Download a one-page summary of this report here.

Americans’ concerns about health care costs are high and growing, and state officials are under pressure to respond to them. About half of adults reported that it is difficult to afford the cost of health care,1 and more than one in three American households have medical debt.2 Since relief from Congress is not on the horizon, people are turning to state officials.

At the same time, states face budget pressures, partly due to Congressional action. States are expected to see a 14 percent reduction in federal Medicaid funding over the next ten years relative to current law due to the budget reconciliation law enacted on July 4, 2025. Such reductions range from 4 percent in Alabama and Wyoming to 20 percent in Louisiana.3 Moreover, the reduction in premium tax credits for people covered through the Affordable Care Act (ACA) marketplace starting in January 2026 will ratchet up pressure on state policy makers to help residents struggling to afford coverage or care.

This report describes how state health and budget officials could achieve measurable (also called “scoreable”) savings and revenue increases by tackling the high prices (also called “rates”) that hospitals charge to commercial (also called “private”) insurance plans, such as employer-sponsored insurance and insurance purchased in the non-group or individual market. It explains and provides evidence on the mechanisms and magnitude of the potential effects, the levers and potential offsetting effects that could occur, and the ways policy design can mitigate unintended consequences. It also explains the rationale for addressing hospital prices at a time when some hospitals are under financial pressure resulting from federal cuts to Medicaid and the health insurance marketplaces. In short, states have an opportunity, if not an obligation, to redirect excessive funding in the health system to improve affordability for those in need.4

Why Focus on Hospital Prices?

There are multiple reasons why state policymakers should focus on lowering hospital prices charged to commercial insurers. Central among them are that hospitals make up the largest share of total health care spending and that the prices for hospital services are growing faster than other health care services, particularly for commercial insurers.

Hospital Prices Are High and Growing

State policy action has gravitated toward the prices hospitals charge to commercial insurers because they are the “highest” in a number of ways. First, hospital services account for the highest share (one-third in 2023) of national health spending across service categories in the United States.5 Second, hospitals have the highest price growth of all services and providers. From March 2023 to 2024, hospital prices rose by 7.7 percent, which was almost double the increase in price growth for nursing homes (3.9 percent) and more than ten times the increase for physicians’ services (0.7 percent).6

Third, commercial insurance pays the highest share of the nation’s hospital spending (37 percent).7 Fourth, hospital prices charged to commercial insurers have consistently grown faster than insurance premiums and professional services, as documented in a study examining an index of hospital prices from 2006 to 2023, as shown in Figure 1. Profit margins were also higher for hospitals compared to insurance companies throughout this period.8

FIGURE 1

Hospital price growth is partly but not fully explained by operating cost changes, such as the cost of salaries for health care professionals. From 2000 to 2018, average payment-to-cost ratios (that is, how much an insurer pays a hospital relative to cost) increased from 116 percent of hospital costs to 145 percent of hospital costs for private payers.9 In a study of hundreds of U.S. hospitals grouped into quartiles from lowest to highest priced, researchers found that high-priced hospitals had operating costs only 17 percent higher than low-priced hospitals yet charged 69 percent higher prices.10 These findings suggest that rising wages and operating costs are not the primary drivers of hospital price growth.

Researchers found that high-priced hospitals had operating costs only 17 percent higher than low-priced hospitals yet charged 69 percent higher prices.4

Commercial Insurers Pay (Much) Higher Hospital Prices

While public policy can and usually does focus on the prices paid by public programs, commercial insurers pay, by far, the highest hospital prices. For all hospital services, commercial insurers pay on average 223 percent of Medicare Fee-For-Service (FFS) rates—in other words, more than two times as much.11 The gap between commercial prices and Medicare FFS rates varies across states. For example, looking just at inpatient services, commercial prices ranged from 54 percent higher than the national average Medicare FFS rates in Arkansas to 294 percent higher in Massachusetts, as shown in Figure 2.12 While state factors matter, this variation exceeds that of other parts of health care, and suggests that some hospitals are charging insurers much more than others, which can be considered excessive.

FIGURE 2

While research does not directly compare hospitals’ commercial prices and Medicaid rates, research comparing Medicaid to Medicare indicates that Medicaid rates are also relatively low. The Medicaid and CHIP Payment and Access Commission (MACPAC) found that Medicaid inpatient FFS rates were 22 percent below those of Medicare. For states that make supplemental payments to hospitals, Medicaid inpatient FFS rates averaged 6 percent above Medicare rates.13 Given that Medicare rates are about 45 percent of commercial rates, Medicaid hospital rates are also well below the prices commercial insurers pay.

Some Hospital Prices Are Higher Than Others

Hospital ownership and management models vary substantially, as do the prices that hospitals charge commercial insurers. While some ownership types, such as private-equity-owned hospitals, may incentivize higher profit-seeking behavior, the factor most associated with the highest hospital prices is market concentration.

The factor most associated with the highest hospital prices is market concentration.

