The Myth of Health System “Costs”:
Why Patients and Independent Physicians Bear the Real Burden
The complex realities health systems face often justify high healthcare costs. But who truly benefits from these inflated prices?
The Unseen Alliance Between Health Systems and Insurance Carriers
In healthcare, some of the most impactful partnerships are not between physicians and patients but between health systems and insurance carriers.
This rarely discussed alliance quietly shapes the cost of healthcare, often to the detriment of patients and independent physicians.
Here’s how it works: health systems negotiate high service prices, knowing insurers will build these costs into premiums. Higher premiums mean more revenue for insurers, who pass these expenses along to patients while maintaining a system with few alternatives.
In this cycle, large health systems secure a reliable revenue stream, and insurance carriers benefit from a larger pool of premium payments. Meanwhile, patients bear the weight of increased premiums and high out-of-pocket expenses, often without realizing the forces driving these costs.
Small, independent hospitals, physician-owned practices, and ambulatory surgery centers (ASCs) offering more affordable options are frequently pushed out, unable to compete against the well-funded health systems that dominate the landscape. The result is a market where competition dwindles, leaving patients with fewer options and higher bills.
The Site-of-Service Differential: A Tool for Expansion
Another critical factor driving up healthcare expenses is the “site-of-service differential.” This differential allows health systems to collect significantly higher prices for procedures performed within their facilities simply because of their location. For instance, a routine MRI at a health system facility collects thousands, while the same service at an independent center only has a price of a few hundred dollars. This differential is built into the system, creating a substantial revenue boost for health systems.
But the impact goes beyond price hikes. Health systems have used this pricing advantage to acquire private practices and specialty providers, drawing them under their umbrella by offering higher reimbursements than independent practices typically receive. The result? Independent practices that once operated efficiently with competitive pricing and high-quality outcomes are incentivized to join health systems for financial stability.
Look around your area—if you still see independent practices, you’re fortunate. In most regions, health systems have acquired private practices, which often control most of the local market. This consolidation doesn’t just affect prices; it also limits patients’ access to more affordable, patient-centered care options.
The Cost of Complexity
With higher-paid claims justified by “higher costs,” health systems often defend their pricing practices as necessary for their operations. But here’s the reality: most health systems used the differential to acquire private practice competition.
In addition, health systems lack a foundational understanding of cost accounting—tracking and categorizing each expense associated with delivering a service. Unlike ASCs and physician-owned hospitals, which rely on strict cost accounting to keep their expenses and pricing transparent, large health systems frequently operate without a clear picture of their actual costs.
This lack of cost accounting contributes to inflated paid claims, where prices reflect not just the cost of care but administrative overhead, unnecessary procedures, and inefficiencies built into the system.
In contrast, leaner, independent physicians use cost accounting principles to streamline their operations and deliver quality care at prices grounded in actual expenses.
Health systems' lack of transparent accounting allows them to justify high prices without accountability, further distancing patients from fair, affordable care.
Why Defending Health Systems Misses the Point
It’s easy to conflate “health systems” with “hospitals,” bringing images of critical access facilities in rural areas working hard to survive.
But when I discuss health systems, I am talking about well-capitalized entities, particularly in urban and suburban areas, that aggressively expand by acquiring practices, setting higher prices, and leveraging their market power to increase revenues.
Small, rural hospitals are rarely in a position to acquire practices or set high prices; in many cases, they’re struggling to stay afloat. However, large health systems often work closely with insurance carriers, strategically inflating prices through paid claims directly affecting premium hikes.
Defending these health systems under the assumption that they’re simply “hospitals” fighting to survive misrepresents the reality and overlooks how these systems contribute to rising healthcare costs.
The argument that health systems “need” higher prices ignores that much of this revenue is funneled toward administrative overhead, executive salaries, and acquisition costs rather than improving patient care.
By supporting these large health systems, we inadvertently reinforce practices that drive up costs for everyone involved, from patients to independent providers.
Rethinking Healthcare: Supporting Independent Care and Transparency
So, what’s the alternative? Support independent, physician-owned hospitals, ASCs, and private practices that provide transparent, patient-centered care.
When patients can compare prices and choose services based on value, it creates accountability for all providers, including health systems. Competition from independent practices encourages fair pricing, allowing patients to make informed choices based on actual costs rather than inflated claims.
Imagine a healthcare system where pricing transparency is the norm, allowing patients to access quality care at prices that reflect actual expenses. In such a model, health systems could no longer rely on inflated pricing without consequence, and patients would have the tools to select providers based on the best value for their care needs.
For this vision to become a reality, we need to level the playing field by addressing site-of-service differentials and limiting the ability of insurance-health system alliances to drive up costs. Transparency and fair competition should be foundational principles, ensuring patients can choose care that meets their needs without financial strain.
A Call for Patient-Centered Reform
The idea that health systems require higher paid claims due to their “higher costs” is a myth that obscures the actual forces driving up healthcare prices. Behind these inflated claims lies a system prioritizing revenue over patient outcomes, perpetuating inefficiency, consolidation, and a lack of transparency.
To break this cycle, we need reform that empowers patients and independent physicians and challenges the structures that currently keep healthcare costs high. Transparency, cost accounting, and support for independent practices can create a healthcare system that values efficiency, affordability, and quality of care.
By shedding light on these misconceptions, we can work toward a healthcare landscape that serves everyone’s best interests, from patients to the independent physicians committed to delivering fair and accessible care.
-Rojas out.