Health care costs have been growing rapidly in recent years, with hospital expenditures being a major contributor to growth. Some states have begun exploring caps on hospital rates for commercial payers. In this paper, we estimate the savings to households, employers, the federal government, and total spending of capping hospital rates at levels ranging from Medicare plus 60 percent to Medicare plus 200 percent. We then estimate the effects under Medicare plus 100 percent while restricting cuts to specific areas.

Why This Matters

Rising health care costs are increasingly problematic, contributing significantly to health care affordability issues. Concentration in the hospital system has grown rapidly with widespread merger activity. Evidence shows that hospital concentration leads to higher prices. Furthermore, evidence shows that many past rate-setting programs were effective but were allowed to lapse given the promise of savings from managed care, a promise that has not held up.

What We Found

We found hospital rate setting to Medicare plus 100 percent in both the nongroup and employer markets would reduce health spending by $114.8 billion in 2028. The federal deficit, including both lower premium subsidies and higher tax revenues resulting from greater taxable compensation when employer spending on premiums falls because of rate setting, would fall by $44.7 billion in 2028 and by $548 billion between 2028 and 2037. If rate setting applied only in the nongroup market, total health spending would fall by $8.3 billion in 2028, and the federal deficit would fall by $7.3 billion. The federal deficit would fall by $89 billion between 2028 and 2037. If the same rate setting applied only in urban areas, i.e., rural areas were exempt, the reduction in the federal deficit between 2028 and 2037 would be $440 billion. If rate setting applied only in concentrated hospital markets and those with major teaching hospitals, the federal deficit would fall by $500 billion between 2028 and 2037. If markets with large concentrations of safety net hospitals were exempt, the reduction in the federal deficit over 10 years would be $449 billion. If low-income areas were exempt, the reduction in the federal deficit would be $459 billion. Thus, rate-setting policies can be targeted in some ways and still achieve most of the savings achieved with a national policy.

How We Did It

We used the Urban Institute’s Health Insurance Policy Simulation Model to estimate the effects of rate-setting policies in selected markets. The analysis was done using a 2028 spending baseline that reflects the changes to the Marketplaces enacted in July 2025 in the One Big Beautiful Bill Act but does not include the effects of the Act’s Medicaid provisions, including work requirements and six-month eligibility redeterminations.