The High Cost of American Health Care
Why does the US pay higher prices for health care than other countries?
The United States spends substantially more on health care than any other high-income nation, yet achieves poorer health outcomes by many measures. In 2024, health care spending in the US reached nearly $4.9 trillion, representing about 17.6% of the country's GDP—a percentage far exceeding that of peer nations. Despite this enormous financial investment, the US ranks poorly on measures like life expectancy, chronic disease burden, and preventable mortality.
This analysis examines the structural and systemic factors that contribute to America's exceptionally high health care costs. From market consolidation to payment models, from profit motives to administrative complexity, multiple interconnected forces drive excessive spending without delivering commensurate value. Independent from the attributes of health care services is a population of Americans that develop a seemingly unstoppable rate of chronic diseases like heart disease, obesity, diabetes, cancers. This coupled with high gun-related deaths, high levels of income inequality, and high rates of negative social determinants of health produces the the underlying demand for health services at high prices. The high prices themselves were the topic of a previous article.
In fact, we received a lot of outreach from the previous article which was intended to review a single Health Affairs article discussing high prices in the US system as the primary driver of US health care spending. There certainly are other factors at play as many pointed out, so I am writing a more comprehensive article on factors that may cause higher prices and total spending on health care in the United States. This is not an exhaustive analysis, but it covers the primary points.
Market Consolidation: The Growth of Health Care Giants
Health care consolidation has accelerated dramatically over the past two decades, with profound implications for costs. Both horizontal integration (mergers between similar entities) and vertical integration (combining different parts of the health care supply chain) have reshaped the American health care landscape.
Horizontal Integration: Less Competition, Higher Prices
Horizontal consolidation occurs when hospitals merge with other hospitals, insurers combine with other insurers, or physician practices join together. These mergers have created regional powerhouses with significant market leverage.
When hospitals consolidate within a region, the impact on prices is substantial. Studies consistently show that hospital prices increase when mergers occur in concentrated markets. With fewer competitors, dominant hospital systems can demand higher reimbursement rates from insurers, costs that are inevitably passed on to employers and patients.
The hospital sector has experienced particularly dramatic consolidation. Between 2010 and 2019, there were over 750 hospital mergers and acquisitions in the United States. By 2021, 76.5% of metropolitan areas, hospital markets were considered highly concentrated according to federal antitrust guidelines. This consolidation extends to rural areas as well, where smaller hospitals have increasingly been absorbed into larger systems.
Physician practices have followed a similar trajectory. Once primarily independent, physicians increasingly work for hospitals or large group practices. The percentage of physicians employed by hospitals or health systems increased from 2012 to 2022. This consolidation gives providers greater bargaining power with insurers and often leads to higher service prices.
Vertical Integration: Control Across the Health Care Value Chain
Vertical integration involves combining different stages of the health care supply chain under single corporate entities. Examples include hospitals purchasing physician practices, insurers acquiring pharmacy benefit managers, or retail pharmacies buying health insurers.
When hospitals acquire physician practices, referral patterns often change. Studies show that hospital-employed physicians refer patients to their employing hospital at higher rates, even when lower-cost options exist. Moreover, services previously provided in lower-cost office settings may shift to hospital outpatient departments, where the same procedure often costs significantly more.
Recent vertical mergers have created powerful conglomerates spanning multiple health care sectors:
CVS Health's acquisition of Aetna combined a major pharmacy chain, a pharmacy benefit manager, and a health insurer
UnitedHealth Group's Optum division owns physician practices, outpatient facilities, and a pharmacy benefit manager
Cigna's acquisition of Express Scripts united an insurer with a major pharmacy benefit manager
These integrated entities enjoy multiple revenue streams and can steer patients within their own systems. While proponents claim vertical integration improves care coordination, evidence of cost savings for patients remains limited. Instead, the market power gained through such integration often translates into higher prices.
