There Is No Set Price, There Are Only Negotiations You’re Not In
Why a knee replacement costs $15,000 in one zip code and $80,000 in another, and what we can actually do about it.
If you have ever received an Explanation of Benefits from your insurance company and felt a creeping sense that the numbers on the page bore no relationship to reality, you are not imagining things. Healthcare pricing in the United States operates less like a marketplace and more like an elaborate negotiation conducted entirely out of public view, where the sticker price bears almost no relationship to what anyone actually pays, and where what anyone actually pays varies wildly depending on who they are, where they live, and whose insurance card they hand over at the front desk.
This is the story of how American healthcare became the world's most expensive system, not because our care is consistently better, but because our prices are consistently irrational.
The Same Procedure, Radically Different Prices
A lumbar MRI, a routine diagnostic scan, costs on average about $500 in Maryland and over $2,500 in Alaska for a commercially insured patient. These are not outliers. A comprehensive 2019 RAND Corporation study of employer-sponsored insurance found that hospitals billed, on average, 247% of what Medicare would pay for the same services. Some hospitals billed 800% or more.
The variation is not just geographic. It exists within the same city, sometimes within the same health system. A 2021 study published in Health Affairs found that two hospitals owned by the same parent company in the same metropolitan area could charge vastly different rates for identical procedures — not because of differences in quality, staffing, or outcomes, but because of differences in how aggressively each facility had negotiated with payers over the years.
This is the central absurdity of American healthcare pricing: the price of a service is not primarily determined by what it costs to deliver, or by the quality of the outcome, or even by local market conditions. It is determined by negotiating power.
How Negotiated Contracts Became the Architecture of Chaos
In most industries, prices are shaped by competition and cost. In healthcare, they are shaped primarily by bilateral, confidential contracts between hospitals and insurers. A large health system with dominant market share in a region can demand higher reimbursement rates simply because the insurer cannot afford to exclude it from its network. Patients in that region will refuse to buy a plan that does not include the dominant regional hospital, so the insurer has little leverage. The hospital knows this and prices accordingly.
The result is what economists call "market concentration effects." As hospital consolidation accelerated through the 2000s and 2010s, the negotiating power of health systems grew substantially. Studies consistently show that hospitals operating in less competitive markets charge 10 to 30 percent more than those in competitive markets, with no corresponding difference in quality. Patients bear this cost through higher premiums and out-of-pocket expenses, even though they have no meaningful visibility into, or role in, the negotiations that produce these rates.
Insurance companies are not innocent bystanders in this dynamic. Insurers benefit from higher negotiated rates in ways that are not immediately obvious. Under the Affordable Care Act's Medical Loss Ratio rules, insurers must spend at least 80 to 85 percent of premium revenues on medical care. A higher cost base means higher absolute profit even at the same percentage margin. An insurer earning 15% administrative overhead on $10 billion in claims earns more than one earning 15% on $7 billion. The incentive to aggressively constrain costs is thus weaker than it might appear on the surface.
Meanwhile, contracted rates themselves are treated as proprietary business secrets. Hospitals and insurers have historically included confidentiality clauses in their agreements that prohibit either party from disclosing what rates were actually negotiated. A self-insured employer trying to evaluate whether their health plan is getting good rates has almost no way to know. A patient trying to compare prices across facilities has almost no way to find out what their insurer will actually pay.
Why Price Transparency Has Not Solved This
Beginning in January 2021, the Centers for Medicare and Medicaid Services began requiring hospitals to post their negotiated rates publicly in machine-readable files. A companion rule extended transparency requirements to insurers in 2022. This was, in principle, a significant policy intervention. In practice, the results have been deeply disappointing.
The data released under these mandates is technically available but practically unusable for most patients and even most employers. The files are massive with some hospital transparency files running to tens of gigabytes, formatted inconsistently across institutions, and riddled with errors, omissions, and rates coded in ways that require specialized knowledge to interpret. A 2022 analysis by the Peterson-KFF Health System Tracker found that many hospitals were publishing data in formats that were intentionally difficult to parse, complying with the letter of the regulation while defeating its purpose.
Enforcement has been weak. The maximum civil monetary penalty for noncompliance was initially set at $300 per day for smaller hospitals and $5,500 per day for larger ones. For a major academic medical center generating hundreds of millions in annual revenue, this is not a meaningful deterrent. The Biden administration increased penalties substantially in 2022, and CMS became more aggressive in sending warning notices, but confirmed enforcement actions remained rare.
There is also a deeper structural problem with the transparency approach: even when patients can access pricing information, they often cannot act on it. For elective, shoppable services like colonoscopies or imaging, price shopping is theoretically possible. For urgent care, emergency services, specialist referrals within a network, or any situation where a physician directs a patient to a specific facility, price information is functionally irrelevant to the decision. The RAND Institute estimates that only about 7 percent of healthcare spending is on services that are truly "shoppable" by consumers. Transparency, however well implemented, addresses a small fraction of the problem.
The Deeper Structural Realities
Beyond negotiated contracts and transparency failures, several other forces sustain price variation and inflation.
Facility fees are among the most opaque. When a hospital acquires a physician's practice, it can reclassify outpatient services performed in that office as "hospital outpatient department" services, triggering a facility fee on top of the professional fee. The clinical encounter is identical, same physician, same office, same service, but the billing code changes, and the patient pays significantly more. This practice, called "site of service differential," adds tens of billions of dollars annually to healthcare spending without any corresponding increase in care quality. Some progress has been made toward site neutral payments, restricting hospitals from charging more for outpatient health care services than if the service is performed at an outpatient site. In November 2025, the Centers for Medicare and Medicaid Services (CMS) issued a rule that establishes site neutral payments for outpatient administration of medications at outpatient sites of hospitals. There are bills before Congress, with bipartisan support, that would further restrict these payment differentials to ensure that what is paid to hospital outpatient sites is similar to other outpatient sites.
