The hospital cost crisis is back in the spotlight. The Paragon Health Institute’s recent report on $1.6 trillion in hospital spending has gained some traction across healthcare media and policy circles. It fits neatly into a familiar narrative from policy groups, employers, and billionaire-funded advocacy efforts: hospitals are driving costs, consolidation has reduced competition, and the payors are the last line of defense against rising healthcare costs.
That narrative is simple, clean, and gives policymakers and employers a clear target. It also leaves out the forces that shape how hospitals operate and react to payor behaviors.
This report narrows the focus to hospital pricing and consolidation while largely ignoring the environment those hospitals operate in — an environment shaped, constrained, and often dictated by payor behavior.
The report surfaces real issues. It also leaves out key forces that shape those issues.
Where the report is right
The report captures several realities that healthcare leaders deal with every day.
Hospital spending now exceeds $1.6 trillion annually and represents roughly 33% of total healthcare expenditures.
The structure of care delivery has shifted. Hospitals and health systems now employ more than half of all physicians, a major change from just over a decade ago. That shift reflects a deeper change in the economics of independent practice.
Patients feel the pressure. A meaningful share of Americans delay or avoid care because of cost concerns.
These points reflect real trends and frame the conversation healthcare leaders need to address.
What the hospital cost crisis narrative gets wrong
The hospital cost crisis narrative places hospitals at the center of the problem. That framing ignores the system that shapes how hospitals operate.
1. Payor behavior drives the ecosystem
Payors, often with dominant market share — like a local BCBS plan — set reimbursement rates. While hospitals attempt to negotiate improvements, their yields are often far from what they were able to negotiate.
Payors and employers design benefit structures. When payors ask hospital systems to take on increased risk (ironic in and of itself since that’s literally the payor’s job), most often the payor then refuses to allow the health system to have a say in benefit plan designs.
Regulators define coverage rules such as mandated ER treatment and other policies. Each of those decisions flows downstream into hospital pricing, patients’ access to care, and overall patient behavior.
Health insurance markets are highly concentrated across the country. 97% of commercial markets meet the definition of highly concentrated, and in nearly half of metro areas a single insurer controls at least 50% of the market. That level of concentration shapes how contracts get written, negotiated, and enforced — or in many cases ignored by the very party who drafted them.
Contracts dictate reimbursement, policy manuals control prior authorization requirements, and certificates of coverage outline benefit limitations. Hospitals carry the operational burden of all of those decisions while maintaining access, staffing, quality, and services.
The report acknowledges government policy. However, it does not account for how payor behavior shapes hospital behavior. Truly, at what point did hospitals volunteer to take on collecting increasingly high patient copays, deductibles, and coinsurance? As payors and employers chose to shift more costs to patients, why not give payors the responsibility of collecting them? They already take in the premium and write the benefit plan design.
2. Consolidation reflects system pressure, not just strategy
The Paragon report points to consolidation as a primary driver of higher prices. That framing leaves out the forces that pushed hospitals in that direction in the first place.
Health systems have expanded in response to reimbursement pressure from payors. Rising labor costs and the need for operational scale now reflect the burden of legal disputes, delayed reimbursement, and constantly changing payor rules that make it harder to collect what is owed. Contract structures in most markets limit provider pricing flexibility.
What choice do hospitals have but to increase scale to gain negotiating leverage and maintain financial stability, a lesson learned from payors themselves. That scale allows health systems to centralize operations and support service lines that smaller hospitals cannot sustain, preserving access in communities where independent providers no longer operate.
Independent practice has become harder to sustain across nearly every dimension of the business, as we outlined in our report, What to expect in 2026: managed care trends and predictions. Administrative burden from payors continues to rise. Payment volatility creates uncertainty, and staffing becomes harder to maintain when clinicians are pulled away from patient care to manage administrative work. Finally, technology investments require capital that smaller practices often cannot afford.
Physicians respond by joining larger organizations or selling their practices as financial and administrative pressure driven by onerous payor policies keeps the focus on paperwork instead of caring for patients. Private equity and venture capital follow suit thinking that these practices can be operated in a much more efficient way with scale.
3. Price growth does not equal financial strength
The Paragon report highlights price growth without addressing margin reality. Many hospitals operate on thin margins, often in the low single digits, but even more operate at a loss in any given year. For many, it’s only their non-profit status and access to religious or other foundations that allow them to remain open.
That pressure is most visible in rural and community hospitals. Nearly half of rural hospitals operate in the red, and hundreds remain at risk of closure. The consequences are not theoretical. Since 2010, more than 150 rural hospitals have closed. Many more have eliminated key services like labor and delivery, especially as new state laws make it difficult or impossible for OB/GYNs to perform life-saving services.
When those hospitals close, access shifts to the next hospital — often over an hour away. Patients in medically underserved areas lose emergency care, obstetrics, and routine access points that cannot be replaced locally.
At the same time, cost pressures continue to rise. Labor, the largest share of hospital expense, has increased significantly since the pandemic. Supply costs and capital requirements continue to climb. Reimbursement from Medicare and Medicaid often falls below the cost of care, which forces hospitals to rely on commercial contracts to remain viable. Imagine running a business where 30-45% of your business is not profitable. How would you fix it?