Consolidated and System-Affiliated Hospitals Charge More

Hospital consolidation through large hospital mergers has risen significantly over the past decade, which has limited competition in some hospital markets. In 2022, an estimated 97 percent of metropolitan areas had highly concentrated markets for inpatient hospital care.14 A large body of research has found linkages between higher commercial prices and rising consolidation.15 For example:

  • Prices at monopoly hospitals are 12 percent higher than prices in markets with at least four rival hospitals. The same study also found that when geographically close hospitals (hospitals within five miles of each other) merge, prices increase by more than 6 percent.16
  • A 1 percentage-point increase in hospital market share is associated with an $88 to $118 higher negotiated rate per admission.17

Large system-affiliated hospitals are often associated with higher prices compared to independently owned hospitals. In 2021, inpatient prices in system-affiliated hospitals were 13 percent higher than their independent counterparts. This difference is likely due to underlying factors, such as the need for funds for further acquisitions and market consolidation, as well as  limits on insurers’ ability to negotiate lower prices by excluding the dominant system.18

Private-Equity-Owned and For-Profit Hospitals Charge More

The growing influence of private equity ownership in health care has also led to more consolidated hospital systems and rising hospital prices. This increasing consolidation and higher prices under private equity ownership could be attributed to the investment structure of private equity firms that promises generous profit returns to investors in a relatively short period of time.19 From 2003 to 2017, 282 unique hospitals across thirty-six states were acquired by private equity.20 A study analyzing over 204 hospitals acquired by private equity consistently found increases in hospital charges after acquisition.21

For-profit hospitals also tend to charge higher prices than nonprofit hospitals for certain services. For example, a study of almost 2,000 U.S. hospitals found that private, investor-owned facilities had higher markups for four major elective procedures.22

That said, extremely high prices are charged to commercial insurers by nonprofit and independently-owned hospitals in certain circumstances. One study found that outpatient hospital prices were highest among system-affiliated for-profit hospitals while inpatient prices were highest among system-affiliated nonprofit hospitals.23 Nonprofit teaching hospitals also tend to have high prices. Ultimately, this demonstrates that states would benefit from tackling hospitals’ high commercial prices regardless of the hospital’s ownership type.

States Can—And Have—Lowered Hospitals’ Commercial Prices

States can use policy to address rising hospital prices charged to commercial insurers. Specifically, they can regulate what hospitals charge, what insurers pay, and transactions such as mergers and buy-outs by private equity firms. Three major types of actions and examples are shown in Table 1, along with the levers that policy makers can dial based on goals and circumstances. The policies have been detailed in other Century Foundation reports, but are gathered together here because they have the common denominator of aiming to lower the level or growth of hospital prices charged to commercial payers.24

TABLE 1

States Have Options for Addressing Hospitals’ Commercial Prices
Option Description Current State Policies 
Capping hospital prices Limits prices and/or growth by capping hospital payments to an upper-limit benchmark, typically Medicare rates, for inpatient and/or outpatient services 

 

Levers: Insurance type (e.g., private markets, state plans), hospital type (e.g., for- or nonprofit), network (in or out), benchmark (e.g., Medicare), cap level (e.g., 150 percent, 200 percent), cap application (e.g., to selected services, overall, reinsurance claims), enforcement mechanism

 • Indiana passed a law during its 2025 legislative session that would strip nonprofit hospitals of their status if they charge payers more than 300 percent of Medicare rates. 

 

• Oregon set price caps for state and public school employees benchmarked to 185 percent of Medicare rates for services, saving almost $110 million in twenty-seven months from implementation. 

 

• Montana’s price cap law for its state health plan generated cost savings of $47.8 million over three years until the policy ended when it switched to another third-party vendor. 
Limiting facility fees and promoting site neutrality Aligns payment rates for the same health services regardless of ownership of the site of care

 

Levers: Services (e.g., all or subset), site (e.g., definition of “off campus”) 

 • Three states (Connecticut, Indiana, and Maine) have passed comprehensive legislation prohibiting facility fees for evaluation and management services. Connecticut and Maine prohibit facility fees for both off and on campus services, while Indiana only prohibits for off campus services. 
Limiting consolidation Addresses the rising integration between hospitals, physician practices, and other services

 

Levers: Approach (merger oversight, transparency, limits on private equity acquisition)

 • Rhode Island allows its attorney general to block transactions for nonprofit and for-profit hospitals and Louisiana and Ohio have similar authority for nonprofit hospitals. 

 

• Connecticut, Hawaii, New Mexico, Oregon, Rhode Island, Vermont, and Wisconsin have given power to oversight agencies to review and approve hospital transactions. 

States have increasingly tackled hospitals’ commercial prices. Eleven states have some type of hospital price regulation that benchmarks or caps hospitals’ commercial prices at some percent of Medicare rates.25 Over twenty states have implemented legislation to address facility fees, ranging from price transparency to banning facility fees,26 while thirty-three states now have the authority to disapprove hospital transactions that are not in the public interest or are anti-competitive.27 Some states have begun taking action to combat rising private equity in health care.28 Figure 3 shows the thirty-eight states that have taken at least one of these actions.

Figure 3

The Benefits to States from Addressing Hospitals’ Commercial Prices

The reason why states are pursuing policies to lower hospitals’ commercial prices is their potential to produce cost savings for states, households, and the health care system more broadly. Specifically, such policies could improve a state’s fiscal outlook. Some of these savings take the form of direct savings that measurably decrease state expenditures on health benefits or programs, or increase revenues for state budgets by raising incomes and spending and thus receiving more in corporate taxes and sales taxes (see Figure 4). Other savings may occur either beyond the typical two-year state budget window or in ways that are hard to measure or include in a state fiscal note such as improved access to care that is more affordable or increased health coverage.

Figure 4

Total cost savings will depend on which policy option a state adopts and which levers it chooses to implement the policy, as shown in Table 1. In general, positive effects on revenue and expenditures will be greater for policies that cover a larger share of payers and hospitals, include a more aggressive phase-in schedule, or implement a more restrictive maximum allowable rate. For example, a policy that applies a price cap of 200 percent of Medicare rates on all hospital prices would have larger effects than a policy with the same price cap on out-of-network prices only. Note that the potential effects described below are generally attributable to lowering hospital prices, whereas the policy intervention, levers, and circumstances would generate specific fiscal effects.

Decreased State Expenditures

State governments can expect to realize direct fiscal gains from lowering hospital prices through reductions in state health care expenditures. This could take the form of lower costs for state employee health plans and other state-sponsored health coverage, lower premium subsidies for residents receiving state-based insurance assistance, and reduced health care spending within state correctional systems.

