Hospitals can’t win every policy battle

North Carolina’s hospital sector employs one of the most effective teams of strategists, lobbyists, and marketers in the state. Still, under present circumstances, I’d be flabbergasted if hospitals emerge from the next 18 months without one or more significant policy losses.

You’ll find North Carolina’s hospitals — and the sprawling networks of physician practices, clinics, urgent cares, and other facilities they own or manage — at or near the center of many political controversies.

Take the state budget. For years, hospitals were among the loudest proponents of Medicaid expansion and helped convince former NC House speaker Tim Moore and soon-to-be-former Senate Leader Phil Berger to go along. Critical to the resulting deal was a new set of charges on hospital bills, supposedly to pay North Carolina’s share of Medicaid expansion, that were in fact a means of evading the cost.

In last summer’s federal reconciliation bill, Congress placed hard limits on such creative accounting. Now the clock is ticking. Sometime during the next couple of years, the General Assembly must either chip in billions of state dollars or let Medicaid expansion disappear.

More generally, medical costs continue to soar, straining public and private budgets alike. Nationwide, health care expenditures rose 7.2% in 2024. The subcategory of hospital spending grew faster (8.9%) than physician and clinical services (8.1%) and prescription drugs (7.9%). Here in North Carolina, health care spending grew by an average annual rate of 6.5% from 1991 to 2020, faster than the nation as a whole (5.7%) and every other state in the Southeast. Spending within North Carolina hospitals also outpaced the region and nation.

Reformers have long sought to tame hospital costs by introducing more competition. Using a standard Herfindahl–Hirschman Index for assessing market concentration, a team of Yale University researchers recently ranked North Carolina second only to West Virginia in the Southeast in hospital concentration, and the 12th-most concentrated state in the country.

This is actually worse than it appears, because nearly all the higher-ranked states are small or sparsely populated — conditions that tend to reduce the number of potential competitors. Among America’s most-populous states, North Carolina sticks out like a sore thumb. The share of our hospitals located in monopoly or near-monopoly markets is 71.2%. It is 61.7% in Georgia, 50% in Pennsylvania, 47.4% in Michigan, and below 40% in New York, Texas, Florida, Illinois, Ohio, and California.

Even in states that continue the archaic process of requiring hospitals to get state permission to enter new markets, North Carolina is another outlier. As of 2023, it subjected 25 medical services to such certificate-of-need regulation. New York and Georgia regulated 22, Michigan 19, Illinois 15, Florida six, and Ohio only one. Such constraints on competition are no more in Texas, California, and Pennsylvania.

Finally, North Carolina House and Senate committees are currently studying potential reforms of our sales and property taxes. North Carolina’s nonprofit hospitals are fully exempt from property taxes, for example. Other states aren’t so generous. Florida allow nonprofit hospitals to take property-tax exemptions no greater than the amount of charity care they provide. A 2021 study by Johns Hopkins University researchers and North Carolina’s state health plan found that the amount of charity care performed by most large hospitals in our state is far lower than the value of their property-tax exemptions.

As for the sales tax, nonprofits are generally exempt from having to pay sales tax on their purchases. The General Assembly capped sales-tax refunds for hospitals some years ago, but at so high a rate that only now are some large hospital systems bumping up against it. Some legislators want to lower the cap. (I disagree with this idea, by the way, because I don’t think business-to-business transactions should be subject to sales tax at all. The right policy, however unlikely, would be to apply sales tax to medical services.)

On these and other matters, hospitals will defend themselves. They’ll doubtless win some battles. But I doubt they’ll win them all.

John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy and American history.

“Hospitals can’t win every policy battle” was originally published on www.carolinajournal.com.