Rising prices reflect the cost of maintaining access in a system where payment does not cover the full cost of care. If Medicare and Medicaid just started covering the cost of care, many hospitals and physicians could remain independent.
4. Competition does not fix a broken market
The report frames competition as a solution. However, healthcare does not function like a traditional market. As a reminder, the supply and demand curve is the inverse of most other industries.
Health plans, brokers, and employers have already tested the idea that patients will behave like consumers. Consumer-driven health plans shifted substantially more financial responsibility to individuals with the expectation that price sensitivity would drive better decisions. The result concentrated benefit to people who could afford to fund health savings accounts and absorb risk, while most patients used lower premiums to pay bills and left those accounts empty.
Patients who could not afford higher out-of-pocket costs delayed or skipped preventive care as exposure increased. By the time they accessed care, their problems were far worse and more expensive. It also drove patients who reached their out-of-pocket maximum to seek every other possible service for the remainder of the year, since they no longer had to pay for additional care.
Shopping for healthcare requires conditions that do not exist for most people. Patients need real choice in their market, which many people in underserved areas do not have. They need to understand what differentiates one provider from another. Price alone does not answer that question. A lower-cost MRI in a free-standing facility with an old, un-serviced machine often leads to a second test at a hospital-owned facility. Where is the national registry of the best-performing cardiac surgeons — and how do we define what best is?
Most care is not elective. Patients do not shop for emergency care. They do not compare prices in the middle of a diagnosis. They follow referral pathways shaped by network design, availability, and trust.
Price transparency tools cover a limited set of services and rarely reflect actual out-of-pocket costs. Payors have hidden their information in HUGE files taking up almost 300 terabytes of data monthly. Researchers and professionals struggle to access and interpret them so no personal computer wielded by the average healthcare consumer can possibly be up to the task.
In addition, there are all kinds of problems with the data. They almost NEVER include all the contracted categories, they might reflect multiple rates for the same services or include the aptly named zombie rates (charges for services the hospital would never provide, like a dentist doing joint replacements). Finally, when price transparency vendors report the issue to CMS, CMS does little or nothing to enforce the rules.
Competition assumes informed decision-making. The ecosystem does not provide the information or flexibility required to make those decisions. Hospital price transparency legislation also points the responsibility toward the wrong party. The payors have all the information – they just don’t share it effectively.
5. Patient behavior reflects uncertainty about cost and what’s allowed
The report recognizes that patients delay care because of cost. It does not address how financial uncertainty shapes those decisions before care ever begins.
Patients make tradeoffs every day. Housing, food, utilities, and transportation come first. Healthcare often moves to the bottom of the list unless something becomes urgent enough to force action.
People delay care and avoid it entirely. They make decisions based on what they think they might owe. Or they’re aware of a range of potential costs that they might owe based on their employer’s decisions and again choose to delay or avoid care.
Financial uncertainty drives those decisions. The inscrutability of health insurance coverage, combined with low levels of financial literacy, makes delaying care the easier choice.
They also postpone care when coverage feels unclear. Insurance documents say a treatment is covered, but then it needs to be approved. Widespread coverage indicates that more and more of these prior authorization reviews are done by algorithms. Then, payors often conduct retrospective reviews and deny services that have already happened. Even after the treatment was initially approved. Who has time for that?
Much of that confusion originates upstream with the payor and employer. Benefit designs shift more cost to patients through high deductibles and coinsurance. Explanations of benefits arrive filled with terms most people do not understand. Coverage decisions change without clear explanation. Some BCBS plans don’t even include the allowable on the explanation of benefits to the patient — so how can a member ever know what they really owe? Payor policies continually change, even within a contracted period, and thus create a system that is difficult to navigate and impossible to predict.
Healthcare providers interact with patients at the point of care and are expected to explain a financial experience they do not control.
We’ve written about this directly in The Price of Care: A healthcare leader’s guide to building trust through health insurance and financial literacy. Financial concerns play a critical role in determining whether patients seek care at all. More than a third of adults report delaying or skipping care because of cost concerns.
That behavior has consequences. Patients enter the system later, with more advanced conditions and fewer options and way more expensive care.
Financial uncertainty is firmly at the front door of healthcare. It determines who seeks care, when they seek it, and where they go.
Control the hospital cost narrative before it controls you
The hospital cost crisis is real, but the narrative around it is incomplete.
Hospitals operate inside a system shaped by payor behavior, payor benefit design, and payor administrative complexity. Pricing reflects those forces. Consolidation reflects those forces. The conclusions people draw about the hospital often miss them.
That gap is not going to fix itself. As a matter of fact, there are plenty of billionaires with their own agendas ready to blame hospitals for all things.
Payors, policymakers, and third-party groups are shaping how costs are explained and who gets blamed. Too often hospitals stay quiet or respond after the narrative has already taken hold.
That approach does not work anymore!
Healthcare providers cannot control every force in the ecosystem, but they can control how they explain it. Organizations that do not explain their economics, their contracts, and their role in the system will have those explanations written for them.
The organizations that lead explain how the ecosystem actually works in clear terms. They connect cost, access, and value in a way people can understand. They step into the conversation early.
This is a strategic requirement.