Chargemaster prices, the official list prices hospitals publish, remain a fiction that distorts the entire system. Almost no one pays chargemaster rates, but they anchor negotiations with commercial payers, affect what uninsured patients are billed, and create a misleading baseline that makes discounted rates appear more favorable than they are. The persistence of inflated list prices is a feature of the system, not a bug: they give the appearance of generosity in negotiated discounts and protect hospitals from accusations of undercharging certain payers relative to others.
Administrative complexity adds enormous cost without adding care. The U.S. healthcare system employs more billing and administrative personnel per capita than any comparable country, largely because every payer has different billing requirements, codes, prior authorization processes, and payment rules. A 2019 study in JAMA estimated that administrative complexity accounts for roughly 34 percent of total U.S. healthcare expenditure or more than $800 billion annually. Some of this complexity is genuine inefficiency. Some of it is intentional: friction in the billing process delays and reduces payments, which benefits payers, and makes it harder for patients and employers to audit whether they are being charged appropriately.
What Would Actually Work
Price variability in healthcare is not an accident or an oversight. It is the logical output of a system designed, layer by layer, to obscure cost information and concentrate negotiating power among large incumbents. Fixing it requires structural interventions, not disclosure mandates alone.
All-payer claims databases (APCDs) are among the most promising tools available at the state level. APCDs aggregate claims data from all payers — Medicare, Medicaid, and commercial insurers — into a unified repository that allows states, employers, researchers, and policymakers to analyze actual paid prices across facilities and payers. States with mature APCDs, including Massachusetts, Maine, and New Hampshire, have used this data to identify price outliers, support contract negotiations, and design payment reform initiatives. Congress should provide funding and technical assistance to states that lack APCDs and create a federal backstop for states unable to collect data from self-insured plans, which are currently exempt from state collection mandates under ERISA (Employee Retirement Income Security Act of 1974).
Reference pricing programs, used successfully by several large employers and by Medicare Advantage plans, set a maximum payment amount for specific shoppable services based on benchmarks derived from median market rates or Medicare rates. Patients who choose higher-priced facilities pay the difference. CalPERS, the California public employees’ retirement system, implemented reference pricing for knee and hip replacements in 2011 and documented a 26 percent reduction in procedure prices over the following years, with no detectable change in quality. Federal legislation enabling reference pricing in employer-sponsored plans and standardizing its implementation would extend these benefits broadly.
Prohibiting anti-steering and anti-tying provisions in hospital-insurer contracts would restore the price competition that market advocates have long promised but that the healthcare market has never been allowed to actually produce. These contract clauses prevent insurers from directing patients to lower-cost facilities or building tiered networks that reward price-conscious choices. The Federal Trade Commission (FTC) has authority to act on some of these provisions under existing antitrust law, and Congress should clarify and expand that authority explicitly.
Site of service payment reform at the federal level would eliminate the financial windfall hospitals receive when they reclassify office-based services as hospital outpatient services. Medicare has moved in this direction with its "site neutral payment" policies, but implementation has been partial and subject to legal challenges. Comprehensive site-neutral reform, paying the same rate for the same service regardless of where it is physically delivered, would remove a significant financial incentive for acquisition-driven price escalation.
Strengthened transparency enforcement with meaningful penalties and standardized data formats would not solve the underlying structural problem, but it would at minimum force hospitals to publish accurate and usable information. HHS should mandate a standardized machine-readable format with required fields, conduct regular audits of published data, and impose penalties scaled to institutional revenue rather than fixed at amounts large systems can absorb as a routine cost of doing business.
More aggressive antitrust enforcement targeting hospital consolidation needs to move faster. The current review process is too slow to prevent mergers before integration occurs, and post-merger divestitures are rarely effective. The FTC should have broader authority to block mergers in markets where consolidation has already reduced competition, and states should strengthen their certificate of public advantage processes to ensure approved mergers deliver demonstrable community benefit rather than market power.
The Politics of This Are Hard. The Economics Are Not.
None of the solutions above are new. Health economists have been describing versions of them for decades. The challenge is building enough political will to overcome the substantial lobbying power of the institutions that benefit from the current system.
Hospitals, insurers, and pharmaceutical companies collectively spend more on federal lobbying than any other sector of the economy. They have successfully blocked, diluted, or delayed virtually every major legislative effort to directly constrain healthcare prices. The Affordable Care Act's most aggressive cost-control mechanisms were stripped out before passage. The transparency rules that did pass were implemented in a form that limits their practical impact.
The path forward is probably not a single comprehensive reform but a combination of state-level data infrastructure investment, targeted federal payment reforms, and renewed antitrust enforcement, each of which is politically achievable, and each of which, in combination, would gradually constrain the market power and pricing opacity that sustain current variation.
The basic facts of American healthcare pricing are not complicated. For a knee replacement, a colonoscopy, a mammogram, or a hospital stay, the price you pay is determined largely by where you live, whose insurance you have, and which institution has the most negotiating leverage in your market. Clinical need, quality of care, and actual cost of delivery are secondary considerations at best.
That is a policy choice, made through decades of legislative inaction and regulatory accommodation. It can be unmade the same way.
Sources: RAND Hospital Price Transparency Study (2022); Peterson-KFF Health System Tracker; Berenson et al., "The Roles of Cost Transparency in Health Care Markets" (Health Affairs, 2021); Anderson et al., "It's the Prices, Stupid" (Health Affairs, 2003); Cutler and Morton, "Hospitals, Market Share, and Consolidation" (JAMA, 2013); HHS Hospital Price Transparency Final Rule (2022).
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