Restricting Market Entry: Certificate of Need Laws
Further restricting competition are Certificate of Need (CON) laws, which remain in effect in approximately 35 states. These regulations require health care providers to obtain government permission before building new facilities, expanding services, or purchasing certain equipment. Originally intended to prevent duplication of services and control costs, evidence suggests CON laws have instead protected incumbent providers from competition. Studies show that states with CON laws have higher health care prices and fewer facilities per capita than states without such restrictions. By creating regulatory barriers to entry, these laws effectively shield established health care systems from new competitors who might otherwise drive prices down, further contributing to the market concentration that enables higher prices.
These things really are pretty silly.
Profit Motive: The Business of Health Care
Unlike many other developed nations, the US health care system is predominantly private and profit-driven. This orientation affects prices, utilization, and system priorities.
For-profit hospitals, which constitute approximately ~36% of all hospitals in the US, must generate returns for shareholders while delivering care. These facilities typically charge higher prices than non-profit counterparts and may prioritize lucrative service lines over less profitable ones.
Publicly traded health care companies face quarterly earnings pressure and shareholder expectations. This creates incentives to maximize revenue and minimize costs in ways that may not align with optimal patient care or system efficiency. Health insurance companies regularly report profit margins of 3-8%, pharmaceutical companies often exceed 15-20% margins, and medical device manufacturers typically achieve 20-30% margins. This is not inherently a bad thing when markets are operating competitively, but in a scenario without competition it can lead to less-than-desirable societal outcomes and benefit.
In the pharmaceutical sector, profit motives are particularly evident. US prescription drug prices average 2.78 times higher than in other high-income nations. Unlike countries that negotiate drug prices centrally or regulate them, the US allows manufacturers to set prices largely at will, with limited counterbalancing market forces.
The investor-owned health care model has expanded into previously non-profit sectors. Private equity firms have acquired physician practices, nursing homes, and other care facilities at accelerating rates. These acquisitions often lead to reduced staffing, higher prices, and an emphasis on profitable services at the expense of comprehensive care. This is an area of great attention right now in the aftermath of the Steward Health situation in Massachusetts.
New Technologies: Innovation Without Cost Control
The US leads in developing and adopting new medical technologies, from advanced imaging systems to surgical robots to novel medications. While these innovations often improve care quality, their implementation in the American system typically occurs without robust cost-effectiveness evaluation. In fact, Medicare is barred from considering cost-effectiveness analysis in coverage decisions.
Unlike countries with health technology assessment programs—such as the United Kingdom's National Institute for Health and Care Excellence (NICE) or Germany's Institute for Quality and Efficiency in Health Care (IQWiG)—the US lacks systematic processes for evaluating whether new technologies justify their costs relative to existing alternatives. Thus, in many cases, costly new technologies enter the market at high prices without necessarily improving quality of care or performance compared to the prior standards of care.
Once approved by the FDA for safety and efficacy, new technologies typically diffuse through the health care system, regardless of their comparative value. Hospitals compete to offer the latest technologies as marketing advantages, insurers face pressure to cover them, and patients and physicians often demand access to the newest options. Americans have a special love of new medical technologies, politically. Therefore, it is politically undesirable for government health care programs, that often set the coverage and payment rate standards for other payors, to be seen as stifling medical innovation.
The result is widespread adoption of expensive technologies that may offer only marginal benefits over existing alternatives. Examples include:
Proton beam therapy facilities costing hundreds of millions of dollars to build, despite limited evidence of superiority for certain cancer types, though the evidence is growing for others.
Robotic surgical systems that increase procedure costs by thousands of dollars without consistently demonstrating better outcomes. This is a hotly debated topic. There is evidence of benefits in certain conditions, yet the return on investment is not well-understood.
New pharmaceuticals priced at premium levels without proportionate improvements in effectiveness compared to current medications.
Medicare Limitations: Statutory Constraints on Cost Control
Medicare, America's public health insurance program for seniors and certain disabled individuals, faces significant constraints in controlling costs due to legislative restrictions.