State Employee Health Benefit Savings

Every state provides health insurance benefits to full-time employees as part of their compensation package, although eligibility rules and generosity of benefits vary by state.29 Most states also subsidize retiree health coverage for former state government employees.30 Some states extend benefits or subsidies to local government employees as well. For example, North Carolina’s state health plan covers K–12 teachers—who are employed by local school districts rather than the state—and several states allow local governments to buy-in to the state health plan at negotiated rates.31

State governments bear the bulk of the costs for funding state government health plans. As of March 2025, state and local government employers paid for 87 percent of the premium costs for single coverage and 71 percent for family coverage for their workers.32 Lower hospital prices would lower premiums charged to state government plans by insurers and therefore reduce state expenditures.

Evidence from states that have implemented policies to reduce hospital prices demonstrates the potential for savings in state employee health plans. One study found that capping prices at 200 percent of Medicare rates in state employee health plans would have reduced spending by an average of $150 million per state in 2022, or roughly 0.35 percent of total state expenditures.33 Furthermore, an evaluation of a policy in Oregon, which capped hospital payments within the state employee health plan to 200 percent of Medicare rates, showed that the policy led to a 4 percent reduction in total spending by the state health plan, generating $107.5 million in savings.34 The state saw no network or cost-shifting effects over a year into the policy.35 These results suggest that similar caps could meaningfully lower spending by state government health plans in other states.

Savings for State-Subsidized Coverage Programs that Use Commercially Determined Rates

All states provide free or subsidized health insurance coverage to residents through state-funded programs, such as Medicaid. Some states also have programs that subsidize costs for individuals receiving health insurance policies with commercially negotiated premiums. For example, ten states offer subsidies that supplement the federal premium tax credits provided for Marketplace plans under the Affordable Care Act.36 Premiums for these health insurance marketplace plans are negotiated between marketplace insurers and commercial providers.

State programs that subsidize costs for health insurance policies with commercially negotiated premiums will benefit from lower hospital prices due to insurers making lower reimbursement payments to providers. In a competitive market, insurers are likely to respond to these savings by offering insurance plans at a lower cost or with additional benefits. When the overall cost of these insurance plans is lower, state subsidies for those plans also decrease, reducing state expenditures.

While the effect of lower hospital prices on insurance prices is indirect, most experts agree it is real and positive. One model estimated that a 1 percent reduction in hospital prices would reduce federal spending on health insurance premium subsidies by $2.6 billion (0.4 percent of total premium spending) for employer-sponsored coverage and by $0.2 billion (0.2 percent of total premium spending) for individually purchased coverage.37 Although the structure of federal health insurance subsidies differs from state subsidies, this finding shows that lower hospital prices can significantly reduce subsidies paid by states with such programs and thus lower overall state expenditures.

State Correctional Systems Savings

State governments typically pay the vast majority of health care costs for the over 1 million people housed in state prisons.38 In 2015, the average state spent $5,720 per inmate on health care, ranging from $2,173 per inmate in Louisiana to $19,796 per inmate in California.39 While health care is often provided on-site in state prisons, off-site hospital visits can account for a large share of a state prison system’s health care budget. For example, in 2015, 27 percent of Virginia’s health care budget for incarcerated people was spent on off-site hospital care.40

Reimbursement models for inmate hospital care vary by state, with most states benchmarking inmate hospital rates to rates for other insured populations. Some states benchmark inmate hospital rates to those that are negotiated commercially, such as the state employee health plan rate or the rate paid by a large commercial insurer in the state.41 For example, the health care vendor for the Virginia Department of Corrections pays commercial rates for outpatient hospital services.42 Since lowering hospital prices would lower rates for commercial plans, inmate hospital rates that are benchmarked to commercial rates would similarly fall. In these cases, state expenditures on inmate hospital care would be lowered.

There has been limited empirical evidence directly examining the impacts of changing hospital prices on the cost of inmate care. However, states collectively spent about $8.1 billion on inmate care in 2015.43 Lower hospital prices are expected to reduce the amount states spend on inmate care. In addition to lowering hospital prices, states could pursue a wide variety of other strategies to lower inmate care costs.44 For example, estimates suggest that Virginia would have saved $13 million in FY2017 if it reimbursed providers of outpatient inmate care at the Medicaid rate instead of the state’s usual rates.45

State-funded Uncompensated Care Cost Savings

Some patients who visit the hospital are unable to pay for their care, especially if they are uninsured. If a patient (or insurer) does not pay for the hospital service, the costs absorbed by the hospital become uncompensated care costs. These costs can negatively impact hospital margins, especially for hospitals that serve a large share of uninsured patients. Uncompensated care costs have continued to rise in the United States, reaching an estimated $41.4 billion across community hospitals in 2023.46

Both the federal government and states have implemented various programs to address uncompensated care costs. For example, one way state and federal governments fund uncompensated care is through Medicaid Disproportionate Share Hospital (DSH) payments. These are payments that state Medicaid programs make to certain hospitals that serve a large share of Medicaid and uninsured patients. The payments are jointly funded by state and federal government Medicaid dollars. Some states also have programs to pay for uncompensated care that are largely state funded. For example, Massachusetts pays hospitals to provide essential health care services for uninsured and underinsured residents.47 In 2017, state and local governments spent nearly $10 billion on uncompensated care costs through non-Medicaid programs.48

Lowering hospitals’ commercial prices can reduce uncompensated care costs in two ways. First, the policy may mechanically lower the price charged to uninsured patients, which in turn lowers the amount of federal and state payments for uncompensated care. For example, a recent study found that about 12 percent of hospital prices for uninsured patients are set at the hospital’s chargemaster price, or the price that would be charged to an insurer before negotiation.49 A policy that regulated the prices charged to uninsured patients would reduce the total funds states send to hospitals through state-funded uncompensated care programs.

