From Captive Bargaining to Outside Options: Re-Anchoring Price Formation in US Hospitals

 or decades, policymakers, employers, and economists have debated the spiraling cost of American healthcare. Yet, despite trillions of dollars poured into reform efforts, the diagnosis has frequently missed the mark. A landmark October 2026 working paper from the Institute for New Economic Thinking (INET)—authored by David Introcaso and Dr. Adam Cunningham—argues that the core driver of US healthcare unaffordability is not excess utilization or a lack of data, but a fundamental failure in price formation.

Commercial hospital rates now average 254% of Medicare, with extreme geographic disparities. Why? Because the US commercial hospital market violates a basic tenet of economics: prices in competitive markets are disciplined by a buyer's outside option—the credible ability to purchase elsewhere.

1. The Anatomy of Market Failure: Why Transparency Alone Has Failed

For five years, federal price transparency rules have flooded the market with machine-readable data. Proponents hoped that shining a light on hospital prices would ignite consumer shopping and lower costs. Instead, it produced price convergence rather than cost reduction.

Transparency cannot fix a market where buyers have nowhere to go:

• Extreme Consolidation: As of 2016, 90% of hospital markets were highly concentrated. By 2024, one or two health systems controlled the entire inpatient care market in 47% of US metropolitan areas.

• Anti-Competitive Contracting: Dominant health systems routinely weaponize anti-steering, anti-tiering, and all-or-nothing clauses. These contractual handcuffs legally strip commercial health plans of the freedom to direct patients to lower-cost providers, even when viable alternatives exist.

• The "Prices, Stupid" Reality: Echoing Gerard Anderson’s foundational research, the US does not consume more healthcare per capita than peer nations; we simply pay vastly inflated unit prices.

Furthermore, existing benchmarks—such as Medicare multiples, the Qualifying Payment Amount (QPA), and aggregates of disclosed commercial rates—fail because they are all derived from the same insular, distorted transactions. Much like the LIBOR financial scandal or historical Average Wholesale Price (AWP) drug pricing manipulations, when a benchmark relies on figures generated by the entities being priced, it ceases to serve as an objective discipline. In fact, under the No Surprises Act, median Independent Dispute Resolution (IDR) arbitration awards surged to 459% of the QPA by late 2024, effectively turning price caps into price floors.

2. The Two-Part Policy Solution

To restore market discipline, Introcaso and Cunningham propose a synchronized, two-part intervention that combines an external price signal with structural legal reforms:

+-------------------------------------------------------------------+
|                  THE TWO-PART POLICY FRAMEWORK                    |
+-------------------------------------------------------------------+
|  1. INDEPENDENT BENCHMARK UTILITY                                 |
|     - Multi-stakeholder governance (purchasers, providers,        |
|       patients, actuaries, academics).                            |
|     - Publishes objective, procedure-level reference prices       |
|       authored completely outside hospital control.               |
|     - Voluntary adoption: participating providers accept the rate |
|       as payment in full (eliminating balance billing).           |
+-------------------------------------------------------------------+
|  2. BAN RESTRICTIVE CONTRACTING CLAUSES                           |
|     - Immediate legislative prohibition on anti-steering,         |
|       anti-tiering, and all-or-nothing contract terms.            |
|     - Frees commercial buyers to walk away and direct volume      |
|       to efficient providers.                                     |
+-------------------------------------------------------------------+

Neither mechanism can succeed in isolation. Without banning restrictive contracting clauses, buyers cannot walk away to utilize an independent benchmark. Conversely, without an independent reference price, buyers freed from restrictive clauses quickly exhaust local alternative options in consolidated markets.

3. Key Operational Pillars of the INET Proposal

A. Standardized Service Scopes

To prevent hospitals from unbundling care into opaque, hyper-inflationary billing components, reference prices must be anchored to a universal, externally set service scope. By defining clear clinical boundaries—including facility, professional, and anesthesia fees, implants, imaging, readmission windows, and assumed discharge dispositions—buyers and sellers can execute true "apples-to-apples" comparisons.

B. Strengthening ERISA Fiduciary Protections

Self-funded employer-sponsored plans cover approximately 154 million Americans. Under ERISA Sections 404 and 408(b)(2), plan fiduciaries must prove that healthcare expenditures are "reasonable". The INET paper recommends that the Department of Labor’s Employee Benefits Security Administration (EBSA) issue formal guidance confirming that a documented review of independently sourced reference prices satisfies fiduciary prudence requirements.

C. Reforming Intermediaries & Eliminating Conflicts of Interest

Third-party administrators (TPAs) and re-pricers often operate under a "dual agency" conflict, where compensation tied as a percentage of billed charges or savings creates a perverse incentive to keep prices high:

• Flat Fees: TPA and re-pricer compensation calculated as a percentage of chargemaster spreads or savings should be prohibited, replacing them with fully disclosed, flat per-member-per-month (PMPM) fees.

• Closing the MLR Loophole: Related-party and affiliate payments by insurers should be tested against the lower of local unaffiliated commercial rates or an independent reference price, preventing inflated internal markups from counting toward medical spending under Medical Loss Ratio (MLR) calculations.

4. Economic Impact and Empirical Evaluation

The macro-level dividends of dismantling anti-competitive healthcare contracting are profound. The Council of Economic Advisers projects that a nationwide ban on restrictive hospital contracts would reduce hospital prices in affected markets by 18%, lower employer premiums by 6.5%, and yield roughly $45 billion in annual national savings. Furthermore, CBO scoring on related federal legislation indicates significant deficit reduction.

To ensure accountability, the INET framework outlines strict criteria for empirical evaluation:

• Randomized Market Rollout: Modeled after CMS’s Global Benchmark for Efficient Drug Pricing (GLOBE) approach, reference benchmarks should be published in successive groups of markets drawn by lot.

• The 36-Month Window: Drawing on lessons from Oregon’s state employee payment caps—where outpatient savings took years to fully materialize and low-cost providers initially drifted upward—evaluations should measure contracted commercial rate distributions at the three-year mark.

5. Conclusion: A Practical Path Forward

The debate over healthcare costs often bogs down in false choices between unfettered free-market policies that ignore real-world monopolies and heavy-handed price controls. Introcaso and Cunningham’s working paper provides a pragmatic middle ground: injecting genuine market discipline by arming institutional buyers with an independent pricing baseline and liberating them from anti-competitive contracting.

For lawmakers seeking actionable reform, enacting a statutory ban on restrictive contracting clauses serves as an immediate, zero-cost fiscal down payment. Pairing that down payment with an independent benchmark utility creates the durable infrastructure needed to restore a functional, affordable commercial healthcare marketplace for American workers and employers alike.