In his wonderful and pragmatic new book, A Giant Leap, Dr. Robert Wachter cautions his professional colleagues that simply confiscating potential administrative and clinical staffing savings created by AI could foster a whirlwind of negative consequences for healthcare enterprises.

Nowhere is the explosive potential for reaction to AI incursions into care delivery greater than in nursing, hospitals’ largest single professional expense category. Hospitals employ more than 1.8 million Registered Nurses (RNs) and another 400 thousand non-RN nursing personnel. RNs alone are more than 30% of the hospital salaried workforce, and more than 40% of overall staff costs).

Nursing productivity is a central issue in overall hospital performance, and a key intervening variable both in clinical quality and patient satisfaction. So the capacity of AI to improve nursing productivity will be a core issue in determining AI’s effect on overall hospital operating performance.

There is clearly room for improvement. Studies have shown that nurses spend only 25-30% of their work hours in direct patient care activities. AI’s potential for alleviating the huge administrative burden damaging nursing productivity might be the biggest benefit AI could provide. AI could materially increase nursing time at the bedside, increasing both patient and nursing satisfaction.

However, AI could also reduce hospitals’ nurse headcount, a factor which could, in turn, reduce nursing union membership, the largest and fastest growing single category of hospital employees’ union membership. Almost 18% of all hospital employed RNs are members of labor unions (AFSCME, AFT Healthcare, National Nurses Union, etc. and their local affiliates). Union dues from nurses represent hundreds of millions in annual income to the unions that represent them.

Nursing unions’ most visible public policy initiative, which appeared first in California twenty years ago, was getting its state legislature to mandate nurse to patient staffing ratios in hospitals. These were designed to compel hospitals to hire more nurses with the intention of improving patient safety. What the ratios actually did was throw more nursing bodies at broken processes and systems. These laws had the important collateral benefit of assuring a “guaranteed income” in union dues from more nurses employed by hospitals subject to these ratios!

Formal (though less comprehensive) mandates for nurse staffing ratios have since spread to Oregon, Massachusetts and New York, with legislation pending in Maine, New Jersey, Pennsylvania. Michigan, Minnesota and Washington State. The research on the intended qualitative benefits of California’s state-mandated ratios confirm the expected benefits to patients, though the studies relied upon correlational analyses vs. states without the ratio mandate, not pre- and post- studies of the ratios’ effects on patient care.

Other studies concluded that the ratios pushed up both RN numbers and compensation vs other job categories as well as damaging hospitals’ operating margins relative to states lacking the mandates. The point-counterpoint of these studies gives one a sense of an issue rapidly becoming politicized.

AI joins other technology enabled initiatives such as telehealth-assisted virtual nursing, robotic medication dispensing and “hospital at home” remote monitoring (which enables earlier patient discharge from the inpatient setting) in threatening to undermine state-mandated nurse staffing ratios.

Nursing unions have noticed the AI threat and sounded the alarm. Consider the National Nursing Union warning: “The hospital industry, in cooperation with Silicon Valley and Wall Street, will use A.I. to further its dangerous effort to displace RNs from the physical care of their patients prioritizing low-cost or free labor over patient needs.”

On the threat posed by remote monitoring, likely to be structured and guided by AI, NNU warned: “This contributes to an ongoing effort by the hospital industry to maximize revenue by pushing care onto less-skilled medical workers, or even non-medical workers in remote settings (for example, the patient’s home). Over time, this will dramatically limit opportunities for nurses to care for patients in a hospital setting.”

Navigating this fraught labor relations and political landscape will impose constraints both on the design and implementation of nursing-related AI applications. AI architects and their hospital administrative partners will win plaudits for streamlining meds administration and eliminating pointless fiddling with the electronic health record ( which consume 30% or more of a nurse’s working hours). Both are sources of burnout and job dissatisfaction among nurses. Freeing up nursing time to spend in direct patient care will benefit both patients and caregivers.

Mistrust of administration and the fear that management will simply pocket the savings from AI-driven nursing productivity gains is what is driving union activism, hence the Wachter warning. One can expect the conditions surrounding AI implementation in nursing to rise to the top of the stack in collective bargaining negotiations as contracts enter the renewal cycle.

In a recent essay on AI implementation, Stuart Winter Tear makes a crucial point about AI: “You are not deploying agents. You are redesigning work”. In this spirit, how one structures the division between agentic action and human labor in dynamic work environments like nursing is the heart of the matter.

This means that the agency of human caregivers in that redesign is crucial to the legitimacy of the effort. If nurses feel their professional world is being restructured by a cabal of (largely male) AI technicians and finance folks, the seeds of a deep and bitter alienation will be sown. Labor management relations could markedly deteriorate, whether the facility is unionized or not

How healthcare executives navigate AI implementation in nursing will be one of the most complex and fraught issues in care delivery the next few years, amplified by the high level of anxiety about AI in the society at large. As Wachter said in Giant Leap: “ When doctors and nurses perceive that autonomous Al is safe for patients and can take onerous tasks off their plates, removing the clinician may go swimmingly. But if clinicians perceive a threat to their income, status, or employment, expect vigorous pushback.” The burden of proof regarding AI’s contribution to improving patient safety and the willingness to share power in AI implementation with direct care providers will rest squarely on management’s shoulders.

Acknowledgements: Bob Wachter, Bruce Vladek and Trevor Goldsmith read this essay and had constructive and helpful comments.

Integrated Medical Campus- After Hours

In 1984, when I worked with Ernst and Young, I was retained by John Casey, the dynamic 38 year old CEO of Presbyterian St Lukes Health System in Denver, Colorado to do a strategic plan for his organization, in collaboration with Ernst and Young. John, who became CEO at PSL at age 30, presided over two aging (and competing) central Denver hospitals eight blocks apart and a community hospital in suburban Aurora. PSL was poorly positioned to compete against Kaiser Permanente, which entered Denver in 1969 and was growing rapidly all over the region.

Building new hospitals in the southern and western suburbs of Denver did not make a lot of sense. There was not enough inpatient demand from all the young people moving into affordable housing and starting families. So we said, “Wny don’t we branch your medical staff’s practices into areas that are short of physicians and bring the services to them!” Surgery and imaging didn’t need to happen in vast buildings with parking problems. They were both portable and fit a much smaller scale.

To do this, we advocated building what we called “integrated campuses” anchored in large medical office buildings but offering 24 hour urgent care, ambulatory surgery and imaging, clinical laboratory, physical therapy and, in a strategic reach, maternity care through LDRP (labor/delivery/recovery/post-partum) units. (The obstetric unit was doomed by a sharp mid-80’s spike in malpractice premiums). The larger the physician group we could relocate to the campus, the bigger the patient population they could care for and the more clinical volumes they would generate.

We modeled these facilities on the complex ambulatory facilities built by central city Detroit’s Henry Ford Hospital in Detroit’s suburbs. These facilities diversified Henry Ford’s large medical group geographically and saved the hospital from the flaming collapse of central city-Detroit during the late 1960’s.

The first of Pres-St. Lukes facilities-Centennial Medical Plaza- was built in SW Denver at the strategic intersection of Arapahoe and Jordan Roads and opened in 1986. Today, it belongs to HCA, and is the home of 100 thousand square feet of medical offices and a 20 bed hospital which opened in 2021.

The team which built Centennial Medical Plaza recognized the potential of this revolutionary care model-today they are called micro-hospitals-and formed a company called Integrated Medical Campus (IMC) to develop this model all over the US (see photo). IMC brought together two veteran medical office developers, Western Skies of Denver and Lee Hughes and Associates of Phoenix with administrators from PSL,as well as architects, facilities planners and finance staff. We had a close relationship with Ernst and Young, both to validate demand for new facilities and to conduct feasibility analyses of the projects.

I was founding Chairman of IMC, my first (and only) experience as a founder. The care model we developed was designed to fill a market gap between freestanding surgery and imaging centers and the small hospital. It targeted underserved populations of 30-50 thousand or more that lacked convenient access to an acute care hospital. We believed that the tiny window of 24/7 services (e.g urgent care) could help keep administrative costs down and enable us profitably to offer ambulatory services at rates far below that of an acute care hospital. The pro formas for an IMC printed money!

Sure enough, IMC’s phones began ringing from all over the West from markets where hospital systems were facing competition from Kaiser but which lacked the ambulatory care network necessary to reach underserved populations. And within two years we were at work all over the west- “Inland Empire” Los Angeles, Portland, Tacoma, and Sacramento as well as metro Cleveland (all Kaiser markets!) and suburban Chicago.

IMC sent multi-disciplinary teams expert in commercial real estate development, ambulatory care administration and planning and facilities design to each market to collaborate with physician leadership and health system planners to create a new layer of care delivery in their markets.

IMC’s developers also worked to create ownership models that offered physicians that relocated to our campuses a piece of the action- not only ownership of their office space but partnership shares in the ambulatory services their practices would generate. We also had the seeds of a property management office to manage the campuses and a practice management subsidiary to manage the practices that leased or owned our office buildings. Soon enough, I was exploring leasing a plane to move our teams around from market to market.

What could possibly go wrong?

Sure enough, we ran quickly into “political” problems on two huge potential projects. In suburban Sacramento and NW suburban Chicago, we found Saudi Arabian sized ambulatory surgery and imaging revenue pools in which to develop. The IMC pro formas gushed black ink. But the leadership of rapidly growing captive salaried medical groups sponsored by our hospital system clients wanted to control the IMCs.

They insisted that specialists like orthopedic surgeons relocating to our campuses join their medical groups and contribute their fees to the groups! Docs that wanted to relocate but remain independent were shunned. And our clients, Lutheran General in Chicago ( now part of Advocate Health) and Sutter in Sacramento could not manage the politics that, basically, ended private medical practice in their community to put competing physician interests together in our campuses.

We had a compelling alternative to relying on hospital sponsorship. GE Capital was intrigued by our IMC model and offered us the chance to finance our projects with debt, where we retained a significant ownership stake. This would have required our IMC crew to abandon the fee-based development model they were comfortable with and build a modern development company.

IMC partners were also divided over whether to structure the new enterprise as a partnership, where the founders collected huge salaries, or as a stock company capable of generating equity through a public offering, and which shared equity with our far flung and hard working field staff and our physician tenants.

I was unable to resolve either problem, and in 1990, I resigned as Chairman with regrets, and IMC split up into several smaller groups. One of them, Lee Hughes and Associates, basically focused on a single client, Glendale Adventist, where IMC had been retained to reshape their campus into a modern, ambulatory-centric space. Another, Health Futures Development Group, continued the IMC-style fee based model. And the Denver based Western Skies Development resumed medical office development in Denver and elsewhere as the regional economy recovered from its late 1980’s oil price collapse. And I retired from consulting, burnt to a crisp by my failed experiment as a founder, older but not necessarily wiser.

The integrated campus model-now rebranded as micro-hospitals- prospered, and became the focus of HCA’s capital investments in the regional markets where it doubled down and became a dominant actor. One of IMC’s most successful campuses, in suburban Beachwood Ohio sold to the Cleveland Clinic in 1995 for a cool $56 million. Another, Samaritan North, created by Health Futures Development Group in the early 1990’s in northwest suburban Englewood,. Ohio grew to over 400 thousand square feet, and sprouted a full service 46 bed hospital called Miami Valley North Hospital.

And IMC’s first client, San Antonio Regional Hospital in Upland California, is now ringed with three IMCs, including Rancho San Antonio Medical Campus in neighboring Rancho Cucamonga. These campuses prevented hospital development in SARH’s home community as well as in explosively growing Rancho Cucamonga, and enabled SARH to remain independent through forty plus years of rampant hospital consolidation in southern California!

Rancho San Antonio Medical Campus

Prevailing policy narratives blame operational inefficiency and merger-induced monopoly pricing power as the main drivers. However, we believe the main driver is the people cost of a complex labor-intensive business. Exhibit I shows wage growth in hospitals since 2003, which does not include the cost of the contracts for physician and nurse staffing from hospitals’ 24/7 care functions. These latter costs grew faster than wages during the past five years.

Exhibit I. Year-on-Year Percent Change in Hospital Wage Bill, Commercial Prices, and All-Payer Prices

Source: Bureau of Labor Statistics

Hospitals labor cost growth is grounded in economy-wide trends, but it is exacerbated by the labor economics of hospitals themselves. Hospitals are places where some of the highest priced professionals in the economy collaborate. People costs—for both employees and contract labor—comprise more than half of hospital operating expenses. When people costs rise rapidly, hospital finances feel the impact almost immediately.

At no time was this more evident than during the Covid pandemic. The most visible manifestation of the pandemic cost crisis was the explosive growth in travel nurse utilization, as temporary workers replaced

permanent staff who resigned during the pandemic. The demand for patient-facing personnel was both volatile and geographically specific, unfortunate circumstances that were exploited by staffing agencies. Contract labor expenses for hospitals were 500% higher in 2022 than before the pandemic and grew to $51 billion during 2023, according to the American Hospital Association. In 2022, average contract labor costs for nurses reached an astonishing $136 an hour.

In addition to contract labor dependence, hospitals relied heavily on overtime, which sharply increased wage bills in 2021 and 2022. Temporary staffing costs have come way down, but, spurred by economy-wide inflation, wages and benefits have reset sharply upward. Job actions and labor strife have also increased.

While hospitals were experiencing labor cost volatility, payment updates both from public and private payers did not keep pace. Hospitals benefited from vital financial support from the CARES Act in 2020. However, that relief diminishedsharply in 2021 and 2022. The labor cost shock only began to be mirrored in commercial price growth in mid 2023, more than three years after the pandemic hit. You can see the timing of this lag in Exhibit I. This delay was due in part to multi-year commercial insurance contracts that kept many providers tied to pre-pandemic prices long after their own input costs had soared. All-payer price growth driven by Medicare and Medicaid payment formulae has been lower still.

As federal CARES Act funding tailed off, the lag in hospital price growth and slack post-pandemic clinical volumes resulted in severe hospital operating losses in 2022 nationwide. Hospitals aggressively sought to improve operating efficiency, but there are limits to how quickly staffing models, workflows, and service lines can be restructured without affecting patient access or quality, or triggering labor actions

It is understandable that Americans struggling with affordability across their household budgets have limited patience for the sustained surge in healthcare costs. But there are no silver bullet policy solutions. The imposition of hospital price caps on commercial patients treat the symptoms—high prices—but ignore the labor cost problem. Price caps will only accelerate service reductions, consolidation or closures, especially in economically fragile communities There is also no assurance that publicly traded health insurers will pass the savings from commercial price caps, which reduce their Medical Loss Ratios, along to their business and government clients.

There are signs that labor costs might be levelling off in late 2025 and early 2026, and with it, hospital cost pressure might be easing. In addressing the longer term hospital cost problem, we believe policy makers need to think about how they can markedly reduce the administrative costs in the hospital revenue cycle and encourage care redesign and team-based staffing, loosen licensure constraints, encourage cross training of clinical personnel, and the use of agentic AI driven digital tools, where it is safe and evidence-based, to bring people costs down. Policies that directly address the main driver of hospital cost growth, rising people costs, need to rise to the top of the policy stack.

Technical Note for Exhibit I: Hospital Wage Bill” represents QCEW data for Total Wages for all non-federal general medical and surgical hospitals (NAICS 6221) “Commercial Prices” represents the Consumer Price Index for Hospital Services. “All-Payer Prices” represents the Producer Price Index for General Medical and Surgical Hospitals. For information on CPI and PPI concerning hospitals see the BLS factsheet “Health Care Services in the Producer Price Index.” For visual clarity CPI and PPI are represented as year-on-year % change in the four-quarter average. QCEW total wages are represented as year-on-year % change in the four-quarter sum.

A single institution shows the breadth and reach of this evolution: New York’s Montefiore Health System. Once basically a tuberculosis sanitarium for New York’s Jewish community which cared for impoverished immigrants from Eastern Europe, Montefiore morphed into a long term care facility for patients with syphilis and other incurable infectious diseases.

As antibiotics cured these diseases, Montefiore evolved rapidly into an acute care facility with a huge successful surgical enterprise and major programs in heart disease and cancer. But Montefiore’s emergency department and community clinics treated more than illness. It treated the community itself, through its Department of Social Medicine. Fundamental insight from their experience: “emergencies” were more than medical, they were social and needed to be treated at the roots.

The past forty years has only heightened the tension between the hospital ‘s role as a business and as a social institution. With financial pressures on hospitals mounting from the Trump Administration’s Medicaid cuts and an Arnold Ventures funded campaign to end cost shifting through state hospital price caps, hospitals are being challenged yet again to redefine their business and reinforce its social mission.

In the late 70’s , it seemed like hospitals were at inflection point. Hospitals were almost 40% of US health spending, and were being blamed for rising cost of care. At the time, policy consensus was to regulate them as public utilities, subjecting them to basically political control.

But the health services market was changing. Both diagnosis and clinical intervention (such as surgery and imaging) were rapidly moving to same-day ambulatory settings. Length of stay was also shortening and both recovery and some forms of longer term treatment, such as dialysis, were moving home. Finally, special purpose financing mechanisms-health maintenance organizations- were emerging that aimed at accelerating these shifts and using market forces to control hospital costs (both reducing admissions and reducing payments).

Source: Jeff Goldsmith, Can Hospital Survive, 1981.

I wrote a book about all this in 1981 called “Can Hospital Survive: The New Competitive Healthcare Market” in which I predicted a significant decline in inpatient use despite an aging population. It was a career defining correct call. After a brief period of rising, hospital inpatient admissions began declining and, with a few short pauses, have continued to decline to this day. In 2026, we have two million fewer hospital admissions than we did in 1980, with a hundred million more Americans. Length of stay has also fallen, and is among the lowest in the world. Outpatient services, including physician care, are now more than half of those revenues and are the hospitals principal product.

Hospitals have more than survived. Whereas they were an $80 billion enterprise in 1978 when I started writing my book, they are now a $1.5 trillion industry. The US hospital industry is roughly the size of the GDP of Indonesia. Whether society can afford for hospitals to continue growing is now the awkward question its leaders confront.

