A conservative think tank with proven sway over federal health policy has a new report out undercutting the hospital industry’s claims of sweeping financial distress and broadly calling for rollbacks of favorable payment rates and subsidies it says have fueled an inefficient market.
The Paragon Health Institute’s report and accompanying newsletter describe the $1.6 trillion spent per year on hospital care—about a third of total healthcare expenditures—as a key driver of increased insurance premiums and consumer unaffordability, as well as the national debt. The group notes that, since 2000, hospital prices have risen three times faster than inflation and doubled wage growth.
Paragon previously campaigned hard against provider taxes and state-directed payments, hospital-friendly Medicaid mechanisms it described as “gimmicks.” Restrictions on both have made their way into last year’s One Big Beautiful Bill Act as well as guidance updates from the Centers for Medicare and Medicaid Services.
The think tank’s latest report reiterates those critiques but expands the scrutiny to other areas where the government has a heavy hand in hospital finance.
“If federal and state lawmakers want to lower health costs, improve outcomes and create market discipline, they should start with recognizing how government policies inflate and distort hospital prices while incentivizing consolidation,” the report reads. “Understanding how subsidies, government support and regulatory protections undermine competition and create disincentives for hospitals to be efficient, minimize costs and continually innovate will help inform policy alternatives that can encourage competition, improve accountability and increase cost-effective patient care.”
The hospital industry has historically resisted policy changes that would redirect funds by highlighting their high operating costs and the threat of potential closure among those with tight or negative margins. They’ve also described payments from Medicare as insufficient to cover the cost of care delivery as justification for higher costs among the commercially insured (254% higher in 2022, per a 2024 RAND study).
Paragon’s report flatly objects to that characterization, writing that “overall, hospitals are not unprofitable and have low financial risk.” It took issue with how hospitals and hospital groups allocate costs, attributing much of their overhead to government payers. “A more appropriate metric indicates that Medicare patients are, in fact, often profitable, and Medicaid patients are also likely a source of positive net revenue, not a net loss,” the report reads.
While Paragon contested margin measures that exclude “volatile but significant” investment incomes and war chests, it also noted that the current margin measurements have averaged positive and that much of the hospital sector is in a healthy range.
“In 2024, hospital operating profits averaged 6.4%, total margins reached 6.5% and investment income contributed billions more. Many hospitals have strong cash reserves and growing investment portfolios, but costs not associated with patient care have risen at the same rate as costs for patient care, indicating poor productivity.” Paragon wrote. It later pointed to successful, “high-performing hospitals” with large Medicare and Medicaid populations as proof that hospitals can successfully respond to cost pressures “while delivering more charity care than many well-subsidized tax-exempt peers.”
On that basis, the report outlined a barrage of criticisms of the funding programs and regulations surrounding hospitals, saying they are distorting markets. A 12-point wish list of policy recommendations outlined in the report includes:
- Enactment of site-neutral payments in Medicare
- Medicare rate setting based on Medicare Advantage price transparency data
- Building further on the OBBBA’s provider tax and state-directed payment restrictions
- Increased CMS oversight of hospital supplemental payments, including Disproportionate Share Hospital payments
- Development of a comprehensive inventory of federal hospital payments to identify overlapping programs
- Better targeting of 340B net savings to in-need entities or individual patients directly
- Repeal of state’s certificate of need laws
- Repeal of the Affordable Care Act’s restriction on reimbursement to new physician-owned hospital
- Increased oversight of hospitals’ compliance with tax rules, particularly by tightening nonprofits’ “community benefits”
- Increased enforcement of hospital and insurer price transparency requirements
- Removal of uncompensated care payments from Medicare and replace them with inflation-indexed payments based on share of charity care and non-Medicare bad debt
- Elimination of the current graduate medical education (GME) funding formula in favor of discretionary grants
“The key to reforming hospital financing is reversing or limiting government policies that inflate costs, prices, and spending without accountability to consumers. It means targeting subsidies based on need, rewarding efficiency, and reforming structural distortions that emanate from government programs,” the report concludes.
The American Hospital Association (AHA), in a rebuttal blog post published Thursday afternoon, said Paragon’s report “relies on a long list of distorted and debunked arguments” and that its recommendations would lead to hospital closures.
The group said removing fixed costs from Medicare margins “is particularly misleading,” as is comparing cost growth in labor-intensive clinical care to inflation in the price of commodities like “cars, TVs or clothing” or other sectors like airlines and hospitality that “can cancel routes, shrink capacity, raise prices based on demand and turn away unprofitable customers.”
“It is clear from this report that Paragon isn’t focusing on the real issues facing hospitals, health systems and clinicians on the front lines of providing care each day, especially when they can curate their arguments to respond to strawman positions that don’t reflect the reality that hospitals and communities face,” AHA Vice President of Research Strategy and Policy Communications Aaron Wesolowski wrote in the rebuttal. “We will continue to set the record straight.”
Cutbacks in hospital funding have traditionally been resisted by lawmakers from both parties sympathetic to hospitals’ warnings of potential closures, particularly in rural and underserved areas. Paragon’s success in promoting the state-directed payment and provider tax restrictions marked a turning point, as hospital lobbying and lawmakers, particularly Republicans, have continued to include hospital-focused policy changes in their discussions on healthcare affordability and federal budgets.
Take, for instance, a March House Energy and Commerce Committee’s Subcommittee on Health hearing in which provider group leaders, including the head of the AHA, were faced with questions over provider consolidation and prices.
Many of the panel’s Republicans signaled their support for measures to address these issues, including site-neutral payments and price transparency enforcement. Democrats, meanwhile, generally pushed back against reductions to hospital funding in light of the OBBBA’s to-be-enacted cutbacks.
The House Ways and Means Committee has scheduled another hearing on health systems’ role in healthcare costs and affordability for April 28, with yet-to-be-named health system CEOs.
Editor’s note: This story has been updated after publication with the American Hospital Association’s response to the policy report.