Second, while harder to measure, lowering hospitals’ commercial prices can also reduce uncompensated care costs by decreasing the number of uninsured people. In a competitive insurance market, insurers will respond to lower hospital prices by lowering premiums, copays, and deductibles or by increasing the generosity of benefits. Each of these responses by insurers will incentivize some individuals to purchase insurance that they otherwise would not have.50 When these newly insured individuals receive care, the costs of their care will be charged to their insurer, rather than to uncompensated care programs. If these individuals get state-subsized coverage, however, there may be a cost as well as a savings (see the discussion of utilization below).

Increased State Revenue

Most states collect revenue through a combination of state income taxes and state sales taxes. State income tax receipts depend on the amount of taxable income earned by employees, whereas state sales tax receipts depend on the amount consumers spend on taxable goods and services. Consumer spending on health care services is typically not taxable through a sales tax and health insurance premiums through an employer are also tax exempt, so such spending does not usually generate revenue for a state.

Policies that address high hospital prices for commercial insurance—which in turn lower health care costs—could lead to downstream effects that result in higher wages, more employment opportunities, or generate more disposable income for state residents. Lower health care costs would increase income tax earnings through two mechanisms: shifting employee compensation from nontaxable benefits to taxable benefits such as wages or increasing overall employment levels. Lower health care costs would change consumption patterns and increase sales tax earnings by shifting spending from nontaxable health care spending to spending on taxable goods and services.

Increased State Revenue Due to Shifts in Employee Compensation Packages

One way that lower hospital prices can increase state revenues is by increasing the value of taxable benefits in employee compensation packages. Lower hospital prices lead to cost savings for insurers, which, in a competitive insurance market, would be expected to be passed to consumers in the form of lower premiums. Since employers often pay for a share of their employees’ premiums, lower premiums lead to cost savings for employers. In competing for and retaining workers, employers are likely to pass some of these savings onto employees in other forms of compensation, including higher wages and salaries. These higher wages and salaries would be subject to income taxes, and would therefore increase state revenue.

A large body of empirical research demonstrates the pass-through effect of higher wages from insurers and employers to employees due to lower premium costs. First, a study of the Medicare Advantage (MA) market found that for every $1 increase in federal dollars to MA plans, $0.45 was passed through to enrollees as lower premiums.51 This finding validates the assertion that insurers pass cost savings to enrollees. Second, a recent study shows that a 1 percent increase in health care prices reduced federal income tax withholdings by 0.4 percent.52 For the FY2025 tax year, a 0.4 percent reduction in federal income tax withholdings amounts to almost $11 billion in lost revenue.53 The Congressional Budget Office assumes that many commercial insurers would pass most of their savings from lower prices along to customers by reducing premiums for their plans.54 A similar effect could be anticipated at the state level if prices were reduced.

Increased State Revenue Due to Higher Employment

Employers may also respond to cost savings on insurance premiums by increasing their demand for labor. Economic theory suggests that employers decide how many employees to hire based on two factors: the employee’s productivity and employee’s cost to the employer. On average, health insurance benefits make up about 7 percent of an employee’s total costs for a firm.55 Since lower hospital prices could lower health insurance costs for employers, an employer’s total cost per employee is expected to decline. As a result, an employer would be expected to respond either by increasing employee compensation (as above), hiring more employees, or offering additional hours to existing employees, all else equal. Any additional wages and salaries paid to these employees would be subject to income taxes, and would therefore increase state revenues. A recent study shows that hospital prices are closely tied to employment.56 Specifically, it finds that, at the county level, a 1 percent increase in health care prices increases flows into unemployment by 0.1 percentage points. This means that if a county had 100,000 workers, 100 more people would become unemployed if health care prices increased by 1 percent. A similar reverse trend might be possible with lower health care prices.

Increased State Revenue from Higher Consumption of Taxable Goods and Services

Lower hospital prices will also increase state sales tax revenues by increasing consumption in at least two ways. First, employers may increase wages and salaries or employment due to lower health insurance costs. Both of these employer responses would cause incomes to increase, which would also be expected to increase consumption, all else equal. These increases in consumption would therefore lead to increases in sales tax. Specifically, estimates have shown that a 1 percent increase in income increases sales tax revenue by about 0.8 percent, although the effect varies by state.57

Second, consumers are likely to shift some spending to taxable goods and services in response to more disposable income through lower health care costs. Most consumers pay for a share of their health care costs through premiums and out-of-pocket payments. Lower hospital prices would reduce both premiums and out-of-pocket costs for consumers. Consumers would likely then shift some of these savings to consumption of taxable goods and services. While some consumer savings would be shifted to nontaxable channels, such as savings accounts or debt payments, consumption would still be expected to increase. As a result, states with sales taxes can expect to generate additional revenue.

Potential Federal “Pass-through” Funding for Coverage

While not a direct source of revenue for states, states may receive a waiver allowing them to use federal savings from hospital price reductions for other approved purposes. Under the Affordable Care Act (ACA), states may receive federal approval to temporarily modify existing laws through state innovation waivers, also called 1332 waivers, so long as they adhere to certain guardrails, such as ensuring that coverage does not decline, is equally comprehensive and affordable as it would be under the ACA, and that the waiver will not increase the federal deficit. If a state generates savings under its 1332 waiver, it receives “pass-through” funding, which is a direct payment from the federal government that equals the projected federal premium tax credit amount and cost-sharing reductions that state residents would have received if the waiver was not in place. Fourteen states have active 1332 waivers, which are approved by the U.S. Department of Health and Human Services and the U.S. Department of Treasury for up to five years with the possibility of extension.58

Several states have included indirect hospital price caps in their 1332 waivers. For example, Colorado’s 1332 waiver has designated insurance plans that must achieve premium savings and, if they cannot do so, the state may limit hospital payment rates to 165 percent of Medicare rates. Colorado estimated that this policy will reduce premiums for Coloradans by 23 percent in 2025, generating significant savings under the waiver that support the state’s reinsurance program, as well as its state-funded health insurance subsidy program.59 Additionally, Maine’s 1332 waiver includes a policy that limits how much its reinsurance program will pay for high-priced items and services—such as cardiac rehabilitation and certain imaging services—to 200 percent of Medicare rates.60 While the policy has yet to be evaluated, initial estimates showed that the initial items and services impacted by the caps account for 1.1 percent of claims according to communications with state officials.61 It is therefore possible that state actions taken on hospitals’ commercial prices could yield some federal revenue to spending on federally approved purposes.