My 1981 prescription for how hospitals should avoid obsolescence has proven troublesome. I argued for a strategy of controlling the pathways that led patients into and out of the hospital, basically by acquiring positions in those emerging markets. This strategy urged hospitals extend their tentacles into the growing parts of the market in order to defend their shrinking inpatient franchise, not to save consumers or employers money.

Source: Jeff Goldsmith, Can Hospitals Survive, 1981

I also urged hospitals to take positions in the health plan market in order to direct more patients into their institutions. This strategy led to the notion of a “payvider” (quick, call the exterminator!), where the motivation was, again, not to save the consumer money but to grab inpatient market share.

To put it mildly, this hasn’t worked out very well. A tiny handful of care providers have defensible positions in their health insurance markets. Many others are marginal players, subsidizing their health plans with “below Blue Cross” payments to their care systems. Viewing these growing markets as a “funnel”, to use a popular dehumanizing metaphor, for propping up declining inpatient services is not merely self-serving, but a financially risky strategy nearing its unmasking.

Far from being “before” care, outpatient services have become increasingly where clinical problems are diagnosed and resolved. Simply pushing the price for these services up every year to cover cost increases is rapidly becoming indefensible. Imaging is a great example of the problem. CT scanning is a mature more than sixty year technology. A CT scan should cost about $150. Yet in a hospital, because of all the acute care overhead, it can be as much as $5000.

These eyewatering prices have engendered a lot of pushback from patients and insurance carriers, and are now being targeted by aggressive policy advocates of “site neutrality” as a form of consumer financial abuse. How successful would Apple’s iPhone be if the company was selling its iPhone 3 for $5000? Apple is selling its iPhone 17’s, basically “super computers” with sixteen billion transistors, for about $1000. The ability to charge $5000 for a hospital based CT scan is coming to an end.

What hospitals have thusfar abjectly failed to do is to plan for the exodus of low intensity outpatient services from their institutions by replacing them with services that you cannot get anywhere else than in the hospital. Expect a lot of focus on this strategy as new therapies for autoimmune and neurodegenerative diseases like Rheumatoid Arthritis, Multiple Sclerosis and Parkinson’s, non-pharmaceutical treatments for Alzheimer’s and new surgical tools like Focused Ultrasound emerge later in this decade. They will, at least, initially be hospital focused, but for how long is anybody’s guess.

Strategy is ultimately about making intelligent choices where to put scarce capital and people resources. The choices are going to be painful, because every service hospitals presently offer will have staunch defenders, both inside the care system and in the community. So hospitals will not only have to make painful choices, but to explain those choices in plain English to their communities. Hopefully, care systems will choose to put their scarce dollars and people behind what they do best and what creates the most measurable value for their patients.

Zack Cooper is an Associate Professor of Economics and Health Policy at Yale University*. He is the academic investigator at the heart of the so-called the 1% Solution, an Arnold Ventures funded project which encompasses most of its health policy agenda. The core idea of the “1% solution” is that while comprehensive health reform (e.g. “Medicare for All”) may not be achievable, pursuit of a bevy of policy goals with smaller price tags could generate savings that could be reinvested in policy improvements.

Cooper was the object of unwanted press scrutiny for receiving extensive sub rosa funding from United Healthcare for research work and writing instrumental in the enactment of the No Surprises Act in 2021, which was aimed at controlling out-of-network health insurance billing. United was expected to be the largest single beneficiary of this legislation. (The biggest “surprise” emerging from the No Surprises Act was that providers are winning 80% or more of the independent mediations of these disputes, suggesting that it was health insurers, not providers, who were gouging the public).

According to Arnold’s 990s, Cooper’s Yale policy shop, the Tobin Center for Economic Policy, received over $5 million from 2018 to 2024. Of this amount, $700 thousand funded the 1% Project itself, including more than a dozen papers by academic colleagues on topics ranging from surprise billing to PBM reforms to site neutral outpatient payment to hospital market concentration.

As part of this project, Cooper and a University of Chicago colleague, Zarek Brot-Goldberg, published a paper in early 2024 of the economic impact of hospital mergers: “Is There Too little Anti-trust Enforcement in the Hospital Sector?” which found that 20% of hospital mergers had an adverse economic impact on their communities. The alternative off-message headline, “80% of hospital mergers had no adverse economic on their communities” never surfaced.

However, a follow on piece got wide circulation thanks to a June, 2024 Wall Street Journal article, which exposed it to millions of readers without any reference to Arnold Ventures funding. The paper, which featured an astonishingly complex multivariate econometric model, was originally published by the National Bureau of Economic Research (NBER is also funded by Arnold Ventures). This paper linked hospital mergers to widespread layoffs in the communities where the mergers took place and a subsequent wave of suicides and drug overdoses (!).

According to this study, the 307 hospital mergers Brot Goldberg and Cooper analyzed from 2010 to 2015 resulted in hospital rate increases to commercial insurers of 1.2%. This sad exercise of supposed “monopoly power” (why not a 20-30% increase if you “owned” the market?) was not sufficient even cover a merger’s transaction costs (legal, accounting and bankers fees, consulting services, etc. typically amount to 3-5% of the revenues of the merged enterprise) , let alone generate free cash flow for the merged entity.

The hospital merger-related increases authors found were adding to a health benefit expense that was about 9% of total employment cost in their employer sample. A 1.2% premium increase in an expense that was 9% of payroll raised employers’ compensation costs by less than a tenth of a percent.

Yet, according to their model, this tenth-of-a-percent increase in compensation cost somehow triggered a wave of layoffs in the community where the mergers took place. The mergers in the study took place during a time period (2010-2015) immediately following the Great Recession of 2008, during which layoffs soared nationwide. Unemployment did not return to pre-crash levels until late 2017!

Econometric models such as the one in this study do not establish the direction of causation. Rather they infer it from correlating supposedly independent factors. The study did not control for the impact of the catastrophic economic downturn on the affected (mostly urban) communities or account for the potential role of the Great Recession’s in causing the hospital mergers. Rather, by association, the study chose to blame the victims. There was no control group of employers in communities that did not experience a hospital merger or did not have a hospital at all.

Authors also did not control for the other ways that employers typically respond to employment cost increases, such as raising their prices, reducing costs other than payroll, or most importantly, increasing patient cost sharing. Employees with high deductible health plans increased six-fold in the aftermath of the Great Recession according to KFF .

Straining credulity to the max, the merger-induced layoffs were extrapolated to have caused over 10 thousand deaths of despair (suicides and drug overdoses) nationally in communities where hospital mergers took place. No effort was made to control for other potential causal factors of those deaths - the arrival of fentanyl in the community, business closures, big increases in patient cost sharing and household financial trauma stemming from the recession.

Another crucial missing control group: communities where, instead of merging with an out-of-town health system, the hospital simply closed. Hospitals are often the largest employers in their communities. The layoffs resulting from a hospital closure, both of hospital employees and suppliers/contractors, would have dwarfed any layoffs that “resulted” from keeping the hospital open. The lack of hospital access would also almost certainly have had measurable effects on the mortality rate of the surrounding community.

As a sociologist and management consultant who spent more than forty years trying to help hospitals remain independent, I can say that only economists with an agenda could have constructed this garish, neon-lit throughline from hospital mergers to layoffs to suicides and drug overdoses. Economist Uwe Reinhardt had a term for statistical manipulations of this kind. He called them “siffing”, which stands for “structuring information felicitously”.

What Arnold Ventures did with this study was fund a headline: “A New Study Found Hospital Mergers Caused a Wave of Layoffs and Deaths in their Communities”. That is more than four dangerous words. We have found numerous examples of distorted findings in other Arnold funded studies.

With a foreign policy-oriented Republican in the White House and a Republican controlled Congress, an Arnold Ventures health policy agenda heavy on price controls and tighter government regulation seems unlikely to be implemented in the next couple of years. However, with health costs on the rise, and three more years of academic studies from elite University faculty flooding the zone, Arnold’s health policy agenda will be front and center for the next Democratic Congress or White House.

Arnold’s patient discipline, combined with his billions and sophisticated political action committee efforts, will unleash a fresh wave of technocratic policy solutions on our healthcare system, physicians and patients alike. Whether actual evidence supports this agenda won’t matter all that much!

Author gratefully acknowledges the financial help of the Federation of American Hospitals, in analyzing the paper discussed above. (You can read a more detailed analysis of this study here).

It has happened at least a dozen times. I mention John Arnold and am greeted by knowledgeable healthcare colleagues with a blank stare. Houston billionaire John Arnold is the most powerful man in US healthcare that nobody has ever heard of. An investing savant, Arnold made $50k in high school trading collectors’ hockey cards over the Internet. He became the star natural gas trader at Enron in his early twenties. Arnold, who played no role whatever in Enron’s storied collapse, left the company in 2001 with an $8 million bonus. In 2002, at age 28, Arnold founded a hedge fund, Centaurus Advisors, focusing on energy investing, and reeled off a decade of 100% annual returns.

Bored with investing and by then a multi-billionaire, Arnold shut down Centaurus in 2012, and decided to change the world. With his Yale trained attorney wife Laura, John created a family foundation. and funded it with a large share of their personal wealth. For reasons we will explore more fully below, in 2019, Arnold converted their foundation to a ”for-profit charity” known as Arnold Ventures. At nearly $4.7 billion in assets in 2024, Arnold Ventures was about a third of the size of the lions in foundation world, Robert Wood Johnson ($14.7 billion in 2023) and Ford ($13.7 billion in 2024). Arnold Ventures 501c3 grantmaking subsidiary gave away a cool $194 million in 2024 to a bewildering array of grantees from American Enterprise Institute to Families USA.

But Arnold’s business model is fundamentally different than these legacy charitable foundations. Arnold Ventures, the parent, is a for-profit enterprise with limited financial disclosure requirements. It has two main subsidiaries, the Laura and John Arnold Foundation, a traditional 501c3 and the Action Now Initiative, a 501c4 non-profit, which funds community- based policy advocacy. Arnold’s for-profit parent makes political campaign contributions and funds class action lawsuits against policy targets, which funding is not disclosed as to targets or amounts. Thus, Arnold Ventures is actually closer to a diversified political action committee/public interest lobbyist with a focused policy research agenda than it is to a traditional foundation. As Arnold himself said in defense of the flexibility their structure creates: “If we want to attack an issue, we will do whatever it takes.”

Arnold Ventures has an audacious policy agenda spanning a broad range of domestic issues: criminal justice, housing, nutrition, infrastructure development (e.g. pipelines and the electrical grid), substance abuse, tax policy, education, retirement policy and healthcare. Some of its earliest advocacy was on behalf of charter schools, but also research integrity, through the Reproducibility Project and the Center for Open Science, seeking to determine if research findings are actually real, or whether commercial interests have filtered what reaches the public from the laboratory bench.

It is difficult to pin Arnold’s agenda down on the ideological spectrum. Arnold was a major donor to both Obama campaigns and has seemingly gone to ground during the Trump era. While Arnold’s agenda is broadly progressive, advocating for heightened government activism, Arnold’ advocacy has also funded projects at American Enterprise Institute, Oren Cass’s libertarian project American Compass and Brian Blase’s Paragon Health Institute. You can find all of Arnold Ventures 990s listing their research funding activities here courtesy of ProPublica.

However, its sprawling healthcare agenda appears to consume a large fraction of its project funding. In 2017, Arnold hired Mark Miller, who was for fifteen years Executive Director of MedPac, the Congressional policy advisory body overseeing the Medicare program. Miller brought with him what used to be called a primo Rolodex of contacts in the health services research community, and has dedicated the last eight years to showering his colleagues with Arnold Ventures funding. The biggest beneficiaries of Arnold’s health policy funding reside, not surprisingly, at the nation’s elite Universities.

ARNOLD VENTURES HEALTH POLICY GRANT ACTIVITY AT SELECT UNIVERSITIES 2020-2025

Source: ProPublica Non-Profit Explorer, 2026

The short list of health policy experts Arnold has funded is star-studded: Michael Chernew (Harvard University and current MedPac Chair) , David Cutler, (also Harvard), Jamie Robinson, (UC Berkeley), Paul Ginsberg and Glenn Melnick (USC), Larry Casalino (Cornell), Amy Finkelstein (MIT), Gerard Anderson and Ge Bai (Johns Hopkins), Roslyn Murray and Chris Whaley (Brown), and Zack Cooper (Yale). As one of these distinguished researchers said to me when asked about what Arnold was looking for, “If you want to make war on the medical-industrial complex, Arnold is your man”.

A longer list runs into dozens of younger and less well known health research scholars that represent the next generation of movers and shakers in health policy. Arnold’s reach is broad enough to exert a pervasive influence on the pool of peer reviewers of health policy papers for major journals such as JAMA, New England Journal of Medicine and Health Affairs. As a refugee from academia, I can tell you that you have to work hard to name leaders in health services research who have not been funded by Arnold.

In the spirit of vertical integration, Arnold has also generously funded an impressive array of healthcare foundations, non-profits and media outlets that publicize Arnold funded findings: Health Affairs, Kaiser Health News and the Kaiser Family Foundation, Academy Health, ProPublica, Third Way, the Rand Corporation, the National Bureau of Economic Research, the National Association of State Health Policy, Altarum Institute, Brookings Institution, the Health Care Cost Institute, the National Conference of State Legislatures and the Lown Institute.

These organizations are key parts of the Arnold policy “ecosystem”, because they both amplify and legitimize the writings of Arnold Ventures grantees and/or organize conferences where Arnold funded experts gain access to general media. You pretty much have to have been hiding under a rock to avoid being showered with Arnold Ventures-funded content, often without attribution, in the well-orchestrated post-publication media coverage!

In referring to his early work on scientific integrity a decade ago, Arnold posted on X, “’A new study shows’ . . . are the four most dangerous words.” Yet in its own policy agenda, Arnold seems keenly aware that “A New Study by .. . elite University scholar name goes here . . .” is an almost irresistible publicity magnet. By attaching elite university investigators’ brands to its policy agenda, it has followed the classic progressive playbook.

We take a closer look at how this process works in Part II of this Report.

Turns out, UNH’s market capitalization trajectory presaged the collapse in UNH’s 2025 cashflow. UNH’s projected cashflow from operations is now expected fall to be half of its 2025 forecast- a breathtaking $16 billion shortfall. In multiple investor calls, the new/old CEO Stephen Hemsley and his new crew have not come remotely close to explaining where the $16 billion went. Struggling UnitedHealth Group is one gigantic smoking black box.

2024 was a nightmare year for the company, beginning with the massive Change Healthcare cyberattack in February and concluding with the brutal killing of their senior health insurance executive, Brian Thompson, in November. It is clear in hindsight that business fundamentals for UNH’s health insurance and care delivery businesses deteriorated sharply during 2024, and its senior leadership were scrambling to repair the damage.

Health insurers across the country are experiencing record operating challenges. However, UNH’s business model enhanced their vulnerability. UNH had spent $118 billion in just five years (2019-2023) buying profitable smaller companies, almost all of which ended up inside of their enormous Optum subsidiary. These acquisitions included: multi-specialty physician groups, ambulatory surgery and urgent care, business intelligence/business process outsourcing and claims management companies.

These businesses are closely intertwined with United’s legacy health insurance business. In order to reach estimated $445 billion in total 2025 UNH revenues, one has to eliminate $165 billion in intercompany revenue flows (Examples- purchases of services by Optum Health from its consulting arm, OptumInsight, or purchase of health services from Optum Health by United Healthcare, UNH’s insurance business).

The company’s nearly fifty year old health insurance business had been a reliable 5.5-6% operating margin generator. However, in 2025, it will produce only a 3% operating margin. However, UNH’s incremental revenues and earnings growth for the past decade have not come from health insurance, but have been produced by Optum, whose revenues were growing much faster than its health insurance business.

Several pieces of Optum have also been far more profitable than United Healthcare itself. Optum Health grew into a $100 billion business (before eliminations), and used to earn an 10% operating margin. In 2025, that margin will be more like 2.5%. Optum Insight, a $19 billion business (before eliminations), which used to earn a sizzling 28% operating margin will be lucky to earn 8% in 2025. The complex interpenetration of Optum and United Healthcare’s businesses makes it impossible to gauge the seriousness of the company’s operating problems.

Optum Health appears to be a major source of the smoke, but it is impossible to tell from the skimpy disclosures where exactly the fire is. In its October 28 conference call, Patrick Conway, the new CEO of Optum, said that Optum Health is $6 billion below expected earnings for 2025, the largest single acknowledged culprit in the big earnings miss.

Optum Health was constructed over twenty years out of acquisitions of large sophisticated regional multispecialty physician groups like Health Care Partners, Everett Clinic, Atrius, Reliant and Kelsey Seybold. These groups had extensive experience with managing capitated risk. These acquisitions had brought UNH what was in 2024 $23 billion in “premiums”, e.g. capitated revenue - from insurance competitors with United (like Blue Shield of California, Blue Cross of Massachusetts, etc.). It looks like “premium” revenues to Optum Health from these United competitors fell by almost $3 billion in 2025.

As Optum Health’s labor and costs rose, these contracts were likely not renewed at rates which covered the rising expense of the large practices. Since many of these elite managed care actors have been at the game for thirty years, they have probably run out of “efficiencies” such as reducing hospitalization rates or shifting surgery to ambulatory settings to lower their costs.

Other issues have arisen with the huge network of private practicing physicians that wrap around Optum’s employed groups. Perhaps 80 thousand of the 90 thousand physicians United bragged about “controlling” are not actually employed by Optum. There were signals in the October 28 conference call about shrinking the non-employed part of the Optum Health networks, presumably to get better control over physician behavior. This shrinkage could affect network adequacy and raise patient access concerns if those physicians do not wish to be directly employed by Optum and cease contracting with the company.

