Why American Healthcare Is So Expensive

Why blaming the insurance company alone misses much of the story

When Americans are frustrated with healthcare, the insurance company usually gets the call. A claim is denied, a prescription costs too much, a doctor leaves the network, a Medicare Advantage benefit changes, an ACA premium rises, or an employer faces another expensive renewal. The insurer is the most visible financial intermediary, so it naturally absorbs much of the anger.

Insurance companies are part of the equation and deserve scrutiny. Prior authorization can be excessive, networks can be inadequate, coverage decisions can be frustrating, and consolidation can reduce competition. But treating insurers as the primary cause of America’s healthcare-cost problem ignores the much larger system around them.

The United States spent roughly $5.3 trillion on healthcare in 2024, or about $15,474 per person. Hospitals accounted for about $1.63 trillion, physician and clinical services about $1.11 trillion, and retail prescription drugs about $467 billion. Insurance sits in the middle of this spending, but it does not originate most of the underlying medical costs.

Healthcare inflation becomes insurance inflation

An insurance premium is largely the price of financing expected healthcare claims, plus administration, reserves and profit. When hospital prices rise, physician costs increase, patients use more services, or expensive specialty drugs become more common, premiums eventually have to reflect those costs.

Private health insurance spending grew 8.8% in 2024. Hospital spending grew 8.9%, physician and clinical spending 8.1%, and prescription drug spending 7.9%. Insurers can negotiate, steer patients toward lower-cost care, manage utilization and design networks, but they cannot indefinitely absorb increases in the cost of the services they finance.

This is why a premium increase should not automatically be interpreted as an equivalent increase in insurer profit. In many cases, it reflects higher claims costs flowing through the system.

Provider consolidation increases pricing power

One of the most important structural changes in American healthcare has been the consolidation of hospitals and physician practices. GAO reported that at least 47% of physicians were employed by or affiliated with hospital systems in 2024, up from less than 30% in 2012. Research reviewed by GAO has found that hospital-physician consolidation can increase prices and spending without consistently improving quality.

This matters because healthcare does not behave like a normal retail market. An insurer can refuse to contract with an expensive grocery store and consumers still have alternatives. It is much harder to exclude the dominant hospital system in a region when that system also owns major physician groups, specialists, imaging centers and outpatient facilities. That gives large provider systems substantial negotiating leverage.

GAO has also reported that rising hospital prices were a major contributor to the growth in private health-plan spending between 2012 and 2022. Those higher negotiated prices eventually show up in employer premiums, employee contributions, deductibles and other forms of cost sharing.

Prescription drugs and PBMs add another layer of cost and complexity

Drug innovation has improved and extended millions of lives, but the economics of pharmaceuticals are unusually complicated. Manufacturers, wholesalers, pharmacy benefit managers, pharmacies, health plans, government programs and patients all participate in the payment chain. Rebates and contractual arrangements can make the list price, negotiated price, pharmacy acquisition cost, plan cost and patient cost very different numbers.

PBMs are part of this problem. In a 2025 investigation, the Federal Trade Commission reported that the three largest PBMs marked up a number of specialty generic drugs by hundreds or thousands of percent when those drugs were dispensed through affiliated pharmacies. The FTC estimated more than $7.3 billion in dispensing revenue above estimated acquisition costs for the drugs it examined from 2017 through 2022, plus roughly $1.4 billion from spread pricing.

PBMs are not the only source of drug-cost inflation. Manufacturers set prices, plans manage formularies, pharmacies operate under complex contracts, and government creates another layer of rules. The point is that the copay seen by the patient is only the final step in a much larger pricing system.

The Inflation Reduction Act shows the difference between affordability and total cost

The Inflation Reduction Act made meaningful changes to Medicare prescription-drug coverage. Beginning in 2025, the Part D redesign capped beneficiary out-of-pocket spending at $2,000, indexed to $2,100 for 2026. For beneficiaries taking expensive medications, that was a major improvement in financial protection.