Slowing Long-Run Cost Growth and Non-Fiscal Benefits

While some hospital price policies focus on directly lowering prices, other policies instead target long-run growth in hospital prices. The effects of these policies would likely not be realized as immediate budget savings for states, but would rather lower actual future costs relative to price trajectories under current law. For example, policies that aim to prevent future consolidation among hospitals would be unlikely to change health care costs in the immediate term, but would constrain cost growth over time. Similarly, a policy that limited growth in hospital prices (rather than directly capping the price) may not have fiscal effects in the typical two-year state budget window.

Many states have implemented policies aimed at targeting growth in hospital prices. For example, Connecticut reviews transfers of hospital ownership and has added limits on commercial price growth as a condition of approval in some contracts.62 Additionally, Vermont conducts annual reviews of hospital budgets that constrain growth in net patient revenue.63 A 2018 review showed that the budget adjustment process saved about $108 million over the seven-year period from 2013 to 2019.64 Finally, Rhode Island limits the increase in rates for inpatient and outpatient hospital services in contracts between insurers and providers.65 According to an evaluation, the suite of affordability standards Rhode Island implemented in 2010 reduced quarterly health care spending by $55 per enrollee, a 6 percent decrease.66

Other policies targeting long-run cost growth—such as policies that limit hospital consolidation—have only been implemented recently, which limits the number of evaluations of these policies.67 Nonetheless, a large body of evidence highlights the potential for these policies to decrease long-run cost growth in the health as well as other sectors. For example, one study suggests that there is underenforcement of antitrust laws in hospitals, leading to hospital mergers that have increased prices by over 5 percent.68 A policy that limited the ability for hospitals to merge could mitigate some of those price increases resulting from future consolidation. Another study suggests that adopting a set of national policies to reduce provider incentives to consolidate would reduce hospital prices nationwide by 1 percent to 3 percent relative to current law.69

Benefits will accrue to individuals from lowering hospitals’ commercial prices above and beyond the fiscal benefits to state budgets. Most of these effects would occur because lower hospital prices would lead to lower premiums, which would lower costs for consumers. Already-insured people would save, enabling them to more easily afford deductibles and copays for care. Lower premiums could also increase the number of people who buy insurance. Higher insurance rates can lead to a variety of benefits for consumers, including lower rates of medical debt, increased use of preventive and mental health services, and greater financial security.70 These benefits may also accrue to uninsured patients—even if they do not purchase insurance—if the prices hospitals charge uninsured patients also fall in response to policy changes.

Considerations When Tackling Hospital Prices

As with all public policies, policies to make hospitals’ commercial prices more affordable have limitations and face challenges. Some are mechanical: lowering prices in one part of the system may raise costs in another part of the system. Others may be unintended, such as service or hospital closures at low-margin facilities. Both can be mitigated by policy design. Implementation costs must also be taken into account. Another type of challenge is the need to analyze hospital assertions in light of the available research on the cause and effect of tackling prices. Hospitals will claim that high commercial prices are necessary to offset low public payer rates—and reducing commercial rates will harm the people they serve. As described below, increased experience at the state and federal level show that this claim is ungrounded.

Lower Hospital Prices May Increase Utilization

Policies that lower hospital prices could have offsetting effects as a result of increased health care utilization. Lower premiums and out-of-pocket costs for consumers could incentivize insured people to use more care or incentivize uninsured people to enroll in insurance.71 Higher insurance rates for state-supported programs would increase state expenditures. While evidence suggests utilization effects will likely occur, those effects would not be large enough to fully offset the savings generated from lowering hospital prices. An evaluation from Oregon’s price cap policy, for example, shows that although service use increased in response to lower prices, the state saw a 25 percent reduction in outpatient facility prices per procedure and a 10 percent reduction in out-of-pocket prices, while utilization of these procedures increased by only 5 percent.72 These findings demonstrate that utilization is not fully responsive to changes in price, and increased utilization would therefore not fully offset the savings from lower prices. Furthermore, higher utilization rates may have other positive effects for states, such as increased access to preventative services and improved quality of care.

States could also mitigate these potential utilization effects by coupling the policy changes with more stringent utilization management policies. Utilization management policies impose additional constraints on the actions doctors and patients may take when receiving services. These actions include policies such as prior authorization and concurrent review. The effectiveness of these policies in constraining utilization will likely vary depending on factors associated with the policy, such as the mechanism through which the policy operates and whether the policy targets high- or low-value services.