Optum Insight’s problems almost certainly stem from the disastrous multi-hundred billion dollar AlphV cyberattack in February, 2024, which not only shook partner confidence in Change’s management but likely cost far more than the $3 billion in direct costs United acknowledged as part of its 2024 financial disclosures. Integrating the dozens of IT service applications acquired in the big Change/Equian/naviHealth rollup into a secure and coherent business was easily a five year project had the company not been experiencing the organizational chaos stemming from the attack itself.

Change’s security failure cost it not only United cash and credibility but likely dozens of customers who found they could work with competitors like Waystar or Cotiviti with less hassle and fewer security concerns. Optum Insight’s other major growth business, Optum 360, its business process outsourcing service, lost a major customer during early 2024 (St. Louis-based SSM Healthcare) and has reportedly had great difficulty delivering a coherent product to other customers.

UNH’s October 28 investor call also raised questions about the core health Insurance business’s challenges. United underestimated medical cost growth in its contracts by $6 billion in 2025. Millions of “unprofitable” United subscribers are going to find themselves looking for other carriers. How the company will manage a 10% reduction in its industry-leading 10 million person Medicare Advantage enrollment is not clear. A lot of seniors who bought in to United’s MA offerings through its long collaboration with AARP are going to find themselves on the street, facing fewer choices. higher premiums and fewer perks.

United apparently will also be exiting a number of state Medicaid programs, as the OBBBA federal Medicaid “reforms” continue shrinking their Medicaid enrollment. They also told investors in October to expect a 2/3 reduction in United’s Health Exchange enrollment in 2026. One suspects that United will try to blame hospitals for some of these evictions. But because sterling health systems like Mayo Clinic, Johns Hopkinsand the Mass General have shown UNH’s Medicare Advantage individual plans the door, it is going to be hard to shrug off the “second class networks” label.

The nearly 14% decline in UNH’s stock price since its October 28 call reveals a lot of investor skepticism about the company’s prospects. The company’s biggest problems may not be operational or political, but rather an absence of transparency.

What would help:

- Disclosures of MLRs for each of their major insurance market segments (MA, Managed Medicaid, Exchange and Commercial), as well as the utilization trends that drive them.

- How much Optum or health insurance profits are generated by intercompany charges as opposed to contracts with external actors (including United competitors).

- How much of UNH’s earnings are due to acquisitions or sales of businesses that are accretive to earnings vs the result of operations.

- Details on UNH overhead, which is extensive given its 400 thousand employees, and is presently intermingled with intercompany eliminations.

Absent far more operating details, calls to break up the company will likely grow louder. How long it will take Hemsley and his new crew to put out all the fires as well as address demands for transparent disclosure of its operating problems remains to be seen.

My career goal leaving University of Chicago in 1973 with the ink still drying on my PhD. was to become OMB Director in a future Democratic White House. My graduate advisors, two of which worked in Bureau of Budget/OMB under Johnson and Nixon respectively, told me that I couldn’t just go to Washington and “work my way up”. I’d have to find an ambitious big state Governor who could be President and become indispensable to them.

There were three promising Democratic Presidential candidates in mid-1973 that met this description: Jimmy Carter in Georgia, Jerry Brown in California and Dan Walker in Illinois. Carter was fully staffed. Jerry Brown wasn’t hiring ( I got a nice turndown letter from Brown’s Chief of Staff Gray Davis). But Walker hired me (into his Budget Office). It was a thrilling two and a half years. I flew back and forth from Springfield to Chicago’s lakefront Meigs Field on the Governor’s King Air (Sometimes alone! Sometimes with the Governor).

I was a jack-of-all-trades. I wrote speeches, drafted legislation, conducted investigations of challenging problems and became increasingly involved in the fight with the Democratic Machine in Chicago over the Crosstown Expressway (which we killed) and its disintegrating public school system (which continued disintegrating). I spotted a giant hole in Mayor Daley’s City of Chicago budget, which blew up three years later into a serious financial crisis. My special skill, much appreciated by Walker’s political aides, was inventing elegant post-hoc policy rationales for decisions made for completely political reasons.

By mid-1975, it was clear that my Governor was not going to be President. It was also clear that I was not going to be an effective White House aide. I had too much free floating aggression (which didn’t seem to hamper Rahm Emanuel). I also hated being knifed in the back, which seemed to be happening with increasing frequency. So I put out my traplines, and got a welcome referral from an influential friend at the University of Chicago, who put my resume on the desk of the incoming CEO of the Medical Center, Dr. Daniel Tosteson, late of Duke University.

After escaping the University of Chicago just three years earlier, it was odd and disorienting to land back at the University “on the other side of the street” - Ellis Avenue- where the other half of the University was- its sprawling medical center. Tosteson was a brilliant academic entrepreneur. However, he was also a basic scientist with no prior healthcare management experience who was asked to run a 700 bed urban academic health center serving Chicago’s south side.

Tosteson was expected to rebuild a medical center that was physically, programmatically and managerially obsolete. Its major economic problem: 31% of its patients were Medicaid and another 13% (!) had no health coverage. Plus the State of Illinois was in the midst of the first of what would be three serious recessions brought on in major part by the disintegration of Chicago’s huge industrial base. We were not in a sustainable position. And also, we were an almost completely white (and arrogant) institution in an overwhelmingly black and poor (and immense) inner city community.

I grew up in a snooty, completely white suburb of Portland Oregon. I had been in a hospital exactly twice (being born in one and had my tonsils removed at age 11 in another). That was it. I knew nothing whatsoever about medicine, biomedical science, healthcare finance, or urban poverty.

Straightaway, Tosteson asked me to help him with recruitment. He needed an aggressive young finance chief. This was after discovering that the Medical Center’s finances were being run by a 73 year old retired general surgeon who did the budget and tracked financial performance on an abacus (no kidding!). I helped recruit a brilliant 34 year old Deputy Associate Director of OMB, who was responsible for budgeting for all the national security/defense agencies under President Gerald Ford. His name was David Bray, who eventually became the head of the hospital. David also had not one minute of health care experience, but was a quick learner. David and I became fast friends, and a team. David hired a bunch of impressive, thirty-something direct reports, one of who was Anthony Speranzo as hospital CFO. Speranzo eventually became the legendary finance chief for Ascension Health.

My main job was to figure out how to prevent successive Medicaid funding crises from destroying our place. We suffered almost four months of a Medicaid payment strike, where the State simply did not pay our bills. And then Medicaid decided that following Medicare’s “cost-based” reimbursement system was no longer required. They converted our nearly 100 thousand Medicaid outpatient and Emergency visits from “cost” to “flat fees”, roughly a 90% reduction in rates, on ninety days notice. Put another way, we were simply devastated by a succession of Medicaid financial crises.

I made a lot of friends on our faculty, however. Three became mentors: Daniel X Friedman, Chair of Psychiatry, David Skinner, the formidable Chair of Surgery and Al Tarlov, Chair of Medicine and Skinner’s bitter rival. Skinner went on to be CEO of New York Hospital and an architect of the Columbia/Presbyterian merger. Tarlov to be President of the Kaiser Family Foundation. Tarlov’s Deputy Chair, Arthur Rubenstein, became Exec VP for Health of the University of Pennsylvania. Their young faculty took me into their labs and ORs and taught me about what they did. I became their leading advocate in administration, as part of a regional growth strategy for their practices to help offset our rising Medicaid losses.

Tosteson was not long for the University of Chicago. He and Bray became mired in a dispute with the President of the University over the University’s excessive reliance on overhead charges from the Medical Center and left for the Deanship of the Harvard Medical School after only eighteen months, leaving his young management team to help yet another basic scientist CEO, Robert Uretz. Bray followed five years later and had a spectacular career as Associate Dean for Administration at the Harvard Medical School. The remainder of us stayed on to work for Uretz.

I also worked with our Board Chairman, Stanford Goldblatt, to shepherd a bill through the Illinois legislature creating a Maryland-style hospital rate setting system over our State Hospital Association’s proverbial dead body. The strategic goal was to use a federal waiver to put a floor under our Medicaid rates, and to obtain increases in Medicare financing to offset our Medicaid losses. We got Governor Thompson to appoint one of our Trustees as Chair of this Rate Setting Board. Then Ronald Reagan became President, and suddenly public utility style hospital rate controls became unfashionable.

We also faced a nearly thirty year accumulation of obsolete physical facilities. Skinner’s recruitment results in a whole suite of new operating rooms and faculty office being built, literally, on a remote corner of the two million square feet of obsolete clinical space. Acres of 1940’s style outpatient clinics and hundreds of 1930’s style two bed patient rooms stood between us and modern operating efficiency.

There ensued a great internal debate among our clinical chairs about which to replace first-beds or outpatient capacity. I was a big outpatient advocate and lost the argument to advocates of a new inpatient bed tower (whose regulatory approvals I helped shepherd through our local health system agency and state certificate of need authority). The 400 bed Bernard Mitchell Hospital opened in 1985 and was more or less immediately obsolete.

This was a multi-billion strategic error because it added more than a decade to the timelag for the creation of a modern ambulatory surgery and imaging facility, which the succeeding Medical Center leadership led by Ralph Muller rectified by building the Duchossois Center for Advanced Medicine, which opened in 1995. The DCAM was the centerpiece of Muller’s successful turnaround of the Medical Center, something that cruelly eluded both Tosteson and his well-meaning successor Robert Uretz.

However, the business case for ambulatory investment did not go to waste. It became the basis for an article I wrote for the Harvard Business Review in 1980 entitled Can Hospitals Survive? It sold 7000 reprints and a generation of healthcare CEOs learned about my work by getting a copy sent to them by their Board Chairs with a note saying “Have you read this?”. The article became the basis for a book exploring the future evolution of a rapidly changing industry. An ensuing flurry of urgent phone calls eventually led me out of my corner of the Medical Center and into the bright shiny world of healthcare consulting.

It seems like five lifetimes (and seven million air miles) ago that I accepted Dan Tosteson’s job offer and came to the University of Chicago. Though I did not realize it at the time, it was a life changing career decision and one that brought exposure to a vast complex industry that touches peoples’ lives at their most vulnerable moments. Medicine is the most complicated thing in the world. If you had told me on November 1, 1975 that I would work in this field for fifty years, I would have laughed, shook my head and walked away to my next meeting. . .

The reality is, as you might expect, somewhat different. The following chart, courtesy of healthcare data firm Trilliant Health, shows that hospitals are truly incompetent monopolists. It shows the correlation between hospital operating margins and market concentration for 2023. The hospitals to the far right in this chart have 100% local market shares.

Source: Trilliant Health Analysis of CMS HCRIS files (Hospital Cost Reports), 2023

Do you see a correlation?I sure don’t.According to Trilliant,the average hospital operating margin in 336 CBSAs (markets) where hospital services are “controlled by a single firm” is -1.7%.This negative operating margin average does NOT include the operating losses on their physician practices, which are not reported on hospital cost reports, so the actual operating losses are likely much great

#marketconcentration #hospitalmergers #healthcaremonopolies

Source: Our World in Data

High Health Spending is a Symptom, Not the Disease Itself

Too many policymakers treat the health system like an enormous black box where money goes in, and health comes out the other end. They assume that if less money is funneled in, the system will somehow optimize itself.

This is a flawed model because the intervening variable between spending and health is a markedly unequal society—one that damages its citizens by neglecting their core needs. In addition to leading the world in health costs, the U.S. also exceeds most comparable nations in suicides, obesity, drug overdoses, homicides and maternal deaths.

The heart of the problem is a misallocation of societal resources. In her book The American Healthcare Paradox, Elizabeth Bradley showed that the U.S. was comparable to peer nations in combined healthcare and social infrastructure spending. However, the U.S. markedly underspends on social infrastructure and support for families (e.g., addressing food insecurity and homelessness, drug abuse treatment, paid maternal leave, etc.) and, in turn, outspends them in health services.

Source: OECD, OECD Data Explorer, Accessed July 1, 2025

This same shortsighted misallocation also occurs inside the health system. For more than two decades, Medicare payment policy has starved the primary care physicians (as well as nurses and home health aides) who help manage patients’ serious clinical risks and keep them out of hospital emergency departments. Medicare, the largest single payer of physician services, has allowed Part B physician payment rates to lag cost increases in medical practice by 55%, and lagged general inflation by more than 30% over the past 25 years. This had the predictable effect of undermining private medical practice and driving physicians into hospital employment or corporate practice funded by private equity firms.

Source: AMA, “Policy Research Perspectives--Physician Practice Characteristics in 2024: Private Practices Account for Less Than Half of Physicians in Most Specialties,” 2025

The result: critical shortages of primary care physicians in both inner cities and rural areas. The Association of American Medical Colleges estimates the U.S. will face a shortage of up to 40,000 primary care physicians by 2036. Overall, the nation could be short as many as 86,000 physicians across all specialties by 2036. A major driver: 23% of all practicing physicians in the U.S., including primary practitioners, are over the age of 65 (36% of practicing psychiatrists) and likely to retire within a decade.

Over the same period, hospitals have filled unmet physician needs in their communities, but at enormous cost. By early 2025, the average gap between a hospital-employed physician’s salary and the revenue they generate, after overhead, exceeded $300,000. Without hospitals, the northernmost 300 miles of the U.S. would be a physician desert (and many of the hospitals would have already closed). Yet, the federal subsidies that hospitals use to offset some of these losses-= facility fees and clinic charges (including so-called “site of service” payments)- are controversial and likely to be reduced by Congress in future years.

OBBBA Will Accelerate This Flawed Investment Pattern

Unfortunately, the recently enacted fiscal 2026 federal budget will worsen the misallocation outlined above. While the legislation leaves Medicare largely untouched, it cuts nearly $1 trillion from future Medicaid spending. Medicaid currently covers about one in four Americans. According to the Congressional Budget Office, funding reductions in OBBBA will result in 10 million people losing health coverage.

This estimate does not include an additional 5 million people who are expected to lose Health Exchange coverage if Congress does not extend the COVID-era enhanced subsidies that boosted enrollment to almost 24 million in 2023. The reduced subsidies are expected to result in a 75% increase in premiums for those who remain enrolled in the Exchange, further reducing enrollment. So together, these Congressional actions could increase the ranks of the uninsured to over 40 million, taking us back to where we were at the beginning of the millennium. Congress is in the process of repealing most of the ObamaCare coverage expansion.

The bill also reduces Medicaid state-directed payments to private Medicaid managed care plans and rolls back provider taxes, which provided funding that states have used to true up inadequate Medicaid payments to hospitals and physicians. Combined with the expected increase in the uninsured population, these changes will add an estimated $443.4 billion in uncompensated hospital care over the next 10 years. Much of that cost will be passed on to employers through higher employer-based insurance premiums.

Critically, OBBBA will exacerbate the structural imbalances in the health system discussed above. Medicaid is the largest payer for substance abuse services in the U.S. At least 1.6 million Medicaid recipients receiving substance use disorder treatment are likely to lose eligibility because of OBBBA’s Medicaid changes, potentially disrupting access to treatment and medications that keep them off opioids. Lives will be lost, and more individuals will end up in ambulances headed for hospitals.

Medicaid is also the largest payer for nursing home services in the U.S. Reduced Medicaid funding will likely push many marginal nursing homes into bankruptcy, making it increasingly difficult for hospitals to place patients who are not acutely ill but are too sick to return home into long-term care.

Likewise, Medicaid is the largest single revenue source for the nation’s 1,359 Federally Qualified Health Centers (FQHCs), which care for more than 34 million Americans regardless of their ability to pay. Medicaid payments account for 60% of FQHC revenues. Combined with the $11 billion in ‘clawed-back’ funding for state and local public health agencies, these reductions will further compromise the public health safety net, leaving hospitals even more isolated as the most expensive providers in their communities.

Michigan is a Microcosm of Health System Balance Issues

Michigan exhibits all of these problems. Both its urban and rural communities struggle to provide adequate social and human services. The result is far lower life expectancies than should be expected in a free and prosperous nation. Life expectancy in Michigan is a full three years lower than that of the US as a whole. Life expectancy in rural and urban Michigan counties is lower than that of Mexico!

Source: County Health Rankings and Roadmaps; Institute for Demographic Studies

In both urban and rural communities , the hospital has become not only the largest employer but also the de facto public health system for the surrounding region. Michigan has the highest hospital readmission rate for Medicare patients in the nation, as unstable patients overwhelm their families and return to the hospital. Not surprisingly, metro Detroit ranks among the highest in the nation for Medicare inpatient admission rates and hospital days per thousand residents. Detroit also has the ninth-highest emergency room (ER) visit rate for older adults in the U.S.

It is tempting—but wrong—to blame the care system for this state of affairs. Overall, Michigan ranks 31^st in the nation in per capita health spending, according to KFF, but 43^rd in “other health, residential and personal care,”the closest category to Elizabeth Bradley’s concept of social infrastructure spending.

By the time a patient reaches the ER, it is too late to fix the underlying health problems that led them there. Poverty and lack of opportunity set people up to fail. Alongside the primary care problem, poor nutrition, family instability, and other social factors increase health risk. People fall through multiple cracks into the hospital, which is open 24/7/365, and mandated by federal law to provide care. Reducing these admissions is one of many ways communities can work with their care providers to contain health costs.

Follow the Money (or Lack of It)

It should surprise no one that states with low payment rates for physician services by commercial insurers—the only possible source of funding to offset federal shortfalls— are struggling with health costs. Michigan’s relative commercial payment rates for physician and clinic services are among the lowest in the nation. Only Arkansas pays less for hospital outpatient services in the U.S.

*Note: The relative outpatient price for AR is nearly identical to the relative professional price, so appears to be hidden in this chart.

If the goal is to avoid expensive hospital based acute care, stinting on physician and ambulatory care payment is the textbook definition of a false economy. These low rates make it difficult for independent physician practices to survive, forcing practitioners into higher cost settings. They also penalize hospitals for moving high-tech procedures, such as joint replacements, into ambulatory settings, where care is quicker, safer and far less costly to employers and patients alike.

