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Payments to Hospitals Aren’t Going to Hospital Buildings

In keeping with accepted standards in debates on economic policy, we are now getting a debate on Medicare for All that is doing a wonderful job of ignoring the relevant issues. The focus of this debate is what Medicare for All will pay hospitals. As The New York Times tells us, if Medicare for All pays hospitals at Medicare reimbursement rates, many will go out of business.

The reason why this is a bizarre way to frame the issue is that the payments to hospitals are not going to buildings. They are going to pay for prescription drugs (close to $100 billion a year), for medical equipment and supplies, for doctors and other health care personnel. They also pay for hospital administrators, and in the case of for-profit hospitals, some of the money goes to profits. Also, in recent years a growing chunk of the money has gone to buildings, as many hospitals have sought to attract high-end patients by making themselves more upscale than a facility that exists primarily to provide health care.

Anyhow, a serious discussion of payments to hospitals should focus on the costs that hospitals face. There are enormous potential savings on prescription drugs and medical equipment and supplies if the government were to pay for research upfront and allow these items to be sold at free market prices, rather than granting patent monopolies that allow manufacturers of these products to charge prices that are tens or hundreds of times their cost of production.

We could save close to $100 billion a year if we allowed free trade in physicians services (i.e. remove the barriers that prevent qualified foreign doctors from practicing in the United States). We could also save some money on the high pay received by hospital administrators, especially if we reformed the corporate governance structure so that seven and eight-figure salaries were less common. A Medicare for All system also would presumably not be reimbursing hospitals for lavish facilities.

Anyhow, if we are going to have a serious debate on what Medicare for All would pay hospitals then it must focus on the prices and wages that hospitals pay for goods and services. Debating what the government pays hospitals without asking about the cost of these inputs is entirely pointless.

This article first appeared on Dean Baker’s blog.

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Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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