Lower Hospital Prices May Affect Services

Policies that reduce hospital prices could also reduce margins for hospitals. Hospitals that operate with low margins are often safety-net hospitals in areas with high shares of uninsured or Medicaid patients and may be the sole provider in a rural community.73 Lower margins might cause hospitals to reduce their workforce, stop offering unprofitable services, or close the hospital altogether. Any of these outcomes could reduce access to high-quality care for patients. They could also shift patients to more expensive care settings and increase emergency transportation costs; these higher costs would increase expenditures for a state. Furthermore, evidence shows that hospital closures reduce access to care and harm local economies, especially in rural areas.74

Causal evidence about whether reforms that lower hospital costs lead to hospital closures is limited, but evidence from Oregon showed that no hospitals have had to close as a result of price caps in Oregon’s state employee health plan.75 Another study evaluating the potential impact of a price cap policy on forty-six states and Washington, D.C. found that a price cap of 200 percent of Medicare rates for state employee health plans had minor effects on hospital operating margins.76

While the potential for negative impacts due to lower hospital prices is real, several strategies are available to mitigate the potential negative impacts on low-margin hospitals from lower hospital prices. For one, states could target policies to categorically exclude certain low-margin hospitals from the policy. For example, Oregon’s price cap policy exempts small, rural, critical access, and certain sole community hospitals.77 Similarly, states could also target policies to exclude hospitals whose margins are below a certain amount. Additionally, states could also divert some of the savings from lower hospital prices to increase state subsidies to low-margin hospitals or services. For example, Texas has provided grants to rural hospitals for labor and delivery services and maternal care operations.78 States could also require hospitals to provide key community services as conditions of licensure.

Implementation Costs Must Be Considered

Policies that seek to lower hospital prices may have low or high implementation costs, depending on the policy design. These implementation costs could include IT infrastructure costs from developing systems and processes to identify noncompliance, legal costs from enforcing penalties for noncompliance, and communication costs from informing relevant stakeholders about the policy changes.

State experience illustrates the level and type of implementation costs of these policies. For example, state budget documents from Maryland and Connecticut suggest that the health insurance cost containment programs in each state receive about $20 million in annual funding ($22.3 million in Maryland in FY2024 and $18.2 million in Connecticut in FY2025).79 As another example, states that set price caps on hospital prices often use data from an all-payer claims database to track current hospital prices and establish the price caps. These systems can cost $1 million to $5 million to implement and have ongoing operations and maintenance costs.80 Ultimately, while implementation of these policies are not without costs, the potential savings are likely to far outweigh implementation.

Furthermore, states have numerous avenues through which they can receive funding for policy implementation. For example, states can levy assessments on regulated hospitals in a state, as is done in Maryland.81 States might also levy similar assessments on commercial insurers, as is done in Colorado,82 alongside assessments on hospitals. Finally, some reforms may be able to draw on federal pass-through funding from 1332 waivers, as is done in Colorado as well.83

The Myth of Cost Shifting Must Be Addressed

A common argument against policies that lower hospital prices is that hospitals will respond by cost-shifting. Cost-shifting is the concept that hospitals make up for lower payments in one market segment by raising prices in another market segment. According to these hypotheses, cost-shifting can occur across services as well as across payers within a hospital system. For example, a cost-shifting hypothesis would posit that hospitals would raise rates for imaging services reimbursed by commercial payers in response to a state decreasing reimbursement rates for Medicaid inpatient services, and vice versa.

Although cost-shifting hypotheses are pervasive in policy discussions, there is little evidence that cost-shifting occurs on a large scale. Some evidence does show that hospitals expand profitable services in response to changes in prices and reduce unprofitable services.84 However, that is different from hospitals responding to lower prices in one market segment by raising prices in other market segments. An evaluation of Oregon’s price cap for state employee health plans also found no evidence of cost-shifting to other payers after the implementation of the policy.85 In fact, evidence shows that hospitals are unlikely to respond to lower revenues by raising prices in private insurance markets and will instead adjust service mix or delay purchases of health information technology.86

Of note to state budget officials, the Congressional Budget Office concluded that “the preponderance of the evidence suggests that hospitals do not engage in cost shifting” when public payers reduce payment rates.87 That finding is based on several studies that do not find strong empirical evidence for large-scale cost-shifting across payers.88

Conclusion

The United States spends significantly more on health care than other nations, which is why major legislation to balance the federal budget or reduce taxes often has been funded by health spending cuts—even though gaps in the system exist and are growing. The high cost of the health system also makes it difficult for policy makers to look outside of it to fund gaps within it. A close examination of the system points to high hospital prices charged to commercial insurers as a source of funds for state policy officials to make strategic reinvestments in the health system. This has, and can be, done without unintended harm to hospital services that are essential to the system. This report does not advocate for either specific policies to limit excessive prices or specific reinvestments. Instead, it aims to offer evidence on the rationale, feasibility, and guardrails that states may use in securing savings and revenue from tackling excessive hospital prices. At a time when health care affordability is at risk, states can put people first by holding health care corporations like hospitals accountable for fair pricing.

