A Free-Market Oasis in a Heavily Regulated Health Care System

Introduction

Health care costs in Wisconsin and across the country have surged at an alarming rate. Between 1999 and 2024, total family health insurance premiums increased by 342%, turning health care coverage into an unaffordable, yet unavoidable, cost for American families.

As federal programs have grown through the Affordable Care Act, Medicaid expansion, and various reforms to Medicare, both overall health care spending and the taxpayers’ burden have continued to swell. Despite growing evidence that government involvement leads to higher health care costs, many lawmakers continue to push for even more intervention.

In 2024, the government was by far the largest spender, accounting for 47% of the total $5.3 trillion in U.S. health expenditures when looking at state, federal, and local government spending.

Additionally, 89.5% of all health care spending was financed by a third-party payer in 2024, whether that be a government entity or private health insurer. This is in stark contrast to previous decades. In 1970, only 67.3% of health care expenditures were paid for by third-party payers.

There is, however, a free-market oasis in the midst of the heavily regulated health care industry: physician-owned hospitals (POHs) and cash-only medical providers. While these two models sometimes overlap, they both show how free markets can prevail in the health care system, leading to lower costs, more transparency, and more choice for consumers.

The Data on Physician-Owned Hospitals

Physician-owned hospitals are facilities that are both owned and operated by doctors rather than a hospital system or large corporation.

Many federal rules and regulations have made it difficult for POHs to start and grow. Hospital lobbyists such as the American Hospital Association (AHA) and Federation of American Hospitals (FAH) were able to squeeze a provision into the Affordable Care Act (ACA) that effectively banned POHs from starting or growing.

More specifically, the law states that new POHs, or those that wish to expand, will not be eligible to bill for Medicare. This greatly reduces the financial viability of owning a POH.

An important distinction to be made is that not all physician-owned hospitals are cash-only facilities. While they can’t take money from Medicare, they are allowed to bill private insurers, and many do. However, there is still a strong overlap between the two, as many cash-only medical providers are POHs.

POHs are often able to offer lower costs than traditional hospitals, as direct ownership and the inability to bill some government programs drastically reduce administrative costs.

Moreover, a senior fellow from the American Enterprise Institute contributed to a research paper that discusses why POHs have a useful position in the market, allowing them to increase competition in the hospital market and push down prices.

The paper states that physicians have a unique ability to identify points of entry into the health care market and opportunities for innovation due to their extensive knowledge of the medical field. Having ownership and a greater stake in the success of the hospital also incentivizes physicians to enter and stay in the market, along with providing higher-quality care to their patients.

Both of these things help increase efficiency and competition in the hospital market and often have a downward pressure on prices for patients.

Research has consistently shown that POHs, on average, are able to offer more affordable care, even when they still choose to take payments from third-party insurers.

A study conducted in 2023 at Johns Hopkins University compared the prices between eight different shoppable medical services at POHs vs. non-POHs. They looked at 156 POHs and 1116 non-POHs and used both cash prices and commercial negotiation prices to measure the results.

The research found that commercially negotiated and cash prices were 33.7% and 32.7% lower at POHs than at non-POHs, respectively. This study controlled for region by picking POHs in hospital referral regions (HRRs) with at least one non-POH general acute care hospital.

The Data on Offering Cash Prices:

While POHs represent an ownership model, cash-only facilities represent a payment model. Cash-only providers don't take any kind of third-party payments, whether that be Medicare, Medicaid, or private insurance. Hospital bills are usually paid prior to the service or procedure by check, cash, or credit card.

By taking only out-of-pocket payments, cash-only providers are able to eliminate many of the administrative expenses that come with accepting government reimbursements and negotiating payments with private insurance companies.

Due to the ease of their payment system, cash-only providers are also typically able to have price transparency, a practice that is largely absent from the traditional hospital system.

Another study from the Johns Hopkins Bloomberg School of Public Health analyzed the differences in prices for cash prices set by hospitals for the uninsured and commercially negotiated prices.

The results of this study showed that across the 70 services, nearly half of them had lower cash prices than the median insurance-paid price. “Medicine and surgery” and “evaluation and management services” were the areas most likely to have lower cash prices.

The results also suggested that government and nonprofit hospitals tend to offer even lower cash prices, likely due to their high proportion of uninsured patients.

A Case Study - The Surgery Center of Oklahoma

The Surgery Center of Oklahoma is both a POH and a cash-only provider and is a perfect case study on how the free market can flourish in the health care industry. Because they are a cash-only provider, they do not take Medicare, Medicaid, or any form of private insurance.

Their prices for available surgeries are listed transparently on their website and are all-inclusive rates. Their website claims that their “goal is for the price to be as transparent as possible.” You get a price, you get the bill, and you pay your bill prior to receiving your surgery.

Due to not having to deal with Medicaid reimbursements or bartering with insurance companies, the Surgery Center of Oklahoma is able to have much lower administrative costs. This translates to consumers enjoying far lower prices for their medical services than they would at a traditional hospital and going through their own insurance.

For instance, carpal tunnel release surgery costs $3,205 at the Surgery Center of Oklahoma. However, the average price for this surgery at a traditional hospital is upwards of $7,000 without insurance.

Moreover, hip replacement at the Surgery Center of Oklahoma is only $17,579, while the average for a hip replacement is greater than $40,000 in many regions.

While paying completely out-of-pocket may seem unrealistic to some patients, it has proven to be an extremely successful business model for the Surgery Center of Oklahoma. They have many so-called “medical tourists,” with a significant portion of their patients being from out of state.

This is because the cash-only model, combined with below-average prices, is an extremely attractive option for patients who have high-deductible plans, have high co-payments, or are uninsured.

For some people, it is cheaper to pay the $3,205 for carpal tunnel release out of pocket than it is to pay all the way up to their deductible with additional copayments on top of it.

Furthermore, the price transparency model used by POHs such as the Surgery Center of Oklahoma lowers prices in the medical field for the entire local area. Other hospitals will be forced to lower their prices when patients can easily see that a different hospital is transparently offering a much lower price. This is key for price competition in the medical provider market.

A Possible Path Forward in Wisconsin

While many of the regulatory provisions in health care are implemented at the federal level, there are a couple of things that Wisconsin can do to help free markets prevail. This includes easing restrictions on certificate of need laws and having friendlier regulations around cash-only providers and POHs.

Evidence shows that using free-market principles in the health care system is not just theoretical but a proven way to reduce market consolidation and health care costs.

Expanding opportunities for POHs and cash-based providers would strengthen patients’ choice and create downward pressure on prices across the health care system. Ultimately, restoring market competition through promoting different types of providers offers a practical way to move towards a more affordable, transparent, and patient-centered health care system.