What is Causing the Soaring Cost of Health Care in America?

Rex Ballard
1 day ago
7 min read

Root Causes of Health Care Inflation

The United States spends more on healthcare than any other nation, with total expenditures reaching $4.9 trillion in 2023, or about $14,570 per person. This accounts for nearly 18% of GDP, far exceeding the average of other high-income countries, which hover around 9-11% of GDP. Despite this investment, outcomes like life expectancy and infant mortality lag behind peers, raising questions about efficiency. High costs stem from a complex interplay of factors, including administrative burdens, workforce shortages, subsidized demand, technological advancements, systemic inefficiencies, uncompensated care, and perverse incentives around reimbursements and fraud. Below, we explore these drivers in detail; I am sure this is only a partial list.

Health Insurance and State/Local Bureaucracy

The fragmented U.S. insurance system, with its mix of private plans, Medicare, Medicaid, and state regulations, generates massive administrative overhead. Administrative costs consume 15-30% of healthcare spending, or up to $1.2 trillion annually, far higher than in single-payer systems. This includes billing, coding, prior authorizations, and compliance with varying state rules. For instance, U.S. workers spend $21.6 billion in time value annually navigating insurance bureaucracy, while providers dedicate 10 administrators per doctor.

Private insurance amplifies costs by paying providers 200-300% more than Medicare for the same services, shifting burdens from public programs. The Affordable Care Act's medical loss ratio caps administrative and profit margins at 15-20%, but this ties insurer profits to total spending, incentivizing higher premiums rather than cost control. State mandates for coverage benefits add 10-50% to premiums, further inflating costs. Overall, these layers contribute to excess spending of $248-496 billion annually, with half of it deemed wasteful.

Demand Outpacing the Supply of Doctors

A projected shortage of up to 86,000 physicians by 2036 exacerbates costs by limiting access and driving up service prices. An aging population—expected to grow by 34% among those 65+ by 2036—increases demand as seniors use more care. Meanwhile, 22% of physicians are 55-64 and nearing retirement, with fewer entering primary care due to lower pay (specialists earn twice as much).

This imbalance leads to longer waits, higher emergency room utilization, and higher fees. Primary care shortages affect 76 million people, forcing costlier specialist or hospital care. Medicare's payment cuts (33% since 2001, adjusted for inflation) deter independent practices, consolidating care into pricier hospital systems. The resulting inefficiencies contribute to chronic disease mismanagement, which accounts for 75% of spending.

One key driver of this shortage is the low reimbursement rates for general practitioners (GPs) and family medicine doctors, turning them into the modern equivalent of early-1900s garment-industry pieceworkers. Under fee-for-service models, GPs must see high volumes of patients (20-30 daily) at rates like $68-92 per Medicare visit to sustain income, leading to burnout and reduced satisfaction. This disparity—primary care earning 36% less than specialists ($287,000 vs. $404,000)—steers medical graduates, burdened by $200,000-250,000 in debt, toward higher-paying specialties. Only 24.4% of physicians are in primary care, far below the needed 50%, with rural areas losing 11% of family doctors from 2017 to 2023. Factors such as administrative burdens, a lack of mentorship, and gender dynamics further exacerbate the shift.

Demand Driven by Health Insurance and Medicare

Insurance and Medicare subsidize care, creating "moral hazard" where low out-of-pocket costs encourage overuse, inflating demand and prices. Medicare, covering 67 million, spent $1.1 trillion in 2024 (21% of national health expenditures), growing 7.8% amid an aging population. Expansions like the ACA increased coverage but boosted utilization without expanding supply, pushing premiums up 18-26% in some states.

Private premiums rose 6.5-9% in 2024, driven by higher negotiated rates to offset Medicare's lower reimbursements (83 cents per dollar spent). This cost-shifting creates a feedback loop: government programs underpay, private insurers overpay, and overall spending surges. Chronic conditions, affecting 60% of adults, amplify demand, with lifestyle factors like obesity adding pressure.

Cost of Innovation and New Technology

Technological advancements drive 50% of spending growth over the past 50 years, introducing costly procedures and drugs. The U.S. leads in approvals for new devices and drugs, with R&D spending topping $180 billion annually, but innovations like gene therapies can cost $1-2 million per treatment. Prescription drugs alone jumped 11.4% in 2023, fueled by high-priced biologics.

While innovations extend life (e.g., adding 51.5 days per 10 additional primary care physicians), they often outpace the cost savings they generate. U.S. prices for brand-name drugs and procedures are 2-4 times higher than those of peers, with little regulation allowing unchecked adoption. However, patients capture most value—up to 94% for drugs—while innovators reap 6-18%.

Fraud, Waste, and Abuse

Fraud, waste, and abuse (FWA) siphon $68-300 billion annually, or 3-10% of expenditures. Examples include unnecessary services (30% of waste), upcoding, and kickbacks. In 2025, a $14.6 billion takedown charged 324 defendants, including schemes billing $10.6 billion for fake catheters.

Waste from overuse and inefficiencies adds $750 billion, with abuse like improper billing exacerbating costs. Medicare fraud alone hit $60 billion in 2015, though detection efforts recover billions yearly. Transnational crime and provider greed fuel this, eroding trust and inflating premiums.

Low reimbursements, especially for primary care, encourage fraudulent practices like upcoding (billing for higher-severity services), bill padding (adding unnecessary charges), and unbundling (fragmenting services for separate billing). These tactics offset shortfalls from rates that have dropped 33% in real terms since 2001, with upcoding contributing to billions in overpayments, including $12-25 billion yearly in Medicare Advantage. This inflates claims, raising premiums and administrative costs in a feedback loop.