Crucially, Michigan had the lowest rate of health spending growth in the nation (4.9% annually from 1990 to 2020). If Michigan’s health costs had grown at the national average annual rate of 5.7% for those 30 years, its health spending would have been $25.9 billion higher, or 26% more. Michigan is also 47^th in hospital profit margins. So pointing to Michigan as an example of out-of- control health spending ignores the national context.

What Can Be Done About These Problems?

Reducing demand for the most expensive services offers the greatest leverage for lowering health spending. Reducing avoidable hospital admissions and readmissions should be the core focus of any effort to improve affordability of care.

First, we must move dollars forward—toward the patients before they become patients. This means providing non-incremental payment increases both from commercial insurers and Medicare for:

· Primary care physicians

· Substance abuse treatment programs

· FQHCs

· Ambulatory surgical and imaging services

We also need to markedly increase payment for mental health services, both in person and virtual, particularly in inner city and rural areas that face severe shortages.

Second, we must advocate for federal policies that take pressure off commercial health insurance rates. This means that employers, public health advocates, physician organizations and other stakeholders must advocate aggressively to reverse the Medicaid “reforms” enacted in July 2025 by Congress before they take effect in 2028.

As written, the new federal budget would cut more than $6 billion in Medicaid funding for Michigan hospitals over the next decade. The costs of these Medicaid reductions will directly affect employers’ health insurance premiums in future years. In addition, employers and providers together must advocate for revisions in the Medicare Part B fee schedule for primary care physicians to prevent further strain on frontline care.

Third, Michigan hospital systems have created extensive care management infrastructure to support both provider-sponsored health plans as well as value-based care risk-sharing arrangements with commercial insurers. Health systems can use this care management infrastructure to help identify in advance, by coordination with FQHCs and primary care practices, patients at risk for hospitalization and address both medication and care gaps to keep them out of the hospital. This will be particularly important for the millions of persons who lose Medicaid or ACA Health Exchange coverage under OBBBA, since the increased cost of caring for the uninsured will increase pressure on private health insurance rates.

A related opportunity is reducing maternal mortality. More than a decade ago, California reduced maternal mortality by nearly half through a structured collaboration between state public health, FQHCs, the obstetrical community and hospitals. They did so by identifying pregnant women at risk and attacking leading risk factors through protocols for physicians to aggressively manage them. The result: death rates rivaling those in the European Union and many lives saved. Michigan is well-positioned to replicate California’s model and save more mothers’ lives.

Fourth, health systems can collaborate with health plans to reduce the administrative overburden that drives up hospital and physician operating expenses and diverts scarce caregiver time into documentation and fiddling with their electronic records. Researchers have found that clinicians now spend as much time documenting care as delivering it. McKinsey estimates that better coordination of health insurance payment processes between payers and healthcare providers could save $265 billion.

Though the recent Change Healthcare cyberattack raised questions about the safety, and thus feasibility, of a single national health insurance claims clearinghouse, standardizing data requirements across payers could still significantly reduce administrative costs.

Today, each insurer has different requirements and payment criteria. Extending “Gold Card” programs (which bypass case-by-case prior authorizations) to entire institutions with thoughtful, conservative care patterns could markedly reduce administrative costs as well as increase available physician practice time. Giving physicians back one day a week for patient care is the most sensible strategy for alleviating the looming physician access crisis.

Fifth, health systems should provide “concierge service” for self-funded employers, helping to resolve payment controversies while coordinating care and improving access for employees at risk of serious health problems.

Health insurance middlemen are too far removed from the point of care to meaningfully affect employer access and costs. Presently, 79% of all businesses with more than 200 employees no longer shift insurance risk for health coverage to health plans. Rather, they retain the risk and hire third-party administrators to manage their health coverage on an “administrative services only” (ASO) basis.

Self-funded employers increasingly feel like second-class customers compared with insurers’ fully insured clients. Several large employers have sued their ASO carriers for poor contract performance. Health systems, where services are actually delivered, have the greatest cost leverage and can help fill this gap, directly addressing employer concerns.

Conclusion

The only way to achieve sustainable cost stability and high-value care is to correct the funding imbalances and poor coordination that drive avoidable health costs. COVID-19 destabilized the entire public health and care ecosystem, which are still recovering from the damage done.

But the underlying society in which the health system operates remains profoundly out of balance, creating both excess administrative expenses and shortages of frontline care—conditions that lead directly to avoidable hospitalization.

This, not inflation or “waste, fraud and abuse.” is the real cause of health system dysfunction, excessive cost and lost lives. Recent federal reductions in public health funding, combined with Medicaid cuts and coverage losses under the recently passed federal budget, will only worsen this misalignment.

Call to Action

These problems will not fix themselves. The major players in the health system must act collaboratively and proactively to address them.

-Health insurers must markedly reduce the case-by-case second-guessing of clinical decisions and reduce the administrative burden they impose on clinician and health facilities. In short, they need to stop practicing medicine by artificial intelligence (AI) algorithm. They must markedly improve payment for front-end health services, such as primary care, ambulatory services, behavioral medicine and community health. And they must pass the resulting savings from these actions onto their employer customers.

-Health systems must move aggressively to use their data systems and primary care cadres to identify and manage health risks before patients end up in the ER. They must identify ways in which AI can improve responsiveness and productivity and consequently reduce their administrative overhead. They must also move aggressively to ease their physicians’ administrative burdens and thereby reduce waiting time for appointments as well as improve follow-up care.

-Legislators and Congress must repeal the ruinous reductions in state matching formulae for Medicaid under OBBBA and reverse the “re-welfarization” of the Medicaid program by making it easier, not harder, for low-income Americans to access. They must stop starving frontline caregivers by reforming the Medicare Part B physician payment system and moving dollars forward toward patients. They must also reverse the catastrophic reductions in public health funding for state and local health departments and FQHCs.

-Self-funded employers should reduce their dependence on third-party administrators for managing their health-benefit cost risks and work directly with local health systems to identify and reduce barriers to care and resolve cost issues quickly and transparently.

-Everyone needs to stop pointing fingers at others and work collaboratively to make care more responsive and affordable. Only through meaningful collaboration can patients and their families get the care, support and answers they need to manage their health risks.

Definitive answers to the question-what is happening to United’s sprawling mass of businesses- are impossible because the company is an $400 billion black box. The main United businesses-health insurance, care delivery, pharmacy benefits management and business intelligence/services- are so intertwined with one another that only United CFO John Rex and a few other senior managers actually know from whence United’s earnings actually flow. What follows is some speculation on the root causes of United’s earnings problem.

First, a major driver of the last two decades of United’s earnings growth has been using a big chunk of its astonishing monthly cash flow (which was approaching $3 billion a month) buying other companies. . This party might be over. United has historically spent about half their accumulated wealth on dividends and share buybacks, that is, paying off shareholders to remain shareholders.

However, a big and undisclosed contributor to UNH earnings growth has been acquisitions, which have occurred in a nearly unbroken string for forty years. From 2019 to 2023, United spent an astonishing $118 billion buying other companies, nearly all of which ended up in Optum. Thanks to great discipline by UNH Executive Chair Stephen Hemsley and CFO-now-President John Rex, United almost invariably bought profitable firms in transactions that were accretive to earnings.

United appears to be running out of accretive transactions. With the dearth of major new transactions, United’s $81+ billion horde of cash and short term investments (larger than Exxon Mobil) is likely to plump up yet more. This will cause folks to wonder why United is raising their rates to employers or shaking down providers for deeper discounts when they are sitting on a growing mountain of cash.

United cannot buy more health insurers (both CIGNA and Humana been for sale for years) because federal anti-trust enforcers will stop them. There are no more accretive risk-bearing physician group deals. Hospitals presently employ more than a third of practicing physicians in the US (a very unhappy state affairs for both parties). But these hospital acquisitions have limited the universe of available physician transactions for United.

United’s passing on acquiring bankrupt Steward Healthcare’s physician group (Stewardship) showed us they are leery of buying hospital owned groups, most of which are losing buckets of money. UNH has also steered clear of investor-owend physician groups like Envision or Team Health that service , ie. . vampire-ize, hospitals. FTC/Justice have raised the red flag about UNH buying home health companies after their two multi-billion deals during the pandemic- LHC Group and Amedisys.

When OptumHealth was a quarter of its present size, just seven years ago, it was a 10% margin business. Since then, OptumHealth’s margins have declined by more than 25%. As cost cutting and multiple leadership changes decimate OptumHealth’s corporate culture, expect a wave of resignations and union activity to sweep through OH’s physician groups, further damaging both Optum Health’s and UNH’s overall margins.

OptumInsight -United’s business intelligence and corporate services business- was nearly a 28% margin business before the hasty and reckless acquisitions of Equian, Change and naviHealth during the pandemic. Now it is a 16.5% margin business. OptumInsight and United were badly damaged by the February 2024 Change Healthcare hack.

Change, which used to process a staggering $1.5 trillion, or one-third of all US medical claims, lost a lot of angry customers after they discovered that Change actually was a steaming mass of poorly guarded and barely integrated roll-ups whose security failures damaged their own businesses’ cash flow and operating costs. UNH would be foolish to buy more data businesses since the Change episode proved conclusively that they cannot run them safely.

So UNH’s two biggest businesses, health insurance and health services, both of which have seen operating margin declines in the last five years, cannot be rescued by more accretive transactions. United remains steadfastly disinterested in owning hospitals. Rather, UNH has worked diligently to surround and cannibalize hospitals.

Second, the kindness of strangers has run its course. One strategic challenge posed by OptumHealth’s growth was that when United bought large risk bearing physician groups like Healthcare Partners, Atrius and Kelsey Seybold, it also bought profitable risk contracts with competitors of United’s health insurance businesses. Nearly $23 billion of OptumHealth’s revenues (more than a fifth) , and likely a higher percentage of its profits, came from large Medicare Advantage contracts with the likes of Blue Shield of California, Blue Cross of Massachusetts, etc.

Since the pandemic, OptumHealth has been experiencing the very same cost problems as all those hospitals-rampant nursing and physician expenses from turnover and temp agencies, supply costs, etc, It is likely that a lot of their “partners” finally said “nyet” to contract increases that would enable OptumHealth to recover those costs.

OptumHealth cannot terminate contracts with competing health insurers without stirring up more bad publicity and possibly triggering anti-trust inquiries. So UNH has serious leverage problems in negotiating with their competitors. Almost certainly, inadequate Medicare Advantage contract renewal rates for its owned medical groups cut OptumHealth MA margins. Those competing health plans are unlikely to make maintaining United/Optum’s margins a priority.

And like the rest of the industry, United awaits further reductions in Medicaid managed care enrollment, and almost certain payment reductions from the new administration. The earnings outlook for Optum as a whole is grim. Long term deterioration in Optum’s margins, which fell from 8.1% in 2018 to 6.1% in 1Q25, have done real damage to United’s overall earnings. Optum’s growth was the principal contributor to United’s remarkable earnings growth. That exceptional growth streak is likely over.

Third, the cold hearted strategy of managing care remotely through AI driven algorithms has reached a point of diminishing returns. In the aftermath of Brian Thompson’s appalling assassination and brutal exposes in STAT and the Wall Street Journal on UNH’s enthusiastic denials and coding practices, some analysts have speculated that UNH may have dialed down the denial machine that was fattening their margins by niggling patients and physicians out of payment for medical services, including for services covered by regular Medicare.

Giving lie to this speculation, UNH’s health insurance margins actually rose in 1Q25, to 6.1% vs. 5.2% for all of 2024. However, claims denials to care providers are killing UNH politically. They will lead directly to a lot more cancelled contracts by providers, lawsuits and continued mediocre consumer satisfaction ratings. United has a minus 12 net promoter score, suggesting that UNH is not delighting the its tens of millions of customers.

We should expect Sir Andrew Witty to stop pretending to be UNH’s CEO and return to England to tend his flock and fly fish. It has been a sorry and unconvincing performance. And the 25% market cap loss after the Q1 earnings call has damaged President/CFO John Rex’s virtually odds-on chances to succeed him. United’s brilliant and reclusive Executive Chairman Stephen Hemsley, who has done a remarkable job of growing this company since he succeeded Bill McGuire in 2006, has a devil of a succession challenge.

The greatest growth story in the history of US corporate health enterprise appears to be coming to an end. I have been a shareholder in this remarkable company on multiple occasions but am no longer, having lost faith in this ambitious managed care project. As we await the Medicaid bloodletting from Trump47 and the unlucky Republican Congress, it is difficult to discern a reason to invest in UnitedHealth Group. Actually turning United from a gigantic pile of acquired healthcare assets into a real business may prove to be an impossible management challenge.

It is hard not to be impressed by the sweep of change, both in the capabilities of the American health system and in health care organizations, over the last 20 years. In the space of a single generation, health services have evolved from a cottage industry into a substantial corporate enterprise. A breathtaking array of new technologies has been added to the hospital's diagnostic and therapeutic capability. Hospitals have also managed-though not always gracefully-the transition to a more ambulatory and community-based model of care.

Through all these changes, the hospital has remained a central actor in the health system -- and despite periodic political challenges, its economic position has significantly strengthened. But this success has come at a terrible price: the increasing alienation of professionals who are the lifeblood of health care and who bear most of the moral risk of the health care transaction.

As organizations have integrated structurally, they have disintegrated culturally. Not merely physicians, but also nurses, technicians, and social workers have seen themselves transformed into commodities and marginalized by the corporate ethos of health services. Professional discontent has intensified as physician practice has become increasingly incorporated into the hospital and as health systems have begun rationing care through captive health plans.

The gulf between managers and professionals -- and even between senior and middle management -- has widened into a chasm. At its peak financial strength and amid a record economic expansion, the health field has grown ripe for unionization. In fact, the labor climate among health professionals has become so hostile toward management that organizing health services could single-handedly revive the dying union movement in the United States.

Some of this tension is a by-product of the pressure to reduce the excess hospital capacity that health systems have inherited. To move from the present concentration of ownership to consolidation of excess capacity will inevitably mean workforce reductions or redeployment. The fact that little actual reduction in hospital workforce capacity has taken place so far doesn't mean that the pressure to cut jobs and improve productivity isn't real and tangible -- or that it won't increase in the future.

But the origin of workforce problems in hospitals and health systems runs deeper than the pressure to consolidate. In little more than a generation, management of hospitals has moved from a passive, custodial, and largely benign "administrative" tradition to an aggressive, growth-oriented entrepreneurial management framework. It's hard to dispute the economic success of these growth strategies. Since 1978, hospitals' net revenues have increased almost five-fold, from $71 billion to more than $350 billion. Despite the challenges of managed care, hospital profitability soared to a record level in 1997.

At the same time, operations -- the critical interface between technology, professionals, and patients- have taken a back seat to deal-making and "positioning" relative to managed care in most executive suites. This migration didn't occur overnight. Over the past two decades, in breathless sequence, hospitals have reorganized, diversified, consolidated, "integrated," built regional health care networks, evolved captive financing vehicles, and incorporated an astonishing array of new technologies and services.

The resulting modem enterprise is often a billion dollars large. Health systems, without realizing it, have grown to the point where they dwarf both the patient and caregiver who must work within them. However powerful their capabilities, many health care enterprises have grown beyond human scale and have lost their focus on the daily life-and-death struggles occurring within their walls.

The focus on growth also has led to a failure to develop or encourage the culture ofoperational excellence needed to run health systems thoughtfully, efficiently, and safely. Only recently have health service researchers begun tallying the cost of using our increasingly complex health system.

In the past 20 years, the hospital nosocomial infection rate has risen 36 percent. Up to180,000 Americans die in hospitals each year of treatment-related causes, and about half those deaths are preventable. Adverse drug reactions are thought to kill 100,000 patients a year in U.S.hospitals. In many metropolitan areas, as much as a fivefold variation in mortality risk for common surgical procedures exists among hospitals, Given our health system's capabilities, the human cost of using it is unacceptably steep.

Most Americans understand neither the magnitude nor the type of risk they run. They believe that some invisible force-the government, perhaps-has created a uniformly high-quality standard that protects them when they use the health system. But the illusion is dissolving, replaced by heightened consumer vigilance.

The variation in quality provides a marvelous strategic segue for managed care firms under siege for allegedly interfering with the practice of medicine and damaging quality of care. The best way for health plans to change their image from consumer adversaries to advocates is to become "transparent" to the substantial quality and cost variation in the nation's health care system. By giving patients both information and economic incentives to select the highest-value providers that pose the lowest risk, managed care plans can help families make intelligent use of the choice they have demanded.

Mastering health care operations and instilling a culture of continuous clinical quality improvement can provide the critical missing ingredient in health systems. Fostering operational excellence is the logical next step in the evolution of health system management. Creating a culture intolerant of avoidable systemic medical error and setting up a collaborative framework for defining what constitutes best medical practice will help reintegrate professionals and managers, specialists and primary care providers, supervisors and caregivers.

After all, as everyone ages, they inevitably use the health system. Efforts to achieve a higher standard of excellence will have measurable benefits for individual patients and for society as a whole. Hospital and health system executives privately applaud the public's increasingly hostile view of managed care -but they fail to see that the same brush tars them.

The American people do not like the new corporate face of medicine. They do not distinguish between for-profit and not-for-profit health care or, amazingly, between managed care plans and provider conglomerates. Americans believe increasingly that money, not meeting their care needs, is thedriving force of the new health care enterprise.

This is not an image problem. It is a reality problem. Addressing it should be an urgent priority for health care managers and trustees. Health care enterprises large and small are stewards of community health. Restoring a human scale and human values to the health system is vital for those who manage our health enterprises. Unless those enterprises can organize to provide measurable value to consumers, and unless managers can unify their organizations to improve the lives and well-being of those in their communities, the management revolution in health services will prove short-lived.

Reconnecting with health care professionals and reconciling professional and managerial values inside hospitals and health systems are essential pre-conditions for creating a safer, more responsive health system.