Notes

  1. Cynthia Cox, Jared Ortaliza, Emma Wager, and Krutika Amin, “Health Care Costs and Affordability,” KFF, October 3, 2025, https://www.kff.org/health-costs/health-policy-101-health-care-costs-and-affordability/.
  2. Scott L. Fulford and Eric Wilson, “Medical Debt and Collections in the United States,” Health Affairs Scholar 3, no. 8 (2025): qxaf159, https://doi.org/10.1093/haschl/qxaf159.
  3. Rhiannon Euhus, Elizabeth Williams, Alice Burns, and Robin Rudowitz, “Allocating CBO’s Estimates of Federal Medicaid Spending Reductions across the States: Enacted Reconciliation Package,” KFF, July 23, 2025, https://www.kff.org/medicaid/allocating-cbos-estimates-of-federal-medicaid-spending-reductions-across-the-states-enacted-reconciliation-package/.
  4. Jeanne Lambrew, “The Chance for States to Tackle High Health Prices,” The Century Foundation, September 5, 2025, https://tcf.org/content/commentary/the-chance-for-states-to-tackle-high-health-prices/.
  5. “National Health Expenditure Accounts,” Centers for Medicare and Medicaid Services, 2023, https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/historical.
  6. Shameek Rakshit, Emma Wager, Cynthia Cox, Paul Hughes-Cromwick, and Krutika Amin, “How Does Medical Inflation Compare to Inflation in the Rest of the Economy?” KFF, May 17, 2024,  https://www.kff.org/health-costs/how-does-medical-inflation-compare-to-inflation-in-the-rest-of-the-economy/.
  7. Cynthia Cox, Jared Ortaliza, Emma Wager, and Krutika Amin, “Health Care Costs and Affordability,” KFF, October 3, 2025, https://www.kff.org/health-costs/health-policy-101-health-care-costs-and-affordability/.
  8. Salpy Kanimian and Vivian Ho, “Why Does the Cost of Employer-Sponsored Coverage Keep Rising?” Health Affairs Scholar 2, no. 6 (2024): qxae078, https://doi.org/10.1093/haschl/qxae078.
  9. “The Prices That Commercial Health Insurers and Medicare Pay for Hospitals’ and Physicians’ Services,” Congressional Budget Office, January 20, 2022, https://www.cbo.gov/publication/57422.
  10. Derek Jenkins, Sasathorn Tapaneeyakul, and Vivian Ho, “Prices Versus Costs: Unpacking Rising US Hospital Profits,” Rice University’s Baker Institute for Public Policy, September 6, 2024, https://www.bakerinstitute.org/research/prices-versus-costs-unpacking-rising-us-hospital-profits.
  11. “The Prices That Commercial Health Insurers and Medicare Pay for Hospitals’ and Physicians’ Services,” Congressional Budget Office, January 20, 2022, https://www.cbo.gov/publication/57422.
  12. Ibid.
  13. Cindy Mann and Adam Striar, “How Differences in Medicaid, Medicare, and Commercial Health Insurance Payment Rates Impact Access, Health Equity, and Cost,” The Commonwealth Fund, August 17, 2022, https://www.commonwealthfund.org/blog/2022/how-differences-medicaid-medicare-and-commercial-health-insurance-payment-rates-impact.
  14. Jamie Godwin, Zachary Levinson, and Tricia Neuman, “One or Two Health Systems Controlled the Entire Market for Inpatient Hospital Care in Nearly Half of Metropolitan Areas in 2022,” KFF, October 1, 2024, https://www.kff.org/health-costs/one-or-two-health-systems-controlled-the-entire-market-for-inpatient-hospital-care-in-nearly-half-of-metropolitan-areas-in-2022/.
  15. “The Prices That Commercial Health Insurers and Medicare Pay for Hospitals’ and Physicians’ Services,” Congressional Budget Office, January 20, 2022, https://www.cbo.gov/publication/57422.
  16. Zack Cooper, Stuart V. Craig, Martin Gaynor, and John Van Reenen, “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured,” National Bureau of Economic Research, Working Paper No. 21815, December 2015, https://doi.org/10.3386/w21815.
  17. Yuvraj Pathak and David Muhlestein, “Hospital System Market Share and Commercial Prices: A Cross-Sectional Approach Using Price Transparency Data,” Health Economics Review 14, no. 1 (2024): 102, https://doi.org/10.1186/s13561-024-00580-w
  18. Jessica Y. Chang and Kathryn Martin, “Commercial Inpatient Hospital Price Growth Driven by System Affiliation and Nonprofit-Status Hospitals,” Health Affairs Scholar 2, no. 11 (2024): qxae140, https://doi.org/10.1093/haschl/qxae140.
  19. Erin C. Fuse Brown and Mark A. Hall, “Private Equity and the Corporatization of Health Care,” Stanford Law Review 76 (March 2024): 527–96, https://review.law.stanford.edu/wp-content/uploads/sites/3/2024/03/Fuse-Brown-Hall-76-Stan.-L.-Rev.-527.pdf.
  20. Anaeze C. Offodile II, Marcelo Cerullo, Mohini Bindal, Jose Alejandro Rauh-Hain, and Vivian Ho, “Private Equity Investments In Health Care: An Overview Of Hospital And Health System Leveraged Buyouts, 2003–17,” Health Affairs 40, no. 5 (2021): 719–26, https://doi.org/10.1377/hlthaff.2020.01535.
  21. Joseph D. Bruch, Suhas Gondi, and Zirui Song, “Changes in Hospital Income, Use, and Quality Associated With Private Equity Acquisition,” JAMA Internal Medicine 180, no. 11 (2020): 1428–35, https://doi.org/10.1001/jamainternmed.2020.3552.
  22. Sara Sakowitz, Syed Shahyan Bakhtiyar, Yas Sanaiha, Amulya Vadlakonda, Troy Coaston, and Peyman Benharash, “Hospital Price Markup and Outcomes of Major Elective Operations,” JAMA Surgery 160, no. 11 (2025): 1241–49, https://doi.org/10.1001/jamasurg.2025.3647.
  23. Kelsey Burke and Jessica Chang, “System-Affiliated Hospitals Associated with Higher Prices,” Health Care Cost Institute, July 2025, https://healthcostinstitute.org/wp-content/uploads/images/pdfs/CMWF_Issue%20Brief_InpatientAndOutpatientPrices.pdf