But reducing the amount paid directly by the patient does not make the underlying drug free. The law changed who bears the cost. Under the redesigned catastrophic benefit, Part D plans generally assume a much larger share of covered drug costs, while manufacturers and Medicare also bear defined portions. That shift is important because it changes plan liability and therefore affects bids, premiums, formularies and benefit design.

The distinction matters in almost every healthcare debate: lowering what a patient pays is not necessarily the same as lowering what healthcare costs. Sometimes policy reduces the underlying price. Other times it reallocates the bill among patients, insurers, manufacturers, employers and taxpayers.

CMS itself created a temporary Part D Premium Stabilization Demonstration as the redesigned benefit took effect. The program reduced participating standalone Part D plan premiums in 2025 and provided somewhat less assistance in 2026. That is a practical example of government trying to soften the market disruption created by a major change in who pays for the benefit.

Rapid policy changes create instability

Medicare Advantage illustrates how quickly government policy can change the economics of a health plan. Plans have to react to annual changes in payment benchmarks, risk adjustment, Star Ratings, coding rules, benefit requirements, Part D policy, utilization-management requirements and compliance standards.

MedPAC continues to argue that Medicare Advantage is paid more than comparable fee-for-service Medicare because of factors such as coding intensity and favorable selection. At the same time, Medicare Advantage beneficiaries often receive an out-of-pocket maximum and supplemental benefits that traditional Medicare does not provide on its own. Both facts can be true.

The difficulty is that policy changes have consequences. Reduce payment enough and plans may respond by changing supplemental benefits, copays, formularies, networks, premiums or service areas. Increase payment and taxpayers and Medicare beneficiaries ultimately finance more of the program. Policymakers are constantly balancing affordability, access, benefits, provider participation and federal spending.

The ACA has the same economic tradeoffs

The Affordable Care Act solved real problems in the individual market. It established guaranteed issue regardless of health status, standardized many coverage requirements and created premium tax credits and risk-adjustment mechanisms. Those protections also changed the economics of insurance.

If insurers cannot price individuals based on health status, some mechanism is needed to compensate plans that enroll disproportionately sick populations. If policymakers want consumers to pay less than the full premium, subsidies make up part of the difference. That improves affordability for the enrollee, but the underlying medical cost still exists.

The expiration of enhanced ACA premium tax credits after 2025 illustrates how policy changes can alter enrollment and premiums. CBO projected that expiration would increase the uninsured population and raise gross benchmark premiums because healthier consumers would be more likely to leave the market. A change in subsidies changes enrollment, the risk pool, carrier pricing and ultimately the consumer experience.

Medical technology improves care while increasing spending

Modern medicine can do things that were impossible a generation ago: advanced imaging, robotic surgery, biologic drugs, implantable devices, genetic testing, sophisticated cancer therapies and increasingly capable durable medical equipment. These advances improve and extend lives, but they also create new categories of spending.

Technology in healthcare does not always reduce cost the way it does in consumer electronics. A patient who previously had no effective treatment may now have a treatment that costs $100,000. That is medical progress and additional healthcare spending at the same time.

Administrative complexity is expensive

Hospitals and health systems employ large billing, coding, compliance, credentialing, legal, IT, cybersecurity, quality, utilization-review and finance teams. Insurers maintain parallel operations for contracting, claims, medical review, appeals, fraud detection and regulatory compliance. Providers document and submit; plans review and adjudicate; providers appeal; government audits both.

Some of this infrastructure exists because American healthcare financing is unusually complicated. Administrative simplification is therefore one of the legitimate arguments for a single-payer system. Even then, administration does not disappear entirely. Someone still has todetermine what is covered, set reimbursement, detect fraud, process claims, measure quality and decide how limited resources are allocated.