In late June, 2024, two economists, Zarek Brot-Goldberg and Zack Cooper, from the University of Chicago and Yale respectively, released an economic analysis arguing that hospital mergers damage local economies and result in an increase in deaths by suicide and drug overdoses in the markets where mergers occur. Funded by Arnold Ventures their study characterizes these mergers as “rent seeking activities” by hospitals seeking to use their economic power to extort financial gains from their communities without providing any value.

The Brot-Goldberg-Cooper analysis was a spin-off of a larger study decrying the lack of federal anti-trust enforcement regarding hospital mergers. These two studies used the same economic model. The data were derived from the Healthcare Cost Institute, a repository of commercial insurance claims information from three of the four largest commercial health insurers, United Healthcare, Humana and Aetna (a subsidiary of sruggling pharmacy giant CVS) plus Blue Cross/Blue Shield. HCCI’s contributors account for 28% of the commercial health insurance market.

The authors use a complex econometric model to manipulate a huge, multifactorial data base comprising hospital merger activity, employer health benefits data, county level employment data and morbidity and mortality statistics. This data model enabled a raft of regression analyses attempting to ferret out “associations” between the various domains of these data.

Using HCCI’s data, the authors construct what they termed a “causal chain” leading from hospital mergers to community damage during their study period -2010 to 2015. It looked like this: hospital mergers raise prices for private insurers-these prices are passed on to employers--who respond by laying off workers--some of whom end up killing themselves. So, according to the logic, hospital mergers kill people. Using the same methodology, tha authors argued that between 2007 and 2014, hospital price increases of all sorts killed ten thousand people.

A classic problem with correlational studies of this kind is their failure to clarify the direction of causality of data elements. The model lacked a control group--comparable communities that did not experience hospital mergers during this period--because the authors argued that mergers were so pervasive they could not locate comparable communitites that did not experience them.

The model focused on a subset of 304 hospital mergers from 2010 to 2015, culled from a universe of 484 mergers nationally during the same period. The authors excluded mergers of hospitals that were further than fifty miles apart, as well as hospitals with low census. The effect of these assumptions was to exclude most rural hospitals and concentrate the mergers studied in metropolitan areas and cities. The densest cluster was in the I-95 corridor between Washington DC and Boston. See map below:

According to the model, these mergers resulted in an average increase of 1.2% in hospital prices to commercial insurers, 91% of which were passed to their employer customers in those markets. This minuscule rate increase had a curiously focused and outsized effect--a $10,584 increase in the median employer’s health spending in the merged hospitals’ market.

According to the model, local employers “responded” to this cost increase by reducing their payrolls by a median amount of $17,900, all through layoffs--70% more than the alleged merger cost increase. This large overage was not explained by the authors. Moreover, the layoffs took place almost immediately, in the same year as the merger-induced increases, even though many health insurance contracts are multi-year affairs, and lock hospitals in to rates for that period.

At the end of the “causal chain,” 1 in 140 laid off people in those communities for whatever reason killed themselves through suicide or drug overdoses. By extrapolation, the authors accuse the perpetrators of overall hospital rate increases of killing ten thousand people in the affected communities during seven years overlapping the study period.

Failing the Test of Real World Plausability

It is difficult to know where to begin to unravel this complex web of “associations”. The biggest puzzle is the magnification of impact of a 1.2% “shock”, as the authors term it, to health benefits cost on employers. To put this in in perspective, the 1.2% average price increase is against a health benefit that amounts to about 9%, on average, of the sample employers’ total compensation costs.* So, 1.2% increase of a 9% cost is an exactly one tenth of 1% (.001) increase in employer’s total compensation expense. Payroll and benefits are in turn perhaps 50-70% of an employer’s total operating expense. A one-tenth of a percent increase in employment costs is a mosquito bite, not a “shock”.

The authors’ inferred leap from this micro-increase in employer costs to widespread layoffs is indefensible compared to real world managerial behavior. The authors ruled out the most obvious cost response--cost-shifting to workers by raising their deductibles or copayments- -on the grounds that they found no changes in Health Savings Account enrollment in the sample during the five year study period. After more than quadrupling from 2006 to 2011, growth in HSA enrollment levelled off during the last four years of the study period.

Yet employer cost shifting to workers by raising their out-of-pocket spending limits accelerated during the same period. According to Kaiser/HRET’s annual survey, from 2010 to 2015, the number of workers with deductibles and co-insurance more than $2,000 doubled. Thus, the effects of any commercial health insurance rate increases, whatever their size, were likely shared broadly across the entire covered population in the merger-affected markets.

Most employers facing economic challenges bend over backwards to avoid parting company with productive, experienced workers. And they have a wide range of options to avoid doing so: raising prices, cutting hourly workers’ hours, shifting workers from employees to contractors (dodging benefits expenses altogether), pressuring other suppliers for discounts, improving productivity, finding new customers, and “shrinkflation” in their product (e.g. a half-ounce smaller Almond Joy bar for the same price ). None of these responses were measured or controlled for in the model.

Meager Exercise of Market Power

If an anti-competitive exercise of market power was the goal of the mergers, then an average 1.2% rate increase struck us as a remarkably meager exercise of that power. If merging hospitals were free to charge what they wanted because they had increased bargaining power, why not charge 10% or 20% more after merging? According to colleagues who work in hospital mergers and acquisitions, transaction costs in a merger can run 3-5% of an acquired hospitals’ annual revenues, and the complex transaction itself is a huge hassle.

A 1.2% post-merger rate increase would not even cover the transaction costs of the merger (legal, accounting and actuarial analysis, deal brokers and investment banker fees, systems integration consultants to get their different “instances” of EPIC to communicate and outside experts to assist in operational improvements, etc), let alone yield any actual cash flow to the merged entity.

What Caused the Deaths?

As for the final leap -that one in 140 of the workers presumably laid off by these employer reductions in force kills themselves or overdose on drugs--authors made no traceable efforts to tie these deaths to the companies allegedly laying off workers. Here, in particular, the absence of control groups makes it impossible to determine how much contribution, if any, hospital rate increases or mergers made to the overall upward trend of deaths of despair in the affected communities, as opposed to other similar communities.

The authors did not control for the other factors that lead to deaths of despair in the target communities and that might introduce “covariance” error-- divorces, deaths of loved ones, broad-based declines in employment opportunities, closures of churches, schools, or community based services, declining availability of mental health services or the sudden arrival of deadly fentanyl in the local market.

Remember the authors deliberately oversampled urban markets. Many of the urban counties covered in the study (Cook County-Chicago, Nassau County-Queens, Wayne County-Detroit, Philadelphia County e.gs) are both vast and rife with urban poverty. To tie deaths of despair in those troubled communities to hospital mergers is an egregious case of victim-blaming. The same forces that lead to deaths of despair--the loss of economic opportunity and social support--are the ones harming their hospitals and leading to their mergers or closure.

What Caused the Mergers in the First Place?

I am an expert in hospital strategy. In 1980, I wrote a book called Can Hospitals Survive, which predicted much of the ensuing consolidation in the industry. In my forty-plus year consulting career, I worked for more than a dozen struggling hospitals that wanted to retain their independence. In my nation-wide industry experience, hospital boards and medical staffs do not willingly surrender their autonomy and historical identity unless forced to by economic circumstances.

The reality is most hospital mergers aren’t really mergers at all, they are acquisitions of a poorly performing independent hospital or system by a larger hospital or health system. No less an authority on hospital financing than MedPac Chair Michael Chernew found that higher levels of Medicare funding as a percentage of total predispose hospitals to failure and, subsequently, merger. An excessive concentration of Medicaid and uninsured patients has an even more adverse impact. Cost shifting to employers, and charging those employers more is the only way economically challenged hospitals can recover their losses.

The authors did not measure or assess the role that adverse payor-mix changes played in hospital rate increases, or analyze its role in causing hospitals to merge. They attempted, unsuccessfully in my opinion, to adjust for failing local economies as a cause of mergers, employer layoffs and deaths of despair by excluding low census hospitals from their merger analysis as well as excluding most rural hospital mergers. But many hospitals that are failing are full of publicly funded patients whose coverage pays 85% or less of their actual costs, or of patients with no insurance at all.

Merger or Closure: The Real Choice Facing Communities

Most importantly in my view, the authors made no effort to compare the effects of a merger to that of the loss of the hospital itself. Hospitals are often the community’s largest employer. The authors estimate that merger-induced rate increases raise the unemployment rate in the local market around the merged hospital by perhaps a tenth of a percentage point. By contrast, hospital closure in a rural community can raise the unemployment rate by 1.6 percentage points--that is a sixteen-fold greater effect.

Measuring the unemployment effect in small or large metropolitan labor markets is more challenging but the effects of hospital closure can run into the many hundreds of jobs lost, not counting the “multiplier” effects on suppliers, industry partners and neighboring businesses.

Whether saving these hospitals was worth the price paid by a post-merger rate increase is the real-world policy question. Though this proposition needs empirical testing, I believe that most communities would willingly trade a 1.2% health insurance rate increase for avoiding the loss of their hospital. Excluding the low census hospitals from their regression runs was part of the authors’ failed attempt to avoid discussing this tradeoff.

Regardless of the condition of the mergee, the authors made a whopping value judgment in assuming that that the 1.2% average post-merger rate increase was simply extortion, borne of increased market leverage, not the price paid for continuing that hospital’s operations in the community. The authors also made no effort to measure post-merger service enhancements, such as increased physician retention or recruitment, management or capital improvements or other tangible benefits.

Though some studies the authors cite fail to find cost reduction or quality benefits accruing from hospital mergers, more recent analyses (for roughly the same study period as Cooper’s) found convincing evidence that a stronger operating partner results in a statistically significant drop in costs (-2.5%) per adjusted admission at acquired hospitals, which is consistent with the hospitals gaining economies of scale post-merger. There was also statistically significant decline (-3.9%) in revenue per adjusted admission, which casts doubt upon the 'mergers lead to higher prices' hypothesis.

Adequacy of Hospital Capacity a Pressing Concern

During the 1970’s, federal health policy in United States focused on controlling the supply of hospitals and hospital beds in the US, believing that efforts to fill empty beds were a major driver of health cost growth, then in double digits. At the time of Can Hospitals Survive, 30% of hospitals were already part of systems. Since that time, nearly a thousand hospitals have closed, and the proportion of hospitals that are part of multi-hospital systems has grown to 70% or better. Hospital inpatient utilization measured by hospital days per thousand has fallen by half since 1980.

Compared to the Health Planning statute’s target of 4 acute care beds per thousand, today the US is at 2.3 beds per thousand. The US now has the 26th lowest ratio of hospital beds to population of the 28 OECD countries. During the pandemic, many communities experienced critical shortages of hospital ICU beds, ER capacity, etc. and were housing patients requiring intensive medical services in tents in the parking lot.

Faced with a choice between merging struggling hospitals into larger systems and losing those hospitals--both their service capacity and their employment--through hospital closure, the US does not have a margin of error. If the surviving multi-hospital health systems cannot demonstrate measurable benefits not only to acquired hospitals but also for the communities they serve, there are going to be serious repercussions for the future of Medicare and for the nation’s health.

This leap from a one-tenth of one percent increase in employment costs to widespread layoffs and deaths in the affected markets calls into question not only authors’ methodology but also their objectivity. The most charitable explanation for this odd focus on layoffs is what behavioral economists call “confirmation bias”, the unconscious tendency we all have to ignore data or relationships that do not confirm pre-existing expectations.

Investigators succumbing to confirmation bias tend to find what they set out to find.

A less charitable explanation is that the authors found what their funders (e.g. Arnold Ventures) expected them to find, given investigators’ past research findings and the funder’s desired policy conclusion, that anti-competitive conduct damages local economies and needs to be reined in.

In either case, a rigorous search for actual causes is circumvented, and readers are misled.

Nobel Laureate economics Ronald Coase once said: “If you torture data long enough, it will confess to anything”. That maxim seemed fully relevant to the analysis of merger impacts we have been discussing. In my view as a long time participant/observer of the hospital consolidation process, the authors made no contribution whatever to solving the problem of how to assure access by struggling communities to hospital services, nor making those services more affordable to those communities’ citizens.

Actually working in those communities is a useful antidote against being hypnotized by econometric models. Blaming hospital mergers for damaging their communities’ economies and killing its citizens is not only a gratuitous insult to the involved hospitals and their Boards, it also moves us no closer to a sustainable health system going forward.

The research underpinning this paper was funded by the Federation of American Hospitals, but the opinions expressed therein are the author’s alone. Trevor Goldsmith assisted with research on this paper, and Richard Bajner and Keith Pitts provided insights into the economics of hospital merger transactions.

Insurers Shift Strategy from Sharing Risk with Hospitals and Doctors to Markedly Implicating their “Patients’

After the 2008 recession, employers and their health plans shifted strategy from putting physicians and hospitals at risk through delegated risk capitation to putting patients at risk through higher patient cost sharing.    In the wake of the recession, the number of patients with high deductible health plans nearly quintupled- to over sixty million lives.  By 2024, 32% of the lives in employer-based plans (50% among small employers’)  were in high deductible plans regardless of patient economic circumstances.   

The stated intention of the High Deductible Health Plan movement  was to encourage patients to “shop” for care. In real care situations, however, patients found it difficult or impossible to determine exactly what their share of the cost would be or which providers did the best job of taking care of them.   For an extensive reviewof the literature on how healthcare “consumers” struggle to manage their financial risk, read Peter Ubel’s 2019 Sick to Debt: How Smarter Markets Lead to Better Care.

Employers and insurers,  working together to “empower consumers”,  rapidly shifted “self-pay”  bad debts onto their provider networks.   Some 60% of hospital bad debts are now from patients with insurance.     Instead of “shopping for care”, consumers found themselves saddled with almost $200 billion in medical bills they could not pay, and hospitals and physicians ended up eating most of it.    

This escalating “insured bad debt” problem forced providers to hire revenue cycle management (RCM) consultants to revise and strengthen their policies regarding patient financial responsibility, “revenue integrity” (meaning crossing all the “t’s” and dotting all the “I’s” in each medical claim and making sure care is coded properly )and rigorously monitoring the flow of claims to and from their major insurance carriers. As a result  Many providers found themselves spending 10-15% of their total operating expenses on RCM! 

Medicare Advantage Enables Insurer Market Dominance

The movement from Ellwood’s vision of regionally-based provider sponsored health plans to market dominance by huge national carriers was cemented by the emergence of Medicare Advantage as the most significant and profitable health insurance market segment.    In 2013, Medicare Advantage accounted for 29% of total Medicare spending.  A decade later, in 2024, it was 54% (of roughly a trillion dollar program).   And until a federal crackdown on MA coding and payment policies by the carriers, it was a 5% margin business, significantly more profitable than commercial insurance, ObamaCare Exchange or managed Medicaid businesses.

As Medicare Advantage emerged as the largest health insurance market, it was dominated by a cartel of large publicly traded carriers.  Six publicly traded carriers (United, Humana, CVS/Aetna, Elevance/Anthem, CIGNA and Centene)  accounted for 69% of MA’s 34.6 million enrollment as of November 2024.  Kaiser, the “founder” of the movement, added another 5.5%.   The top two MA plans, United and Humana, account for almost 46% of MA’s enrollment!    Sixty percent of United and CVS/Aetna’s health insurance premium flow and 90% of Humana’s now come from this single program, according to a recent Bank of America analysis.

However, owing to the aggressive promotional activism of consultants and private equity financed “management services organizations”, the median MA plan enrollment is less than 2000 lives (!).  During the 2010’s, Medicare Advantage became an industry in and of itself.    An amazing number of small hospital and physician sponsored plans are fighting over less than a quarter of MA enrollment, and, predictably, losing money on every subscriber (negative 5% margins are typical).  Some communities have as many as forty MA plans competing for their share of this lucrative market. 

The Rise of Machine Driven Managed Care

The huge national carriers rely, in turn, on a complex network of contractors to manage their Medicare Advantage care management and payment.   A shadowy industry populated with billion dollar high tech firms no one in the care system had ever heard of-  with names like Emdeon (now Change Healthcare,), Equian,  MultiPlan (taken private by Carlyle in 2024), naviHealth, Signify and Cotiviti - emerged to service health plans with automated systems to review hospital and physician claims prior to payment. 

These firms used AI driven machine learning to analyze and process the flow of hundreds of billions of dollars in medical claims.   A significant fraction of those claims are denied, either because of data errors in the claims themselves, or because AI rules engines kicked them out for not conforming to constantly evolving  medical necessity criteria.

 Prior authorization, a forty-year-old HMO expense control tool for managing “elective care”, has been augmented by  “prospective pre-payment review” applied after hospitals have admitted and cared for patients and submitted insurance claims.    According to the American Medical Association, each practicing physician in the US is required to submit 45 prior authorization requests for their patients each week.  

Hospitals saw, in some cases, a doubling of claims denials or repricing in just a twelve to eighteen-month period after 2016 based on these automated “prospective” reviews.   This surge of machine-driven denials played a major role in the mysterious 39% plummet in hospital operating earnings seen in 2016 and 2017. 

A key factor in the wave of denials was the increased centrality of hospital emergency admissions as the main gateway to complex and expensive inpatient care.  Upwards of 70% of patients in many health systems are admitted through the emergency room and care is rendered to those patients on an urgent basis.   

With primary care physicians withdrawing from hospital practice, decisions to admit patients to hospitals were increasingly made by employed physicians or physician contractors to the hospital, many of whom are “out of network” with the insurance carriers, and under limited control by the hospitals themselves.     

After-the-fact denials by insurers often result in unexpected higher bills to patients with high deductible plans as well as significant new administrative expenses for hospitals to track and contest the surge of denials. 

UnitedHealth Group Makes its Move

Following the more than decade-long private equity rollup of these care managing tech firms after the year 2000 dot-com/tech stock crash, an amazing percentage of this shadowy sector ended up being owned by a single company.  In a stunning rapid fire $20 billion acquisition spree from 2019 to 2021, UnitedHealth Group bought   Equian, Change Healthcare and naviHealth,     The US Department of Justice unsuccessfully challenged the largest of these transactions-the Change Healthcare acquisition- on anti-trust grounds. 