  24. For example, Thomas Waldrop and Lex Brierley, “State Reference Pricing Can Lower Health Care Costs Equitably,” The Century Foundation, August 13, 2024, https://tcf.org/content/report/state-reference-pricing-can-lower-health-care-costs-equitably/; Thomas Waldrop and Lex Brierley, “How States Can Protect Patients from Harmful Hospital Pricing Practices,” The Century Foundation, September 16, 2024, https://tcf.org/content/report/how-states-can-protect-patients-from-harmful-hospital-pricing-practices/; Tara Oakman, Thomas Waldrop, and Lex Brierley, “How States Can Advance Equity When Addressing Health Care Consolidation,” The Century Foundation, March 6, 2024, https://tcf.org/content/report/how-states-can-advance-equity-when-addressing-health-care-consolidation.
  25. Karen Davenport, Julia Burleson, Abigail Knapp, and Kennah Watts, “States’ Oversight Approaches to Hospitals’ Market Behaviors: A Set of 50-State Maps,” Georgetown Center on Health Insurance Reforms, November 17, 2025, https://chir.georgetown.edu/states-oversight-approaches-to-hospitals-market-behaviors-a-set-of-50-state-maps/.
  26. “Overall Picture of State Outpatient Facility Fee Billing Reforms for the Commercial Health Insurance Market,” Georgetown Center on Health Insurance Reforms, September 5, 2025, https://facilityfeereform.chir.georgetown.edu/state-uptake-of-reforms/.
  27. Karen Davenport, Julia Burleson, Abigail Knapp, and Kennah Watts, “States’ Oversight Approaches to Hospitals’ Market Behaviors: A Set of 50-State Maps,” Georgetown Center on Health Insurance Reforms, November 17, 2025, https://chir.georgetown.edu/states-oversight-approaches-to-hospitals-market-behaviors-a-set-of-50-state-maps/.
  28. Michael Fenne, “2025 State Healthcare Policy Review: Tracking Private Equity Oversight and Reform,” The Private Equity Stakeholder Project, November 2025, https://pestakeholder.org/wp-content/uploads/2025/11/PESP_Report_HC-Policy-Review_2025.pdf.
  29. “State Employee Health Benefits, Insurance and Costs,” NCSL, May 1, 2020, https://www.ncsl.org/health/state-employee-health-benefits-insurance-and-costs.
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  33. Roslyn C. Murray, Christopher M. Whaley, Erin C. Fuse Brown, and Andrew M. Ryan, “Hospital Payment Caps Could Save State Employee Health Plans Millions While Keeping Hospital Operating Margins Healthy: Article Examines Hospital Payment Caps and Possible Savings to State Employee Plans,” Health Affairs 43, no. 12 (2024): 1680–88, https://doi.org/10.1377/hlthaff.2024.00691.
  34. Roslyn C. Murray, Zach Y. Brown, Sarah Miller, Edward C. Norton, and Andrew M. Ryan, “Hospital Facility Prices Declined As A Result Of Oregon’s Hospital Payment Cap,” Health Affairs 43, no. 3 (2024): 424–32, https://doi.org/10.1377/hlthaff.2023.01021.
  35. Ibid.
  36. “Which States Offer Additional Financial Assistance for Marketplace Plans?” KFF, September 29, 2025, https://www.kff.org/faqs/faqs-health-insurance-marketplace-and-the-aca/help-paying-marketplace-premiums-the-basics/which-states-offer-additional-financial-assistance-for-marketplace-plans/.
  37. “Policy Approaches to Reduce What Commercial Insurers Pay for Hospitals’ and Physicians’ Services,” Congressional Budget Office, September 29, 2022, https://www.cbo.gov/publication/58222.
  38. “State Prisons and the Delivery of Hospital Care,” Pew, July 19, 2018, https://www.pew.org/en/research-and-analysis/reports/2018/07/19/state-prisons-and-the-delivery-of-hospital-care.
  39. Matt McKillop, “Prison Health Care Spending Varies Dramatically by State,” December 15, 2017, https://www.pew.org/en/research-and-analysis/articles/2017/12/15/prison-health-care-spending-varies-dramatically-by-state.
  40. “State Prisons and the Delivery of Hospital Care,” Pew, July 19, 2018, https://www.pew.org/en/research-and-analysis/reports/2018/07/19/state-prisons-and-the-delivery-of-hospital-care.
  41. Ibid.
  42. David Reynolds, “Update on Inmate Health Care,” Virginia House Appropriations Committee Retreat, November 20, 2019, https://hac.virginia.gov/committee/files/2019/11-20-19%20Retreat/IX%20-%20Reynolds.pdf.
  43. “Prison Health Care Costs and Quality,” Pew, October 18, 2017, https://www.pew.org/en/research-and-analysis/reports/2017/10/prison-health-care-costs-and-quality.
  44. Philip S. Schaenman, Elizabeth Davies, Reed Jordan, and Reena Chakraborty, “Opportunities for Cost Savings in Corrections Without Sacrificing Service Quality: Inmate Health Care,” Urban Institute, 2016, https://www.urban.org/research/publication/opportunities-cost-savings-corrections-without-sacrificing-service-quality-inmate-health-care.
  45. “Spending on Inmate Health Care,” Commonwealth of Virginia, Joint Legislative Audit and Review Commission, 2018, https://jlarc.virginia.gov/pdfs/reports/Rpt511.pdf.
  46. Rob Nelb, “Estimated Effects of H.R. 1 on Hospital Uncompensated Care Costs,” America’s Essential Hospitals, 2025, https://essentialhospitals.org/wp-content/uploads/2025/06/CBO-Analysis-Reconciliation-June-2025.pdf.
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  49. Yang Wang, Mark Katz Meiselbach, John S. Cox, Gerard F. Anderson, and Ge Bai, “The Relationships Among Cash Prices, Negotiated Rates, And Chargemaster Prices For Shoppable Hospital Services,” Health Affairs 42, no. 4 (2023): 516–25, https://doi.org/10.1377/hlthaff.2022.00977.
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  69. Those policies include adopting site neutral payments, reforming 340B, reducing hospital administrative costs, increasing provider mobility, and prohibiting anticompetitive contracts between providers and insurers. See “Policy Approaches to Reduce What Commercial Insurers Pay for Hospitals’ and Physicians’ Services,”  Congressional Budget Office, September 29, 2022.
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