Fines and penalties for these practices perversely contribute to inflation. Enforcement under the False Claims Act recovers billions but imposes treble damages and per-claim penalties up to $27,894. For-profit hospitals, facing hits like $45-290 million settlements, recoup losses through higher charges and negotiated rates to maintain shareholder returns, adding up to 20% to insurance bills ($308.6 billion in 2022). This cost-shifting embeds additional expenses, eroding efficiency and fueling premium hikes.

Uncompensated Care

Uncompensated care—services provided without payment—totaled $745 billion since 2000, with hospitals absorbing $130 billion in Medicare/Medicaid shortfalls in 2023. This care, often provided to the homeless, indigent, and undocumented immigrants, is not truly free; costs shift to hospitals, taxpayers, or paying patients through inflated fees. For the indigent and homeless, burdens fall on emergency Medicaid, which spent $27 billion federally/stateside from 2017-2023 (0.4% of Medicaid), or local taxes funding safety-net hospitals.

Hospitals Are Not Overflowing with Profits; Many Operate at a loss or as Non-Profits

Many believe that health care inflation is, in part, driven by hospital gouging to maximize profits. However, facts belie this notion. Hospital margins averaged -13.5% in 2022, with medians at -3.8%; non-profits saw improvements to 1.2% in 2024 but remain below pre-pandemic levels. For-profits are more profitable (16.4% share), but non-profits (67.7%) focus on mission, with margins dropping for rural and high-Medicare-share facilities.

Possible Solutions

Without action, spending is projected to hit 20% of GDP by 2033, straining families and the economy. A potential solution lies in a reformed system that eliminates private insurance middlemen and empowers individuals through universal Health Savings Accounts (HSAs). The following enumerated steps outline how this system could be implemented to address the root causes while promoting efficiency, equity, and better health outcomes:

Make America Healthy Again through Sound Regulation Targeting a Healthier Food Supply: To improve Americans' health under a "Make America Healthy Again" (MAHA) framework, integrate enhanced food quality and safety regulations, such as stricter FDA oversight on processed foods, pesticides, and additives linked to chronic diseases (e.g., obesity, diabetes), potentially reducing the 75% of spending tied to preventable conditions. HSAs could cover nutrition counseling and healthy food incentives, promoting preventive wellness.
Establish Universal HSAs with Government Funding: The federal government would collect premiums via payroll taxes (replacing employer-sponsored insurance deductions) and deposit them into citizens' HSAs, with tiered subsidies to ensure equity (e.g., full matching for those below 200% of the federal poverty level, partial for 200–400%). Individuals would pay providers directly from their HSAs for routine care, incentivizing cost-conscious shopping via mandatory price transparency tools.
Provide Catastrophic Coverage Backstop: For catastrophic events, an enhanced Medicare program would automatically activate above a $10,000 threshold, funded by a dedicated portion of collections to provide a national risk pool and prevent bankruptcies.
Implement Cost-Control Reforms: Incorporate antitrust enforcement to block anti-competitive mergers (e.g., those exceeding 40% market share), patent reforms to limit extensions and accelerate generics entry (potentially dropping prices by 95% with increased competition), and expanded drug negotiations tying U.S. prices to international benchmarks.
Enhance Fraud Detection and Prevention: Leverage HSA data analytics, with incentives for consumer reporting, to reduce the 3–10% annual drain from fraud, waste, and abuse.
Earmark FWA Savings for Workforce Incentives: Redirect savings from FWA reductions (potentially $20-90 billion annually if 30% is recaptured) toward student loan forgiveness programs, such as an expanded "Underserved Service Loan Forgiveness" initiative modeled on the National Health Service Corps. Eligible new doctors (MDs, DOs, NPs, PAs) committing to 2-5 years in Health Professional Shortage Areas—like Shasta County, California, facing acute shortages in primary care, psychiatry, and OB/GYN—could receive $50,000–$120,000 in forgiveness, plus HSA bonuses for relocation. This could attract 5,000–10,000 providers each year, boosting retention in rural areas and helping ease the projected 21,400–55,200 primary care deficit by 2036.
Expand Outpatient Care Networks: Incentivize the creation of more outpatient clinics leveraging nurse practitioners (NPs) for primary and routine care, easing the load on hospitals and physicians. Through grants from administrative savings or tax credits, clinics could receive funding for setup in underserved areas, with NPs handling 80-90% of primary care needs at lower cost, improving access and efficiency. Additionally, promote telemedicine solutions to further extend reach, allowing remote consultations via video or phone for non-emergency issues, reducing travel burdens in rural regions, and cutting costs by 20-30% per visit while maintaining quality care.
Phase In Implementation: Roll out the system over five years, starting with state-level pilots (e.g., in California, leveraging San Jose's tech ecosystem for innovative HSA management tools) to build evidence and bipartisan support. Fiscal offsets could come from taxing non-medical withdrawals for high earners and capturing administrative savings ($248–496 billion annually), with initial costs around $45 billion balanced by long-term reductions in overall spending by 5–15% through better incentives.

This comprehensive approach could streamline bureaucracy, promote personal responsibility, and cover gaps for vulnerable groups, ultimately curbing inflation while improving access and outcomes. It seems simple when put on paper like this, however, the challenge is in the implementation. This type of solution upends the powerful insurance industry, which boasts deep ties to politicians through a myriad of lobbyists. It will take a mandate from the people to make it happen.