By the time this blitz was over, United’s $19 billion OptumInsight business intelligence subsidiary was processing one-third of all medical claims in the US with automated claims management software- a remarkable $1.5 trillion in health provider payments a year.   OptumInsight’s largest single customer was United’s health plans-63% of its total revenues.

But OptumInsight’s other customers were competitors of United’s  health insurance business (so much for “vertical integration”).  The RCM Industry , on behalf of physician and hospital providers, and Optum Insight have locked horns in what could be called The War of the Robots- as dueling AI systems fought over the documentation, approval  and payment of trillions of dollars in medical payments.  In the war between Skynet Medical and the RCM industry, patients and physicians have been reduced to mere datapoints. 

COVID produced what proved to be a temporary cease fire in the War of the Robots.  This is because the shutdown of routine care in hospitals during 2020 produced a multi-hundred billion windfall in cash flow for health plans including United’s.  Denying care during a health emergency would have also produced a lot of ugly headlines, so health plans simply turned the denial machine off, according to colleagues in the revenue cycle industry.  Health plans did not want to be socked with a “windfall profits” tax (for exceeding ObamaCare’s statutory medical loss ratio  (MLR) limits.  However, when health plans medical expenses (so-called Medical Loss Ratios, or MLRs) began rising again, the denial machinery cranked up again, and the war resumed.   

Physicians have been collateral damage in this war, because a huge fraction of their available practice time, as much as half of their total hours, is now spent minutely documenting every single clinical decision they make in their electronic health record system, feeding the AI denial machine data. 

Electronic health records were touted as a revolutionary tool for improving clinical productivity. Instead, they have become an all-seeing surveillance mechanism- a 24/panopticon surveilling physician activity of behalf of vast insurance carriers, and depriving patients of direct care time spent with their physicians and other caregivers. 

Skynet Crashes!

It didn’t take more than eighteen  months for the historic Optum roll-up of medical claims management software and services to blow up in United’s face.  On Feb 21, 2024, a shadowy Russian hacker collective AlphV invaded and crippled Change Healthcare’s data systems, shutting down $120 billion a month in healthcare payments.  Only eighteen months into owning all this apparatus, Optum’s data systems were a hot mess, a highly vulnerable mashup of dozens of applications and databases rolled up from the dozens of smaller companies that were part of Change. 

AlphV operatives impersonated a senior Change executive, stealing his login credentials.   The hackers used those phony credentials to find and exfiltrate (e.g. download and steal) about 8 terabytes of health claims information, including personally identifiable health information on 100 million Americans.   Then they deleted Change’s back-up files so they could no longer process medical claims. United paid a $22 million ransom payment to restore their files, but it was stolen by one of AlphV’s members and their systems remained offline for months!  

The effect was markedly uneven depending on where providers were located and who they contracted with. Some hospital systems whose health insurance payers used other vendors than Change saw no economic harm.  Other saw 100% of their cash flow crash to zero dollars and began incurring, in some cases, seven or eight figure weekly operating losses.   Physician practices all across the US were crippled, and owners were putting their payrolls for nurses and physicians on their personal credit cards or obtaining personal loans from their banks.     

The Change outage was slowly restored over a four month period. United/Optum has admitted so far to $3 billion in direct expenses for restoring their data systems.  Lawsuits seeking to recover damages from United for the extra cost of months of submitting and tracking paper medical claims remain unresolved. 

While one hundred million patients and their families experienced violations of their medical privacy, the Change hack revealed a major national security challenge.   Fully one-third of all medical payments and one fifth of US GDP were flowing through a single private company’s leaky pipes.  Foreign hackers have today the capability of reaching into United’s data systems and basically crippling the US healthcare system.  After a scorching May Senate Finance Committee hearing, the US Congress took no action to close this gaping hole in data security for a key piece of US infrastructure.   Skynet Medical is now back in operation. 

Managed Care in the 21^st Century 

A managed care movement which began more than seventy years ago by empowering clinicians to manage care for populations in their communities within a fixed budget has devolved, by degrees, into an increasingly data-driven cash management system run by AI on behalf of vast, publicly traded health care conglomerates. Physicians pay a huge tax in time diverted from patient care, and patients bear an unpredictable and unmanageable level of economic risk for health care over which they have limited or no control.  And a managed care industry dedicated to reducing healthcare costs added tens of billions in administrative expenses to hospitals and other care providers. 

The early stages of this devolution spawned successful, high quality integrated health systems and health plans in some  parts of the country.     However, the last decade has seen a massive consolidation of health insurance in the hands of a small number of immense firms, through the explosive growth of the Medicare Advantage program.    

 In its recent 10Q SEC filing, after complaining about providers’ aggressive coding practices and increasing Medicare utilization, United said, “We endeavor to mitigate these increases by engaging hospitals, physicians and consumers with information and helping them make clinically sound choices . . . “   This helpful “advice” from United’s AI driven claims management system promises to restore United’s lagging earnings growth. 

Clinicians and hospitals are increasing managed by machines, not colleagues and their decisions dictated by algorithms they never see, rather than thoughtful clinical culture and human values.    Dr. Ellwood is likely rolling over in his grave. 

The exemplar, Kaiser Permanente,  damaged its financial position with an ill-considered 1990’s (McKinsey-inspired) push to become a “national brand”.   Today, over 80% of Kaiser’s 13 million enrollment is still in the West Coast markets where it began 80 years ago!  

HMOs Go Public and Roll Up

Two little noticed developments accelerated the shift in power from providers to payers.   One was the movement of provider sponsored health plans into the public markets.   PacifiCare, the most significant hospital sponsored health plan owned by the Lutheran Hospital Society of Southern California, was taken public in 1995.   A subsequent merger with FHP health plan destabilized the newly public company. 

After PacifiCare crashed post the 1998 Balanced Budget Act cuts, and struggled to refinance its debt, it was acquired by United Healthcare in 2005, bringing with it a huge sophisticated, delegated risk contracting network.   United then bought Sierra Health Plan based in Nevada in 2007, including its large captive medical group, its first medical group acquisition.   Following these acquisitions,  United rolled up PacifiCare’s southern California based at-risk physician groups in the late 00’s, and then capped off with its purchase of HealthCare Partners, the largest of all, 2017 from DaVita in forming the backbone of today’s $110 billion Optum Health.    

United’s buying BOTH sides of the delegated risk networks-plan and docs-in high penetration managed care markets is not fully appreciated by most analysts even today. 

It has meant that as much as 40% of Optum Health’s revenues, including almost $24 billion in capitated health insurance premiums, come from competitors of United’s health insurance business.  

However, of greater strategic significance was Humana’s decision in 1993 to exit the hospital business by spinning its 90 hospitals off as Galen.     Humana’s unsentimental founders, David Jones and Wendell Cherry, concluded that the intense physician push back against their growing health plan meant that their two business were fundamentally incompatible, and they chose to retain ownership of the higher margin and less complex business.

Galen hospitals began a lengthy and sad journey through multiple owners-Rick Scott’s ill-starred Columbia/HCA, Tenet, and then multiple others. Today, Humana is the second largest “player” in the Medicare Advantage market, and had a market cap north of $60 billion (until a month or so ago).  

HIPAA Sets Stage for 24/7 Electronic Surveillance of Medical Decision Making

The other little remarked development provided the technical foundation for a payer controlled care system- the Health Insurance Portability and Accountability Act of 1996 (HIPAA).  Up until the mid-1990s, healthcare claims were paper and fax transmitted, costly and unreliable. Though HIPAA is mainly known for its confidentiality protections for patient data, its Administrative Simplification provisions set data standards to encourage electronic submittal and payment of medical claims. 

 HIPAA encouraged the emergence of electronic data interchange through dedicated T-1 lines, hardwired ancestors of today’s VPNs - high capacity, secure physical links between hospitals and their major payers.    HIPAA markedly accelerated the use of electronic data interchange (EDI) in healthcare, to the great advantage of health insurers.  

HIPAA spawned a whole ecosystem of small companies who served as financial intermediaries between health insurers and care providers-  aggregating, transmitting and processing medical claims and paying  providers for their care.  These companies proliferated during the first Internet investment bubble, which began after Netscape’s historic IPO in 1995.   When the Internet bubble burst in 2000, these companies were sold by their private equity and venture owners in an ensuing multi-year fire sale. 

PPO Growth Burns Down the Commercial Rate Structure

While the HMO movement faltered, provider-centric delegated-risk capitation gave way to broad panel “preferred provider organization” (PPO) managed care which paid physicians and hospitals a discounted fee-for-service, and overlaid external utilization controls like prior authorization.  The PPO movement markedly diluted physician economic power.    PPOs were basically an industrialized version of traditional Blue Cross, only without physician or hospital governance input. 

PPO health plans threatened to exclude local providers that did not grant them significant discounts. Independent physicians had zero leverage in this transaction.   Hospitals who discounted their rates in the panic to avoid being excluded discovered that their pricing concessions yielded no growth in volume or market share, just reduced revenues.   This late 1990s pricing panic burned down hospital commercial rate structures in the West and Southwest,  as far east as Chicago, Minneapolis and St. Louis, and accelerated the trend to system consolidation.   

The ObamaCare Festival of Technocratic Enthusiasm

At the same time, Medicare moved aggressively to get providers into a new, less politically inflammatory version of managed care for large regular Medicare market (e.g. the non-Medicare Advantage portion).  The 2010 Affordable Care Act’s main event was to expand health coverage to the working poor through a partial nationalization of the individual insurance market and an aggressive expansion of Medicaid.  This coverage expansion was a huge success, bringing new coverage to 30 million Americans. 

But in a muted afterthought, recognizing continuing health cost pressure, ObamaCare also sought to revive, for one last time, for regular Medicare,  the Ellwood/Enthoven vision of a transformed,  at-risk care system.   Having concluded that the closed panel, capitated integrated care system model could not be reached in a single impossible transformation, as the Clintons attempted and failed to do, it would sow the seeds of capitation through a “managed care” lite model called Accountable Care Organizations.    

 There were two ACO concessions to the post-HMO backlash environment.  First, Medicare patients were not forced into managed care plans (or even told they were in them), and providers would be insulated from downside financial risk for a lengthy period. ACO membership was a statistical construct, not a consensual patient panel; patients would be assigned to ACOs if their primary care physicians participated.   The lack of patient choice violated a key principle of the Ellwood/Enthoven model, in which patients would choose systems of care and reap a financial reward for making the “right choice”. 

 The second was that  providers would continue to be paid Medicare’s fee for service but a shadow accounting system would track ACO spending.  If ACO spending fell below growth in regional Medicare spending, providers would get a bonus.  They would also be required to track dozens of “quality” measures and get a small bonus if they exceeded norms.  The late Uwe Reinhardt pricelessly characterized “value based payment” as “fee-for-check-the-box. . . for tips”- .  ACOs unfolded as managed care without the risk, training wheels for a later shift to capitation.   

Large commercial health plans serving employers shadowed the Medicare ACO program, taking advantage of yet another hospital pricing panic based on deeply discounted rates.   Many of the plans offered under ObamaCare’s insurance exchanges were of this type.   While it was assumed by providers that commercial ACOs would move rapidly toward true delegation of risk, a decade on, the risk mysteriously has not passed over to providers, who have spent at least $10 billion preparing for ACOs.  Physician time in helping manage ACOs and in minutely documenting all those “core measures” is invariably costed at “zero”. 

If one counts the bonuses paid out to successful ACOs, the cost overruns by the ACOs that missed their cost targets on the high side, and the cost to Medicare of setting up, administering and monitoring them, the program has yet to reach breakeven.  Paid out bonuses tended to be highly concentrated in those fortunate ACOs operating in high Medicare cost markets.  To no one’s surprise, physician-sponsored ACOs (facilitated by a lucrative  industry of organizers and contracting consultants) have  decisively outperformed those sponsored by hospitals.   

Today, perhaps 14 million regular Medicare beneficiaries are  in some form of ACO, largely without their own knowledge.  MedPac has characterized Medicare’s ACO program as a “disappointment” and a recent NEJM article by a former head of the Center for Medicare and Medicaid Innovation (CMMI)  found that only 5 of the 59 payment experiments by the agency had actually saved Medicare money.  If the ACO was intended as a bridge to a “multiple Kaisers in regional markets” health system, it is a bridge to nowhere.  

However, as an “industry”, the ACO movement has been an incredible success.   The post-ACA push to ACOs created one of the most lucrative consulting franchises in the last forty years.  Wags said ACO stood for “Awesome Consulting Opportunity”.   And private equity facilitators of ACO participation such as Evolent, Aledade, Agilon and Privia have unicorn level market caps and are being shopped by private equity owners and bankers  to would-be healthcare disrupters.    To echo a Wall Street wag, one wonders where are the patients’ and physicians’ yachts. 

All the while, the untransformed regular Medicare program has been eclipsed by Medicare Advantage, which employed private health plans to organize and manage Medicare services for, what is today, well more than half of Medicare’s 66 million beneficiaries.    This program has been captured by a handful of large commercial insurers- two of whom- Humana and United Healthcare-  comtrol almost half of MA’s 33 million beneficiaries- and is by far their most profitable line of business.  

Actual Capitated Risk for Providers has been in Scarce Supply

However, these large commercial carriers have been disinclined to share their risk (and profits) with care providers.   Moody’s Investor Service  found that the median US hospital received only 1.7% of their revenues from capitation, and another 1.1% from “two-sided” ACO style risk in 2020, up from 1.1% and 12% respectively in 2016.  

Hospital Revenue Sources:  Median Values

 Moody’s Investor Service, 2021

By 2013, capitation as a percentage of primary care office based income had fallen to only 5%  from 15% mid the previous decade, according to HHS analysts.   Current two sided risk  income for physicians is unknown to this analyst, but is believed to be negligible. 

Stay tuned for Part III of this Managed Care History where we focus on the transformation of managed care into a machine and algorithm driven surveillance system for physicians and hospitals. 

Phase I- Health Maintenance Organizations and Delegated Risk Capitation

In response to a long run of double-digit health cost inflation following the passage of Medicare in 1965, the Nixon administration launched a bold health policy initiative- the HMO Act of 1973- to attempt to tame health costs. The Nixon Administration intended this Act to provide an alternative to nationalizing healthcare provision under a single payer system, as supported by Senator Ted Kennedy and other Democrats. 

 The goal of this legislation was to restructure healthcare financing in the US into risk-bearing entities modeled on the Kaiser Foundation Health plans- a successful group-model “pre-paid”  health plan founded in the 1940s and based on the Pacific Coast.   These plans would accept and manage fixed payments for a defined population of subscribers, and offer an alternative to what was perceived as an inflationary, open-ended fee for service payment system.    In varying forms, this has been the central objective of “progressive” health policy for the succeeding fifty years. 

The HMO Act of 1973 provided federal start-up loans and grants for HMOs, much of which went to community-based healthcare organizations and multi-hospital systems.    It also compelled employers to offer HMOs as an alternative to Blue Cross and indemnity insurance.     While a few HMOs either employed physicians directly on salary (staff models like the Group Health Co-Operatives), or contracted on an exclusive basis with an affiliated physician group (like Kaiser’s Permanente Medical Groups), many more delegated capitated risk to special purpose physician networks- Independent Practice Associations (IPAs)- whose physicians continued in private medical practice. 

By 1996, according to the Kaiser/HRET Employee Benefits Survey, HMOs covered 31% of the employer market (roughly 160 million employees and dependents), and the federal government had begun experimenting with opening the Medicare program to HMO coverage.   The impact of HMO growth on overall US health spending remains uncertain, because health spending as a percentage of US GDP continued growing aggressively during the next fifteen years,  before levelling off during the mid-1990’s around the Clinton Health Reform debate.

Two things brought the HMO movement to a crashing halt in the late 1990’s.  One was a political backlashfrom workers and their families who were simply assigned to HMOs by their employers, rather than choosing them themselves.  This unilateral assignment violated a fundamental principle of HMO advocates like Paul Ellwood, who championed consumer choice as an organizing principle of the movement.    

Employees and their families so assigned found their access to care narrowed both by limited panels of providers (that may or may not include their family physicians) and by the mechanical application of medical necessity criteria to their care, such as 48 hour hospital stays after a routine obstetrical delivery.    Women, who are the pivotal actors in managing their families’ health and were growing increasingly confident of their political influence, went ballistic. 

The other political force that helped quash the HMO movement was angry pushback from physician communities, particularly specialists, who bitterly resented the invasion of their professional freedom by prior authorization and medical necessity reviews, as well as pressure to reduce their fees in order to be included in HMO networks. A major concurrent financial blow to HMOs was a sharp downward adjustment in Medicare payment rate for health plans in the Balanced Budget Act of 1998. 

By 2014, HMO’s share of the total commercial market had shrunk to only 13%, well less than half of its peak. They were replaced by preferred provider organizations, broad networks of physicians and hospitals in a region operating under negotiated rates and claims review systems.  HMO enrollment increasingly tilted toward publicly funded patients under Medicaid and Medicare. 

Capitation of primary care physicians under delegated risk shrank by two-thirds from 1996 to 2013 millennium as the HMO share of insured lives contracted.   While the HMO industry shrank nationally, Kaiser saw its enrollment grow to almost 13 million, dominant on the Pacific Coast but a negligible presence elsewhere.   

United Healthcare ended up acquiring not only a lot of HMOs (Oxford Healthcare, Sierra Healthcare, METRA, PacifiCare, etc.)  in the aftermath of the managed care backlash, but also the risk-bearing physician groups that accepted delegated risk from those HMOs (Kelsey Seybold, Healthcare Partners, Atrius, Reliant, etc) , which today form the backbone of Optum Health.  Most of the capitated payment in Optum Health (almost $24 billion in 2024)  comes from health plans other than United itself! 