Most notably, Medicare is explicitly prohibited from considering cost-effectiveness in coverage determinations. The program must cover treatments deemed "reasonable and necessary" regardless of their price relative to benefits. This contrasts sharply with health systems in countries like the UK, Canada, and Australia, which routinely assess both clinical and economic value before covering new treatments.
Additionally, Medicare is forbidden from directly negotiating prescription drug prices with manufacturers. Until recently, the program had to cover virtually all drugs in certain protected classes at whatever price pharmaceutical companies set. The 2022 Inflation Reduction Act provided Medicare limited authority to negotiate prices for a small number of drugs, but this represents only a modest change to a system that still largely accepts manufacturer-set prices. This is an ongoing debate.
Medicare's rate-setting ability is also constrained by political pressures and provider lobbying. Payment formulas established by Congress often reflect political considerations rather than economic efficiency, and attempts to reduce payments frequently face fierce resistance from affected stakeholders.
These limitations affect not just Medicare but the entire health care system, as private insurers often follow Medicare's coverage policies and use its payment rates as benchmarks for their own reimbursement structures.
Fee-for-Service Payment: Incentivizing Volume Over Value
The predominant payment model in American health care remains fee-for-service (FFS), where providers receive payment for each service, procedure, test, or treatment delivered. This model inherently rewards volume rather than outcomes or efficiency.
Under fee-for-service, providers have financial incentives to:
Deliver more services, regardless of marginal benefit
Perform more complex procedures that carry higher reimbursement
Order additional tests and follow-up visits
Focus on treatment rather than prevention
The financial consequences are substantial. Studies estimate that 25-30% of all health care services in the US may be unnecessary or provide minimal benefit, directly attributable to the incentives created by fee-for-service payment.
Attempts to shift toward value-based payment models—such as bundled payments, accountable care organizations, and global budgets—have made only incremental progress. As of 2023, approximately 60-70% of healthcare payments still followed traditional fee-for-service arrangements.
Even in "value-based" programs, the underlying fee-for-service architecture often remains, with modifications like shared savings or quality bonuses layered on top. True transformation of payment incentives has proven difficult to implement at scale. CMS has set a goal to have most Medicare beneficiaries covered under some form of shared savings or accountable care-like model by 2030.
Administrative Complexity: The Hidden Cost Driver
Administrative costs represent one of the most significant differences between US health care spending and that of other developed nations. Studies estimate that administrative activities consume between 15% and 30% of total US health care expenditures—roughly $800 billion to $1.3 trillion annually.
This administrative burden stems from the system's complexity and fragmentation:
Billing and Payment Complexity
With thousands of health insurance plans, each with unique coverage rules, prior authorization requirements, and payment rates, providers must maintain extensive billing departments. A typical US hospital employs more billing specialists than beds, and physician practices spend an average of $70,000 per doctor annually on billing-related activities.
The average US hospital submits claims to 51 different payers. Each claim must be coded precisely according to complex classification systems, with errors resulting in payment delays or denials. This administrative burden doesn't exist in single-payer systems or those with standardized and streamlined payment procedures.
Insurance Overhead
Private health insurers in the US spend 12-18% of premium dollars on administrative costs and profits, compared to 1-3% for public programs in other countries. These costs include marketing, underwriting, claims processing, and shareholder returns.
The Medical Loss Ratio provision of the Affordable Care Act requires insurers to spend at least 80-85% of premium dollars on medical care, but this still allows for significant administrative expenses compared to international counterparts.
Provider Administrative Burden
US physicians spend an estimated 15-20 hours per week on administrative tasks not directly related to patient care. This includes documentation for billing purposes, quality reporting, prior authorization requests, and compliance with various regulations.
Nursing staff similarly spend greater than 25% of their time on documentation and administrative tasks rather than direct patient care. This represents both a direct cost (staff time) and an opportunity cost (reduced patient care capacity). This is due to insurance billing administrative burden and the need for documentation for both clinical purposes and defense purposes in the event of litigation.