Fraud, waste and improper payments are significant

The scale of American healthcare also creates a large target for fraud, abuse and payment errors. HHS's Office of Inspector General reported that CMS estimated more than $95 billion in improper payments across major programs it examined for fiscal year 2025.

An improper payment is not automatically fraud. It can result from documentation problems, eligibility errors, administrative mistakes or incorrect payment amounts. But the figure demonstrates the scale of leakage in a multi-trillion-dollar system.

Fraud prevention creates another source of friction. Patients and providers dislike verification, documentation and audits, but removing those controls entirely would make inappropriate billing and overutilization easier. The challenge is making oversight targeted enough to protect the system without unnecessarily obstructing legitimate care.

Prior authorization is unpopular because it sits at the point of conflict

Prior authorization is one of the most visible and disliked tools in managed care, and some prior-authorization practices deserve reform. Patients should not face unreasonable delays for medically necessary treatment, and physicians should not spend excessive time navigating inconsistent requirements.

At the same time, every large healthcare system has to manage utilization somehow. Patients often do not pay the full cost of the service at the point of care, providers generally earn revenue by delivering services, and the party recommending the service is usually not the party financing it. Without any counterweight, unnecessary utilization becomes easier.

Private insurance uses utilization management, network design and coverage rules. Government programs use reimbursement rules, coverage determinations, budgets and other controls. The better debate is not whether utilization should ever be managed, but how it can be managed quickly, transparently and clinically sensibly.

Insurance companies still deserve accountability

None of this gives insurers a free pass. Insurers can create unnecessary bureaucracy, make poor coverage decisions, design weak networks, overuse prior authorization, consolidate markets and negotiate poorly. Those issues should be addressed directly.

But the ACA's medical-loss-ratio rules provide useful context. Insurers in the individual and small-group markets generally must spend at least 80% of premium revenue on healthcare and quality improvement, while the requirement is generally 85% in the large-group market. Plans that fail the applicable standard must rebate money to consumers.

That does not mean every remaining dollar is profit, and it does not prove the insurance market is perfectly efficient. It simply reinforces the point that the majority of premium dollars are tied to medical claims and healthcare-related spending.

What about Medicare for All?

A Medicare-for-All or single-payer system could address several real weaknesses in the current system. It could provide near-universal coverage, reduce the number of uninsured people, lower or eliminate many forms of patient cost sharing, simplify billing and give the federal government much greater leverage over hospital, physician and pharmaceutical prices.

Those are meaningful potential advantages, but they do not make healthcare free. CBO modeled several illustrative single-payer systems and found that the effect on total national healthcare spending could vary widely depending on the design. In some scenarios, national spending fell substantially; in others, it increased. The result depended heavily on provider payment rates, drug prices, cost sharing, long-term-care coverage and changes in utilization.

CBO also estimated that federal healthcare subsidies would increase by roughly $1.5 trillion to $3 trillion in 2030 under the options it modeled. That figure should not be presented as though every dollar were a new cost to Americans. Much of it would replace spending that employers, households, states and private insurers currently make. The important issue is the financing shift: the federal government would need much more revenue through some combination of payroll taxes, income taxes, employer taxes, other taxes, spending reductions or debt.

There is also a capacity question. When patient cost sharing falls, people tend to use more healthcare. CBO concluded that demand could rise faster than provider supply in some single-payer scenarios, especially when low cost sharing is combined with lower provider reimbursement. That can create congestion, longer waits or unmet demand even while financial access improves.

This is the central tradeoff. Paying providers substantially less can generate savings but may affect participation and capacity. Maintaining generous reimbursement protects providers but reduces potential savings. Eliminating cost sharing improves affordability but increases utilization. Keeping meaningful cost sharing restrains utilization but preserves some of the financial burden consumers dislike.

A public option is a narrower alternative

A public option would preserve private insurance while allowing consumers to buy a government-sponsored plan. CBO has found that a public option could reduce premiums in some ACA markets, particularly where competition is limited.