Our second essay will focus on the second phase of managed care development- the dominance of the PPO and the rise of “value based care’ after the 2010 Affordable Care Act. 

Yet clinicians of all stripes but particularly physicians feel a deepening sense of alienation from the expanding care systems in which they work.   In many “wanna-be” health systems, the clinical “enterprise”  is a loosely connected roll-up of independent practices held together by RVU-based compensation plans and a common corporate logo on the door. 

A roll-up is not a credible foundation for a system, but merely a holding action.  If you have lost your clinicians, you do not have a franchise!    

In an age when clinician burnout and moral injury threaten the well-being of care givers, how care systems foster caregivers’ commitment to their enterprise has become the central strategic challenge.  When one looks at the leading enterprises in healthcare- from the Mayo Clinic to Johns Hopkins Medicine - they have one thing in common.  They are not only led by clinicians, but the clinicians there work together both to maintain high clinical standards and develop and propagate clinical innovation.  

This commitment has a direct financial consequence for health systems.  In an environment where an increase percentage of health care revenues are “risk” revenues, having affirmative control over the cost of delivering care is the key to the organization having a future. Ultimately, that control comes not from clever compensation schemes, but from how clinicians behave in working together to manage their patients. 

To be clear, the clinical enterprise does not mean that all clinicians are salaried employees.  In some organizations like Kaiser Permanente, for example, clinicians are employees of the Permanente Medical Groups, a closed panel entity which provides most of Kaiser’s clinical care.   

But in many organizations, clinicians may be independent practitioners or members of affiliated medical groups, but are still actively involved in the governance of the clinical enterprise.  In academic institutions, not all members of the clinical enterprise are full time faculty.  And not all of them have MDs after their names, but are advance practice nurses and other clinicians with post-graduate degrees.  

Rather, the successful clinical enterprise is characterized by;

1) a common value set which defines what constitutes quality medical practice.  This value set embodies the beliefs and values that animate clinical care, and is maintained and reinforced by educational programs, awards and recognition, and high standards for promotion and compensation

2) rigorous quality and safety standards   Rather than being paralyzed by requirements to document dozens or hundreds of clinical standards, clinicians are held to high expectations for collaboration and patient outcomes.  Those standards evolve and improve as clinical medicine advances.

3) high levels of collegiality and mutual trust   At its base, quality patient care requires collaboration, and that collaboration cannot take place without high levels of trust-both in clinical judgment and behavior.  One can conceive of a high functioning clinical enterprise as interlocking circles of trust- between the clinician and patient (and their family), between the clinician and his/her circles of consultants, between that circle and the clinical and administrative teams which support their care of patients and between all those circles and the managements that supervise them.   Absent collaboration lubricated by trust, patients experience their care as a sequence of missed connections or dropped batons (where they are the baton).  Those circles of trust act as shock absorbers for the inevitable surprises and events that crop up in the care process. 

4)  effortless communication and consultation   In this complex collaboration, clinicians rely on high-functioning information technology to share information with colleagues about patients and get feedback from them about next steps.  The electronic record is not simply a static electronic version of the old paper chart, but a communications tool to support patient care.  One reason the electronic health record has not achieved its potential is that this communication function is often a stepchild of the billing functions of clinical IT.    Effective communication is vital to assuring timely and safe management of patient problems, as well as “patient progression” through the care episode -an increasing concern with length of stay in hospitals rising post-pandemic.  That increasing length of stay is a direct financial threat to hospitals in particular under Medicare’s prospective payment system or under risk contracts with private health plans.

5) inspirational leadership   Maintenance of high clinical standards and morale is not going to be guaranteed by artificial intelligence, clinician MBAs or clever compensation models.   Inspirational leadership is the animating force in a high-functioning clinical enterprise.  Leadership by example- living the values of the organization- is the essential ingredient of that enterprise. Fostering and maintaining collegiality begins at the top. 

How do you know that you have a high functioning clinical enterprise?   Because clinicians in that enterprise feel and behave like owners.  They feel they can effectively address and change factors that interfere with effective patient care and that damage morale,  cause moral injury and waste their time (the scarcest resource in most healthcare enterprises).

There is no better diagnostic for the absence of a sense of ownership in an organization than a movement to unionization among practicing physicians.   The movement to unionize clinicians is not driven by money, but rather a feeling of disempowerment, that clinicians cannot count on management’s commitment to changing the things that prevent them from being effective caregivers.    

A danger of the wave of consolidation now underway is that systems will outgrow their nervous systems- that they will not reach the clinics, ORs, ICUs and physicians’ offices where all the value is created. Clinical enterprises that connect with and animate their workforces will have a prohibitive competitive advantage in the coming era of clinician scarcity as the baby-boom physicians and other care givers retire.  

In an effective clinical enterprise, physicians and non-physician colleagues feel a sense of efficacy in changing things that harm their patients or their practicing colleagues.   It is not mass and scale, or wealth, that will determine who survives and prospers in this coming healthcare environment, but the ability of clinicians in the clinical enterprise to work together effectively to meet our needs.  The health and vitality of the clinical enterprise is the single most important factor in the success of healthcare enterprises large and small.

By Jeff Goldsmith

Though the results of the November election are by no means a foregone conclusion, it is worth thinking about how a second Trump administration might affect the nation’s $4.7 trillion health system.  People were not the problem with the first Trump term;   his healthcare team was strong and capable: Alex Azar, Scott Gottlieb, Seema Verma,. Bret Giroir, Brad Smith etc.  

 After the embarrassing political failure of Repealing and Replacing ObamaCare in 2017 (for which blame look to his White House staff), his healthcare team settled in to a quiet and unremarkable term until the COVID wave broke over them and helped drive them out of office.  It was not merely  ironic but deeply disturbing that MAGA politics prevented Trump from claiming credit for the Operation Warp Speed vaccine miracle his team produced. 

A second Trump term would likely be very different- both more ideologically driven but also fiscally constrained.   The people part is completely unreadable at this early hour. But health policy will almost certainly be a second tier priority because trade and tariffs, conflicts with our traditional allies and trading partners, and inflamed social issues like illegal immigration, wokeness and abortion will crowd out changes in health coverage, costs and payment policy.   

Show Me the Money! 

However,  fiscal pressures will force a second Trump administration to confront federal health spending and set him on a collision course with the hospital and pharmaceutical industries, two of the three largest organized actors in healthcare.  Trump inherits a 2024 $5 trillion federal budget with a $1.7 trillion  deficit, an anomalous degree of fiscal stimulus at the height of an economic boom.  That deficit is also a major driver of the inflation Trump has promised to conquer.   

Trump is committed to reauthorizing the individual tax cuts from his 2017 Tax Cuts and Jobs Act which are scheduled to expire in 2025, which would add $3.3 trillion to the deficit over the next ten years.  He also wants to reduce the corporate tax rate from 21% to 15%.   If Trump does nothing meaningful about federal spending, his FY 26 budget, due shortly after he arrives in the White House, would harbor immense out year deficits and completely gross out both the bond and currency markets- a “Liz Truss” moment for the new regime. The promise of immediately reducing inflation which Trump made in his RNC acceptance speech goes sailing out the window.  

Savaging Medicaid Spending  (or Trying to)

Trump has tied his budgetary hands by committing to not cutting a single penny from Medicare and Social Security, which are forty percent (!) of the federal budget.  This commitment appears both in the Republican platform and in Agenda47, which is the Trump campaign’s compilation of commitments made in his speeches.  Trump has also committed to not reducing the $850 billion spent on Defense

 Ringfencing Social Security,  Medicare and Defense leaves the more than trillion dollar Medicaid program (state and federal combined)  as the largest single potential source of potential budgetary savings to avoid inflationary blow-out growth in the federal deficit.   At its peak in March of 2023, Medicaid/CHIP enrolled 94 million people, or 28% of the US population.   Expect an incoming Trump administration to attack Medicaid spending,  both by accelerating the decline in enrollment that began in 2023 with the expiration of the COVID Public Health Emergency and by cutting rates and payments to Medicaid Managed Care providers.  Some 24 million Medicaid beneficiaries have been “redetermined” and over 15 million have lost coverage.   KFF says present Medicaid enrollment is about 80 million in mid-2024 but that number is certainly moving down 

While Trump has distanced himself from the Heritage Foundation’s Project 2025, that policy blueprint characterized the ObamaCare Medicaid expansion as “inappropriate” and the program itself as a “cumbersome, complicated and unaffordable burden on nearly every state”.  It advocated ending what it called “financing loopholes” (e.g. provider taxes that have trued up Medicaid rates to hospitals and physicians vs. Medicare), tightening Medicaid eligibility, and imposing both work requirements and cost sharing, “reforming” disproportionate share payments, time limits and lifetime caps on Medicaid benefits and ending coverage for “middle and upper income beneficiaries”!   We can certainly expect inflammatory publicity from a Trump White House on states that have expanded Medicaid eligibility to  “undocumented aliens”, followed by pressure on Congress to prohibit this coverage by statute.   

When former Trump press secretary and present Arkansas Governor Sarah Huckabee Sanders, announced her removal of 400 thousand Arkansans from Medicaid enrollment, she said she was “liberating them from dependency”.    It is likely that that millions  more Americans will be “liberated from dependency” on Medicaid during the first two years of a second Trump Administration. There will be work requirements (with politically damaging pressure on the 11 million very poor or disabled “dual eligibles” eg. Medicare plus Medicaid) population), as well as cost sharing and an voucher option to purchase private insurance (!?) for Medicaid beneficiaries.  An aggressive effort to “re-welfare-ize” the Medicaid program will raise numerous bureaucratic barriers to Medicaid enrollment, scaring off a lot of otherwise eligible beneficiaries. 

However, tinkering with the federal match, which Project 2025 hinted at: cancelling those “financing loopholes”-read provider taxes- which juice up federal funding, is like hammering on the fuse of a bomb for Trump’s southern political base.    It would not just be California that is affected by such an effort.  Even though large Trump states like Florida and Texas declined to expand Medicaid, they aggressively availed themselves of provider tax leverage to more generously compensate both hospitals and physicians as well as balance their budgets.   Solving a federal funding crisis at a cost of pushing political allies’  state budgets into the red is a non-starter. 

It is interesting to speculate upon how much the Supreme Court’s recent demolition of the so-called “Chevron” doctrine will inhibit fiscally motivated administrative changes in the Medicaid program by a second Trump administration.   But Republican control over both houses of Congress could provide a Trump administration the statutory authority it needs to make non-incremental changes in the program.    Academic health centers and safety net providers could anticipate a lethal cocktail comprised of sharply higher uncompensated care costs and reduced Medicaid payment rates (channeled conveniently through Medicaid Managed Care entities). 

Health Policy  Viewed thru the Prism of Hot Button Social Issues

We do not know how a second Trump regime would frame health policy.  Our only clues are a remarkably unenlightening Republican platform and the now notorious Heritage Foundation Project 2025 policy blueprint, from which Trump has nominally distanced himself.   The Republican platform devotes four short paragraphs to healthcare, assuring seniors of no Medicare cuts and strengthening chronic care and home care options.   That’s about it. 

However, Project 2025 devotes 54 pages to healthcare-an otherworldly discourse haunted by inflamed social issues, particularly abortion (which somehow miraculously disappeared from the Republican platform!) and gender identity.  If Project 2025 is any guide,  we should expect a much more ideological and aggressive regime in healthcare across all federal agencies, with a laser focus on abortion, use of aborted fetal tissues, “gender redefinition” and strengthening of the traditional “Leave it to Beaver” family.  

For example, the sum total of  Project 2025 policy priorities for the $48 billion National Institutes of Health were:  making sure fetal tissues were not used in research, eliminating conflicts of interest among current and former NIH scientists and administrators, block granting research fund to the states to do their own research (!?) and eliminating woke policies (like supporting Pride Month).  That was it! 

Project 2025’s first priority for the Department of Health and Human Services, which they want to rename “The Department of Life”  was “Protecting Life, Conscience and Bodily Integrity.”     It highlighted the importance of affirming marriage between men and women, teaching “sexual risk avoidance” or SRA (a rebranded “abstinence” program), and stamping out access to abortion pills (a stance explicitly repudiated by candidate Trump) and the morning after pill (a feint in the direction of restricting contraception).  

Project 2025 takes a blowtorch to the Centers for Disease Control, accusing it of administrative incompetence and exceeding its public health mandate during COVID.  It advocated partitioning CDC into two parts- an epidemiological data collection agency and a much pared back public health enterprise with a “severely confined ability to make policy recommendations”.   Project 2025 authors asked “how much risk mitigation is worth the price of shutting down churches on the holiest day of the Christian calendar?” and “What is the proper balance  of lives saved vs. souls saved?”

 A major priority for the first part of the partitioned CDC will be a rigorous tracking  (antecedent to stamping out) what the authors call “abortion tourism”, by collecting detailed information on abortion incidence by state of residence, migration patterns, specific procedures and outcomes.  The repudiation of the agency’s public health agenda in favor of a libertarian approach to health risk management presages major reductions in force in the agency. 

Also targeted were pharmaceutical funding both of CDC and FDA, whose user fees are a major source of support of FDA’s drug review process, which were characterized as a “conflict of interest” for both agencies.    So, reading between the lines,  FDA is also likely to experience major staff reductions, (and a lengthened approval cycle for new drugs).  Overall, I expect HHS to experience five figure reductions in career staff (especially the super grade GS15-18 levels) as the Trumpadministration conducts an ideological purge, attempting to root out “deep state” opposition to its social agenda.

Pharma is Warned (and Not Quaking in its Boots)

One controversial commitment Trump made during his 2020 campaign was to rein in Medicare beneficiaies’ drug costs by forcing drug companies to match their prices with those charged in European countries.  He issued two executive orders to attempt to do this, to little measureable effect.   This claim is repeated in the 2024 Agenda47 materials.  It is not clear that HHS can do this  without legislative authorization, which he will be unlikely to get even with Republican control of Congress.  He also promised to alleviate shortages of drugs by “reshoring” the production of generic drugs.  

Medicare Advantage Health Insurers Get a Pass

Project 2025 recommended making Medicare Advantage the default enrollment option, which would presumably accelerate the trend away from regular Medicare.  Medicare Advantage is likely to see reduced federal efforts to rein in aggressive risk coding, AI assisted care denials and other administrative hot button issues, in favor of efforts to “simplify program administration”, telegraphing an easing of regulatory pressure on carriers.  These measures would help restore Medicare Advantage profitability for the major carriers that control this program. 

However, and a large “however” it is, Project 2025 also advocated “competitive bidding” for MA, which could generate vital savings (somehow “not cutting Medicare”) by burning down the MA rate structure (possibly below the DRG/APG level) and  potentially damaging MA margins, which have declined sharply in the past two years.  This would also have the effect of pushing down negotiated payment rates to providers, perhaps reducing Medicare spending while nominally avoiding cuts in DRG/APG rates or the Part B fee schedule.    

There was no mention of anti-trust  issues, despite the fact that only two MA providers account for 46% of present enrollment and the top three about 60%. The Project 2025 Federal Trade discussion did not mention healthcare.   Health insurers dependent on Medicare (like Humana and United  saw their stocks rise sharply after the failed Trump assassination  attempt, while those dependent on Medicaid sank.

Amusingly, Project 2025 advocated moving payments to “value based care” while advocating repealing the Medicare Shared Savings Program, the main Medicare value based payment initiative.

Hospitals and Physicians- Nary a Mention

Hospitals and physicians are about half of health spending, yet both were studiously avoided in the Project 2025 policy blueprint.  While physicians were barely mentioned in discussion of HHS, it is not difficult to detect in Project 2025 an intent to  “de-federalize”  policy regarding physicians and physician practice.  Nods were given to reducing their paperwork burden (no details given), but also repealing the ObamaCare prohibition on physician-owned hospitals as well as federal pre-emption of state licensure laws (e.g. for telehealth provision).   There was also discussion of gutting the arbitration process in the No Surprises Act, which was targeted at hospital-based physicians, in favor of a “truth in advertising” approach, whatever that means.  This would be a gift to physicians and a backhanded swipe at the health plans who were No Surprises’ main advocates. 

Project 2025 underlined the position that state government, where State Medical Societies are powerful advocates, is the appropriate locus of regulatory authority over medical practice.  How this will jibe with efforts to address a looming shortage of physicians remains unclear; the expected shortage was not mentioned in the report.

Hospitals were singled out as recipients of questionable subsidies, particularly for drug purchasing under 340B and so-called “site of service” payments, which have increasing hospitals’ ambulatory revenues and tilted the balance of power away from physician practice and toward the hospital.    However, cutting “site of service” payments would violate Trump’s assurances that he will not “cut a penny from Medicare or Social Security”.  

Overall, health care policy will be a lower second tier issue in a second Trump administration, and will be viewed mainly as a vehicle for prosecuting the sixty year long cultural war against promiscuity, abortion and gender fluidity at the heart of the Trump agenda.  However, fiscal problems and the prospect of a rebellion inside Trump’s own party over soaring deficits will force a second Trump administration to confront federal health spending, and set the stage for a battle with some of the most powerful interest groups in the US- the “elderly”, health plans, hospitals and big pharma.  Guess who wins?

By Jeff Goldsmith   

Democrats’ despair after Joe Biden’s pallid and halting debate performance stems from the realization  that the uphill climb needed to prevent the return of Donald Trump might be too steep.  What is less obvious is the awareness of the urban intelligentsia of the root causes of the adverse political climate, which can be seen in this map, taken from the Economist’s April 20 feature on declining US population.

America’s economy is booming, and the gap between its economic performance and that of the rest of the world is widening.  The on-the-ground political reality is very different depending crucially on where you live.  People who live in the red parts of this map do not need convincing that all that wealth, and the power that goes with it, has eluded them. Many of them believe that it has been stolen from them by corrupt leaders and the oligarchs and corporate interests that finance their campaigns.

