Private payer rates outpaced Medicare's by 47%: KFF

Why faster price growth matters now

Hospitals are in the hot seat over their prices.

Lawmakers grilled healthcare CEOs last month over rising prices and their role in the healthcare affordability crisis. They said hospital prices have increased rapidly over the last two decades, particularly amid intense consolidation among hospitals, health systems and physician practices.

When consolidation occurs, healthcare prices rise, KFF researchers explained. Hospital markets have especially become increasingly consolidated, with just one or two health systems controlling at least three-quarters of the market for inpatient hospital care in most metropolitan areas, they reported.

This can tip the balance of negotiating power between hospitals and private payers, enabling hospitals to secure higher reimbursement rates. But these rates translate into greater premiums and out-of-pocket costs for patients, insurers say.

Federal and state policymakers are trying to insert more competition to rein in hospital prices. Proposed policies include stronger antitrust enforcement, greater price transparency and encouraging more providers to enter the market through scope-of-practice laws and altered state Certificate of Need statutes, which have limited construction of new healthcare facilities.

However, some states have sought more direct action by capping hospital prices. Oregon already limits hospital prices to 200% of Medicare rates for its state employee plan, and Indiana is taking a similar approach for the state's nonprofit hospitals.

The federal government is also seeking to eliminate financial incentives for hospital systems to buy up independent practices. For example, CMS has broadened site-neutral payments in Medicare, equalizing the rates the program pays for care that can be delivered in hospital outpatient departments and practices.

CMS is actively expanding site-neutral payment policies despite pushback from hospital advocacy groups. The agency is also reforming the 340B Drug Pricing Program and requiring more healthcare price transparency to promote competition.

The cost of care continues to increase

Healthcare leaders have defended their prices to lawmakers and private payers alike. They argue that prices are justified as the cost of delivering care continues to increase, even outpacing general economic inflation.

Total hospital expenses have increased by 7.5%, more than twice the rate of overall growth in hospital prices during the same period, the American Hospital Association reported in a March 2026 report. Hospitals saw growth across all major spend categories, including a 5.6% increase in workforce spending, a 9.9% increase in supplies, and a 13.6% increase in drugs.

These large increases in labor and supply expenses, especially during the pandemic, prompted providers to negotiate higher prices with private payers, KFF researchers said.

Hospitals are also caring for medically complex patients while investing in the necessary services, technological innovations and high-cost equipment , AHA stated. But sustaining these investments can be hard when hospitals are spending precious resources to address administrative burden and payment friction, including $18 billion on overturning claim denials and $43 billion on collecting payer reimbursement for care already delivered, AHA reported.

Tying prices to Medicare rates won't solve the problem of rising healthcare prices, hospitals argue. Medicare reimbursed hospitals just 83 cents on the dollar in 2024, leading to over $100 billion in underpayments, according to the latest data from AHA.

Medicare rates have also plummeted by roughly 33% since 2001, when adjusted for inflation of practice expenses, the American Medical Association also reports.

Medicare underestimated inflation in recent periods, KFF researchers found. CMS uses a specialized inflation measure called the market basket to determine Medicare rates for hospitals. However, inflation has been much higher than expected when hospital rates were set for the year, researchers stated, citing a Medicare Payment Advisory Commission report.

Hospitals argue that the healthcare affordability crisis is driven by systemic issues rather than their pricing practices. To solve the crisis, they proposed broad, multistakeholder reforms, including the regulation of payer and drug prices, rather than targeting hospital budgets directly.

Jacqueline LaPointe is an Executive Editor at Xtelligent Healthcare Media, covering revenue cycle management, healthcare payers, health policy, and health IT since 2016.