Again, provider reimbursement is central. A public plan can often charge lower premiums if it pays hospitals and physicians less than commercial insurers do. That may be an appropriate way to attack excessive provider prices in some markets, but it can create financial pressure on providers in others. The policy outcome depends on local market power, reimbursement levels and provider economics.

There is no single villain and no single fix

America's healthcare problem is a collection of overlapping problems: high hospital prices in some markets, consolidation among hospitals and physician groups, expensive pharmaceutical innovation, opaque PBM economics, fraud and payment errors, administrative complexity, incentives that can reward volume over value, and government rules that frequently change the economics of coverage.

The consumer experiences only the end result. A Medicare beneficiary sees a copay increase, not the risk-adjustment change behind it. An ACA customer sees a premium increase, not the deterioration of a risk pool. An employee sees a larger payroll deduction, not the hospital contract that drove the employer's renewal. A patient sees an unaffordable prescription, not the manufacturer, PBM, pharmacy, rebate arrangement and formulary negotiation behind it.

The insurance company is often standing at the end of those transactions, which is why it receives so much of the blame. Sometimes that blame is deserved. Often it is incomplete.

A more productive healthcare debate starts by asking where the money is actually going and what incentives caused it to go there. Meaningful reform requires addressing provider pricing and consolidation, pharmaceutical and PBM economics, fraud and waste, administrative burden, payment incentives, unnecessary utilization and the unintended consequences of government policy.

The basic economic reality is unavoidable: if a healthcare service costs money to provide, someone ultimately pays for it. The important questions are who pays, how much they pay, what incentives that payment system creates and whether Americans receive enough value in return.

Key principle: Lowering what a patient pays is not necessarily the same as lowering what healthcare costs. Policy can reduce the underlying price, but it can also shift the bill among patients, insurers, providers, manufacturers, employers and taxpayers.

Sources and reference material

CMS, National Health Expenditure Data - NHE Fact Sheet
https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/nhe-fact-sheet

GAO, Physician Consolidation and Vertical Integration
https://www.gao.gov/products/gao-25-107450

GAO, Hospital Prices and Private Health Plan Spending
https://files.gao.gov/reports/GAO-25-106995/index.html

FTC, Second Interim Staff Report on Prescription Drug Middlemen
https://www.ftc.gov/news-events/news/press-releases/2025/01/ftc-releases-second-interim-staff-report-prescription-drug-middlemen

CMS, Final CY 2025 Part D Redesign Program Instructions
https://www.cms.gov/newsroom/fact-sheets/final-cy-2025-part-d-redesign-program-instructions-fact-sheet

CMS, 2026 Part D Bid Information and Premium Stabilization Demonstration
https://www.cms.gov/newsroom/fact-sheets/2026-medicare-part-d-bid-information-and-part-d-premium-stabilization-demonstration-parameters

CMS, Final 2027 Medicare Advantage and Part D Payment Policies
https://www.cms.gov/newsroom/press-releases/cms-finalizes-2027-medicare-advantage-part-d-payment-policies-strengthen-accountability-long-term

MedPAC, March 2026 Report to Congress, Medicare Advantage chapter
https://www.medpac.gov/wp-content/uploads/2026/03/Mar26_Ch12_MedPAC_Report_To_Congress_SEC.pdf

CBO, Effects of Enhanced ACA Premium Tax Credits / Coverage Projections
https://www.cbo.gov/publication/59230

HHS OIG, Spring 2026 Semiannual Report to Congress
https://oig.hhs.gov/documents/sar/11794/Spring_2026_SAR.pdf

CMS, Medical Loss Ratio
https://www.cms.gov/marketplace/private-health-insurance/medical-loss-ratio

CBO, A Single-Payer Health Care System Based on Medicare
https://www.cbo.gov/publication/56898

CBO, Effects of a Public Option on Health Insurance Markets
https://www.cbo.gov/publication/57125