That is the underlying reality of MAGA.  Ninety percent of those red counties voted for Donald Trump in 2020.   People in metro Austin,  Manhattan or the suburbs of Houston do not resonate with the need to make America great again.  It’s already great for many of them.

For folks living in the abandoned parts of the US, the on-the-ground reality is absurd gas prices, unaffordable mortgages, a mountain of forever debt, deteriorating public services, dreams cruelly out of reach and the despair that goes with all of it-alcohol and drug dependency, depression and anxiety, obesity, domestic violence.    There is an almost perfect correspondence between the above map and that of the epidemic of “deaths of despair”  - suicide, drug overdoses and alcohol poisoning.  This phenomenon is rooted in middle-aged whites, the overwhelming demographic of the red parts of this map, but affects all demographic segments including black and Hispanic folks who traditionally supported Democrats.     

After 2016, political analysts believed that the prevalence of non-college educated whites in a local electorate was the single best predictor of Donald Trump’s shocking victory.  That was not the case.  A post-election analysis by the Economist revealed that a better predictor of Trump’s victory was a composite measure of health/life expectancy, specifically “county-level data on life expectancy and the prevalence of obesity, diabetes, heavy drinking and regular physical activity (or lack thereof)”, the mapping of which again correlates remarkably with the map of population decline above.

The very same forces of outmigration and economic stagnation are destroying these communities’  local health systems, as well as their schools, commercial businesses and churches.  The same red areas are also areas where local physicians have retired and were not replaced, and whose hospitals closed or merged with larger regional conglomerates.    A recent scurrilous analysis by Yale and University of Chicago economists blamed the rising deaths of despair and  local business’s economic struggles on hospital mergers, an absolutely “from central casting” example of blaming the victim. 

The bitter irony of this political season is that the Biden Administration’s remarkable roster of Congressional achievements in 2021 and 2022- the American Rescue Plan, the American Infrastructure and Jobs Act, the Chips and Science Act and the Inflation Reduction Act showered many tens of billions in temporary relief spending and capital investment for manufacturing and infrastructure on these red areas. Because many of these investments take years to execute, credit for them will be claimed by future administrations.

Yet due to the arrogance and isolation of the progressive policy advocates that shaped this legislation, it was simply self-evidently obvious that the most ambitious domestic reconstruction program in the ninety years since Roosevelt will help many of the most economically challenged areas in the country.  Proud and sparsely attended ribbon cutting ceremonies made the local newspaper, if there still is one.   News of these investments never arrived via the partisan news channels and hyper-targeted social media venues on which most ordinary Americans rely these days.   That attitude of “self-evident good works”  is of a piece with the “Why Bother Visiting Wisconsin” arrogance that let Trump into the White House in the first place. 

If post-debate polling is any guide, all these trillions of dollars of good works, funded with money borrowed from our grandchildren,  will not be enough to turn the red tide, which could well leave the Republicans firmly in control of all three branches of the federal government.    As they go to their cushy post-administration redoubts at the Brookings Institution, Yale, Hopkins and Harvard’s Kennedy School of Government, and hobnob at Aspen Institute and Martha’s Vineyard cocktail parties, the executors of all these good works, for the unforgiveable political sin of failing to communicate effectively with the struggling working class they used to champion, will have fully earned their retirement. 

#USpopulationdecline #deaths of despair #2024PresidentialElection

Disco, Jimmy Carter, polyester leisure suits, soaring gas prices- older folks have lots of fond memories from the 1970’s.  And yet a relic from 1970’s health policy- public utility style hospital rate setting- is having a moment in the mid-2020’s. 

Led by a coalition of the Centers for Medicare and Medicaid Innovation, policy entrepreneurs at Arnold Ventures, Obama-era technocrats like Zeke Emanuel and, believe it or not, some state hospital associations, hospital rate setting is staging a comeback.

Under CMMI’s new AHEAD program, states are being encouraged to cap hospital revenues through voluntary programs including non-managed care Medicare and Medicaid and at least one private insurer.

It is worth asking:  is it worth the effort?   In celebration of the fiftieth anniversary of the State of Maryland’s hospital rate setting project, we asked the simple question:

Are health costs in Maryland lower than in the nation as a whole, or neighboring states, after fifty years of controlling hospital rates.  They certainly ought to be after all that regulation!

Well, the short answer is: no!   Per capital health spending in Maryland is 6% higher than in the nation as a whole, and 14% higher than neighboring Virginia, with no state regulatory apparatus. 

Read our JAMA-style analysis of Maryland’s health cost position, including all the data (from KFF’s open source State Health Facts) and what it means below.

Question:  Has Maryland’s fifty year program of regulating hospital rates resulted in lower health spending overall or slower health cost growth versus other states or the nation as a whole?

Findings:   Maryland’s per capita health costs are 6% higher than the US vs 4% higher in 1990, and have grown at a faster rate than the country as a whole.   Maryland’s system was designed to minimize cost shifting to employers, yet per capita private insurance health costs were also higher than the national average and have grown at a faster rate than in the country as a whole.

Meaning:   Regulating hospital rates may not be an effective way of containing overall health spending. And with the rate of increase in health costs levelling off, targeting controlling the rate of increase in hospital costs may not be the most sensible policy target.

 Abstract

Maryland’s hospital rate control system has been in place for close to fifty years and is a national model of health cost control.  Maryland’s system rests on a premise that hospital costs are an effective pivot point for containing  overall health spending. Given the fifty year history,  it Is reasonable to expect that overall health costs are much lower in Maryland  than in states that have not taken this approach, and have risen at a lower rate. 

Objective:  To evaluate the effectiveness of Maryland’s hospital rate controls in containing overall health spending.

Design and Methods:    We accessed a comprehensive open-source compendium of state health data maintained by KFF:  State Health Facts.   We evaluated key health cost and utilization data for Maryland and five other states-two neighbors and three other states with significant managed care infrastructure , none of which have not regulated hospital rates.  We compared per capita health spending for the populations as a whole  as well as Medicare spending and spending for private health plans. 

Findings:   We found that per capita health spending in Maryland was higher than the US and in four of the five states, and grew at a faster rate over the past twenty years.   Medicare spending was significantly higher, both for Parts A and B (for beneficiaries that used medical services during the sample years) .  But spending for private health plans was also higher and had grown at a faster rate,  an  unexpected finding given that Maryland’s system was explicitly designed to control  cost shifting from public to private plans.

In the wake of Medicare’ enactment in 1965, health costs in the US began rising at double digit rates annually.  Many policy experts blamed hospital costs, which were by 1970 close to 40% of health spending.  It was believed that if you contained hospital costs, overall health spending would come under control. 

In 1974, the State of Maryland embarked on a bold attempt to rein in rising health costs by regulating hospital rates. The Maryland Health Cost Review Commission (MHCRC) has been regulating hospital rates without pause for 49 years, even as other states like New York and Massachusetts abandoned this approach.  With the new CMMI AHEAD program¹, states are being given a chance to replicate the latest version of Maryland’s system, targeted at controlling the “total cost of care” for the state population. 

Given Maryland’s long history of state regulatory oversight of hospital rates, one might  reasonably assume that healthcare in Maryland would be notably cheaper than in other states, and that Maryland’s rate of increase in health costs would be lower than in those states. 

After fifty years of state regulation, health costs in Maryland in 2020 are higher, not lower, than the national average and have grown at virtually the identical rate to the country as a whole over the past thirty years.  More surprising, despite a system geared to freezing cost shifting from public programs to private health plans, private insured patient care costs are ALSO higher than neighboring states and the national average.

Methodology

Maryland’s system has been exhaustively studied, but nearly all of those studies have focused on the rate of increase in hospital revenues in Maryland vs. predetermined inflation targets.  The focus of Maryland’s regulation has shifted over time- from revenues per hospital admission to global hospital budgets and, most recently, to “total cost of care”  attributable to the hospital (a’la the ACO), layered on top of the global budget.    

Our purpose is not to review this literature - this has been ably done recently by others.²  Rather it is to focus on the macroeconomic effect of Maryland’s system on health spending and ask the question:  was it worth the effort?   To answer this question, this author accessed a comprehensive open source repository of state health information - KFF’s State Health Facts.

We chose five states to compare Maryland’s health cost performance to over time and currently - two neighbors (north and south) along the I-95 corridor, Pennsylvania and Virginia, and three other states with extensive multi-specialty group practice and/or managed care history-  Wisconsin, Minnesota and Oregon.   We examined not only the core demographic characteristics (poverty and age structure) in these six states, but also key indicators of healthcare utilization and spending for different segments of the population. 

We also looked at key characteristics of the health insurance marketplace (competitive structure and Medicare Advantage penetration) in these six states.  In all cases, we used the most recent information in the KFF State Health Facts database for each indicator - 2020, 2021 or 2022 - and in some cases compared to available historical data to get a sense of long term cost trends.

Findings

1)    Healthcare in Maryland is More Expensive than in the Nation as a Whole

Health costs in Maryland, measured by per capita health spending for all citizens in 2020 (the latest available data from KFF’s repository) , actually are six percent higher than the country as a whole, and higher than three of our six comparison states.  Pennsylvania’s health spending was 7% higher than in Maryland, but Virginia spent 15% lower, with no hospital rate controls in place. 

Interestingly, in 1990, Maryland’s per capita health spending was only 4% higher than the nation as a whole, so the cost gap has widened in the ensuing thirty years.  Maryland’s higher health spending was attributable neither to more citizens in poverty (except for Minnesota) nor to more older residents (over age 65) than in those other states.  Thirty-three states had lower per capita health spending than Maryland did in 2020. 

Per capita hospital spending in Maryland was virtually identical to the US average in 2020. Pennsylvania’s per capita hospital spend was 8% higher, but Virginia’s was 12% lower, again with no help from hospital rate controls.   So growth in other forms of health spending not controlled by MHCRC (physician services, long term care, pharmaceuticals, etc.) accounted for Maryland’s higher per capita health spend overall. 

2)    Per Capita Health Spending Growth in Maryland has been Virtually Identical with the rest of the country for forty years

Since 1990, average annual per capita health spending in Maryland has risen exactly one-tenth of a percent faster than in the country as whole (4.8% per year in Maryland vs. 4.7% in the US) and faster than in all five of our comparison states. 

3)     Maryland Spends Significantly More than the Country on Medicare Patients

Maryland spent much more per capita caring for Medicare patients in 2021 than the nation as a whole (for beneficiaries that actually used services during the year).  That is the historical result of 1980 legislation sponsored by Maryland’s Senator Barbara Mikulski, which set forth the terms of a Medicare/Medicaid waiver for Maryland’s rate control system.  The goal of a more generous Medicare rate structure was to move toward a unified hospital rate that did not burden Maryland businesses (e.g.,  that basically froze and controlled cost shifting to private health plans). 

The most recent estimate of the disparity between what Maryland spends on Medicare patients and what they would have spent if Maryland hospitals had simply been paid the national PPS rates was $1.440 billion in 2017, up from $1.080 billion in 2013.³   This net Medicare subsidy is surely higher now. 

The gap in Medicare spend between Maryland and other states is particularly large for Part A (hospital inpatient) Medicare.  Per admission hospital rates were the principal focus of Maryland’s system for its first forty years. In 2021, Maryland spent 28% more per capita on Part A services (for those beneficiaries who used care during the year) than the national average.   Maryland’s days per 1000 for Medicare patients in 2021 were 13% higher than the national average and 70% higher than in Oregon, which has a very effective Medicare Advantage oriented care system.    

The pattern is replicated on the Medicare Part B side, with Maryland spending 15% more on Part B spending per capita than the national average in 2021 (for patients that used services during the year).    Maryland’s per capita Part B spending was almost 26% higher than Virginia and 23% higher than Pennsylvania.  Maryland hospitals are almost certainly generating positive Medicare margins vs. their colleagues in the rest of the country thanks to the legacy of the Mikulski waiver.

4)    The biggest surprise:  despite the constraints on cost shifting built into Maryland’s system, per capita spending for the commercially insured patient population ALSO exceeded the national average.

One would expect that forty plus years of Maryland’s restrictions on cost shifting to private health plans made possible by the generous Medicare waiver would have resulted in much lower per capita spending for the privately insured population than in the country as a whole.  That is not the case.  Maryland’s per capita spend for those covered by private insurance was 1% higher than the national average in 2020.  

Maryland private insurance spending per capita was more than 4% higher than in neighboring Pennsylvania, and almost 14% higher than in Virginia.  Maryland’s private insurance per capita spend was a trace lower than Wisconsin’s, but between 4-5% higher than Minnesota and Oregon.  And despite constraining commercial insurers’ largest cost center (hospital care), per capita spending for private insured lives grew 0.3% faster in Maryland than the national average for the twenty-year period 2001-2020, and faster than all of the comparator states.

A possible explanation is that Maryland has the least competitive commercial insurance market of any of the six states.  A single carrier (CareFirst Blue Cross) commands almost 70% of the small group market and 55% of the large group market.   Maryland also ranked 46^th in Medicare Advantage participation of its citizens vs the rest of the US.    For those who believe that Medicare Advantage does contain health costs, Maryland’s 24% MA penetration is half the national average.    Maryland’s hospital rate regulation has protected CareFirst’s market and alleviated competitive pressures from other plans.

5)    Access and Affordability in Maryland Does Not Compare Favorably to Other States

The presumed goal of hospital rate controls is to make care coverage more affordable. Maryland’s 6% uninsured rate in 2022 was two points below the national average of 8%,  which latter rate owes much to states like Texas-16.6%-and Florida-11.2%- that did not expand Medicaid.    Maryland’s uninsured rate was lower than Oregon’s but at or above than the other four states we sampled.  Maryland compares unfavorably to other states in the Northeast, notably New York with 4.9% uninsured and Massachusetts with 2.4% uninsured.  Additionally,  7.3% of Maryland’s population reported difficulty finding a physician due to cost in 2021, a rate identical to Oregon’s, but higher than the four other states.   

Discussion

We expected that nearly fifty years of state regulatory control over hospital revenues would have produced markedly lower health costs in Maryland than in the country as a whole.  That is not the case.   We would also have expected Maryland’s system to have produced dramatically lower rates of escalation in health costs than in the country as a whole. That is also not the case. 

Finally, one would have expected that forty plus years of constraint on hospital cost shifting to private health plans would have produced much lower commercial insured per capita spending.  In fact, private employers’ per capita costs are higher in Maryland than elsewhere and have grown at a faster rate. 

In 2022, US health spending amounted to 17.3% of GDP, equal to healthcare’s share of GDP in 2011 when the ACA/Obamacare coverage was implemented⁴.  Hospital spending in 2022 was 30% of GDP,  11 full percentage points less than forty years earlier, and rose by only 2.2% (2022 vs. 2021), half the rate of overall inflation during the year.

The era of hyperinflation in health costs is over.  So why the policy community remains fixated on controlling the rate of increase in health spending as its principal policy objective is a puzzle. In our view, the real crises are affordability⁵, declining life expectancy⁶and huge gaps in care for the mentally ill and those requiring primary care.  51% of American adults report difficulty affording healthcare in 2023, owing either to lack of insurance or patient cost sharing that exceed their ability to pay. 

Controlling the rate of increase in hospital charges appears to be a far less effective method of addressing the affordability problem than imposing broader restrictions on the share of family income subject to deductibles and copayments and providing further incentives to cover the estimated 26.5 million Americans who still lacked health insurance coverage in 2022 - a number surely higher now with post-COVID Medicaid eligibility redeterminations.   

Tasking hospitals to fill care gaps that ultimately generate hospital demand through ACO-like “incentive” programs such as Maryland’s TCOC (Total Cost of Care) program is a circuitous route to addressing life expectancy declines or care gaps, compared with direct investments in public health, mental health services, shelter and care for the homeless and primary care.  This defect also applies to CMMI’s new AHEAD program, modeled on Maryland TCOC program.  There are far more direct and obvious methods of achieving health gains than a complex shadow capitation model based on “attributed lives” connected to hospitals. 

The Maryland hospital rate control system is a relic of the 1970’s, incrementally re-engineered with each new fad in cost control.  Replicating Maryland’s approach in other states, as AHEAD is intended to do, is a sadly inadequate framework for addressing the pressing affordability and access problems of the US health system. 

This work was funded by the Federation of American Hospitals

Author owns HCA common stock and bonds in his IRA but otherwise has no conflicts of interest to report.   

Endnotes

¹ Burns, A.  What is the Centers for Medicare and Medicaid Services New AHEAD Model?  Accessed March 5, 2024 https://www.kff.org/affordable-care-act/issue-brief/what-is-the-centers-for-medicare-and-medicaid-services-new-ahead-model/

² Emanuel E, Johnson D, Guido M and Goozner M. Meaningful Value-Based Payment Reform, Part 1:  Maryland Leads the Way. Health Aff, Millwood)  Feb 9, 2022.  doi: 10.13777/forefront.20220205.211264

³ Holtz-Eakin D,  Strohman A.  The National Implications of Maryland’s All-Payer System.  American Action Forum,  March 2, 2020.  Accessed March 5, 2024 https://www.americanactionforum.org/research/the-national-implications-of-marylands-all-payer-system/

⁴ Hartman M, Martin AB, Whittle L, Catlin A.   National Health Care Spending in 2022:  Growth Similar to Prepandemic Rates.  Health Aff (Millwood)  2023; 43(1) https://www.healthaffairs.org/doi/10.1377/hlthaff.2023.01360

⁵ Commonwealth Fund.  “Paying for It:  How Health Care Costs and Medical Debt are Making Americans Sicker and Poorer”,  October 26, 2023.  Accessed March 5, 2024 https://www.commonwealthfund.org/publications/surveys/2023/oct/paying-for-it-costs-debt-americans-sicker-poorer-2023-affordability-survey

⁶ “’Live Free and Die’  The Sad State of U.S. Life Expectancy”  NPR, Mar 25, 2023.  Accessed March 5, 2024 at:  https://www.npr.org/sections/health-shots/2023/03/25/1164819944/live-free-and-die-the-sad-state-of-u-s-life-expectancy