Duplication and Fragmentation
With multiple payers, providers, and regulatory bodies, the US system suffers from duplicative administrative functions. Each insurer maintains its own claims processing system, provider networks, and utilization management protocols. Each provider organization must interface with dozens or hundreds of different insurers and comply with varying requirements.
This fragmentation contrasts sharply with more unified health systems like those in Canada, Sweden, or Taiwan, where administrative simplicity results from standardized processes across the entire system.
Other Potential Contributing Factors
While the major structural drivers discussed above explain much of America's exceptional health care spending, several additional factors contribute to the high-cost ecosystem:
Physician Compensation
American physicians, particularly specialists, earn substantially more than their counterparts in other high-income countries. US specialist physicians often earn 2-3 times what similar specialists make in countries like Germany, France, or Canada. This compensation differential reflects both the higher costs of medical education in the US and the greater market power of physician groups, especially in consolidated markets with limited competition.
Defensive Medicine
The US malpractice environment encourages "defensive medicine"—the practice of ordering tests, procedures, and consultations primarily to avoid potential lawsuits rather than for clinical necessity. Studies estimate that defensive medicine adds $50-100 billion annually to healthcare costs. While the direct costs of malpractice premiums and settlements are substantial, the indirect costs of defensive practices likely have a larger impact on overall spending.
Price Opacity
Unlike most consumer markets, healthcare prices in the US remain largely hidden until after services are delivered. Despite recent price transparency regulations, meaningful comparison shopping remains difficult for most patients. This opacity prevents normal market dynamics from exerting downward pressure on prices and allows for significant price variation for identical services, even within the same geographic area.
I have a good article on the mechanics of this here.
Employer-Based Insurance System
The predominance of employer-sponsored health insurance, covering approximately 164 million Americans, creates inefficiencies through job lock, administrative duplication, and insulation from true costs. The tax exemption for employer-provided health benefits costs the federal government over $250 billion annually in foregone revenue while incentivizing more comprehensive coverage than many individuals might otherwise choose.
Supply Chain Intermediaries
Numerous intermediaries operate between providers, payers, and patients, each extracting a portion of health care spending. Pharmacy benefit managers, group purchasing organizations, health care consultants, and various brokers add layers of complexity and cost to the system while often obscuring rather than enhancing value.
Social Determinants of Health
The US spends less on social services relative to health care than most developed nations, creating downstream medical costs. Underinvestment in housing, nutrition, education, and community resources leads to more severe health conditions requiring expensive medical interventions. Countries that invest more heavily in social infrastructure typically achieve better health outcomes at lower medical costs.
End-of-Life Care Intensity
Americans receive more intensive, hospital-based care in their final months of life than citizens of other developed nations. Approximately 25% of lifetime Medicare expenditures occur in patients' last year of life, with intensive care utilization particularly high. This pattern reflects both cultural attitudes toward death and the financial incentives inherent in the US healthcare system.
Conclusion: A System Optimized for Revenue, Not Value
America's high health care spending results not from a single cause but from interconnected structural factors that collectively drive costs upward. Market consolidation reduces competition that might otherwise constrain prices. Profit motives incentivize revenue generation over efficiency or population health and in the absence of competition we do not benefit from downward pressure on prices. New technologies enter the market without rigorous cost-effectiveness assessment. Medicare faces statutory limitations on cost control mechanisms. Fee-for-service payment rewards volume rather than value. Administrative complexity consumes resources that could otherwise go toward patient care.
These factors create a health care system optimized for revenue generation rather than health outcomes or economic efficiency. Unlike systems in other developed nations—which prioritize universal access, cost containment, and population health—the US system has evolved to maximize financial returns across multiple sectors of the health care economy. While this is not a comprehensive analysis, it covers some of the key underlying drivers of the US experience with health care.
Meaningful reform would require addressing these structural issues simultaneously rather than implementing piecemeal changes that leave fundamental incentives intact. Until then, Americans will likely continue paying substantially more for health care than citizens of other wealthy nations, without receiving commensurate value for this extraordinary investment. It will require significant political will to unwrap the system.
I discuss potential solutions in the following two articles:
Good read