high-priced cancer drugs and other medications that are administered by physicians in those facilities, said Deana Bell, an actuary at Milliman. Frequently, the drug and location are irrelevant to the price — raising questions about the roles of insurers and higher prices associated with popular plans. As one example: If a worker with a Cigna plan goes to Houston Methodist West Hospital, an employer could pay roughly $78 for a single unit of the autoimmune medication infliximab, better known under the Remicade brand name. An entire vial of infliximab for an infusion would take 10 units, costing $780. If another worker with a Blue Cross Blue Shield of Texas PPO plan got the same drug at the same Houston Methodist hospital, an employer could be paying almost six times as much, or nearly $4,400 for a vial. Same drug, same location, different health plans — extremely different prices. Medicare, meanwhile, pays about $300. “It does not look appropriate that it should be different,” said Matt Robben, a co-founder of data analytics firm Serif Health, which analyzed hospital and drug prices for STAT. But he said these are the types of data discrepancies that should wake up employers. “I think this is where the market can vote with its feet,” Robben said. “If the price is ridiculous, switch carriers, or create a custom contract and take it into your own hands.” Even though drug pricing data can be found in hospital databases that are required to be published, a lot remains unknown. In the employer market, more recent data suggest the volumes of prescriptions — which are proprietary — are driving up spending more than prices, although prices are still a factor. Net drug prices will remain locked out of public view for the foreseeable future as well, according to a Trump administration decision from December. Large employers are considered to be sophisticated in their drug spending management. But “even they express a lot of frustration with the lack of transparency around understanding whether or not they’ve gotten the net price that they were expecting for certain products,” said Anna Kaltenboeck, president of Verdant Research, a firm that studies drug pricing. “There’s just so many different layers that the transactions have to go through.” The pharmaceutical industry has consistently pointed to pharmacy benefit managers and health insurers for raising deductibles and keeping rebates that are based on drugs’ list prices, even though a majority of the rebate money gets sent to employers to lower premiums. Elizabeth Carpenter, an executive vice president of policy and research at PhRMA, the lobbying group representing brand-name drug manufacturers, also said hospital prices remain employers’ biggest spending culprit, “and they can’t stop covering hospitals.” But when asked if pharmaceutical prices are an issue that needs to be addressed — an issue that employers have stressed in several surveys and in conversations with STAT — she said no. “There is incredible innovation in the market that is helping people,” Carpenter said. “I think the issue is employers have a premium problem, and they are helpless to address the biggest driver of that trend,” which she reiterated was hospitals. The path of regulation In 2022, the Congressional Budget Office distilled decades of health care policy fights into a single PowerPoint slide. The conclusion: If employers want to lower prices meaningfully, they would need to back regulation that caps the growth in prices or sets rates administratively. Anderson of Johns Hopkins has been working with a dozen other researchers, through grants from Arnold Ventures, to study prices more and contemplate state-level legislation that mirrors the CBO’s options. They’ve also held webinars with employers and state officials to explain specific policies, such as reference-based pricing, capping out-of-network billing, and full rate setting. The concepts are not that different from how states regulate utilities. And in all his years, Anderson said he’s never seen more companies support robust regulation. “When we asked employers to really seriously consider some kind of regulation [several years ago], it was not in their game plan,” he said. “Now, because they’ve tried everything else, it’s the only quiver that they have left to use.” States are more likely than the federal government to pass these laws. Some like Indiana and Delaware have already passed various versions of price controls. Lawmakers also have to make sure legislation applies to large employers with health plans that are governed by federal law. But Anderson said he believes these changes — especially state efforts to cap prices or tie prices to what Medicare pays — are a matter of when, not if. “Is it next year? Is it three years from now? I don’t have a crystal ball,” he said, “but it is going to happen because they have run out of options.” STAT’s coverage of the soaring costs of health insurance for workers and employers is supported by a grant from the Commonwealth Fund. Our financial supporters are not involved in any decisions about our journalism.