Healthcare: What a Mess
"The price of monopoly is upon every occasion the highest which can be got... the highest which can be squeezed out of the buyers, or which it is supposed they will consent to give."
— Adam Smith, The Wealth of Nations, 1776
This week we continue our series on the major causes of our K-shaped economy. To recap, three big components of the economy are growing in cost more quickly than the rate of inflation or wage growth, and have for decades. We've covered two. First housing, then higher education. Now we look at the biggest and perhaps messiest of the three: healthcare.
If you started from scratch, there's no way you'd design a healthcare system that looks anything like ours, even if you were the most evil of geniuses.
First, some good news: many things in healthcare really have gotten dramatically better and cheaper. Sequencing a human genome, for instance, cost close to a billion dollars in 2003. Today, under $1,500, making CRISPR therapy available to treat a plethora of diseases that once had no cure.
Cataract surgery cost roughly $2,000 a case in 1985, under $800 by 2012. Hepatitis C went from an $84,000 cure at launch to a fraction of that.
GLP-1s are shrinking our friends right in front of our eyes. How many of you have gotten together with someone you haven’t seen in a few months, to find them half the size they were? Incredible! The long-term benefits to human health and our healthcare system will be enormous.
There are many reasons to be proud of our healthcare advances. But for many (the lower leg of the K) healthcare is brutally expensive if not downright unaffordable. And it’s getting worse.
US healthcare spending is skyrocketing, hitting $5.3 trillion in 2024, up 7.2% in a single year, or $15,474 for every person in the country, 18% of the entire US economy.[1]
The Centers for Medicare and Medicaid Services own actuaries project total spending to nearly double again within a decade, reaching $9.0 trillion by 2034.
Yet, none of this is because Americans are using more healthcare. In fact, we see doctors about as often as people in peer countries do.[2] The price is relentlessly rising. Between 2000 and 2024, medical care prices rose 121.3% while consumer prices overall rose 86.1%. [3]
Healthcare didn't just get more expensive. It outran inflation for a quarter century. Note: see the pattern here? Housing, higher education, and healthcare—three massive expenses for the average household—all outpacing wage growth and inflation. The cumulative impact is a society on a political knife’s edge. People are understandably disillusioned and looking to political extremes for answers. I’ll get into this more in the coming weeks. For now, I’m just reminding you why we have embarked on this somewhat depressing series in the first place... Now back to the story.
Why does care cost more? The answers could fill a book. Maybe we start with who's setting the price.
Why Hospitals Can Charge What They Charge
The short answer is they can get away with it. The long answer begins with what Medicare pays versus what private insurers pay for the same care. Medicare's rate is set by the government, by formula, hospitals can't negotiate it. Private insurers negotiate their own rate directly, and negotiation only goes one way when one side has no real alternative.
In 2022, private insurers paid hospitals 254% of Medicare's rate for the same care, the highest gap RAND has measured. And hospitals having the upper hand in these negotiations is increasingly common.[4] In 2024, a single system controlled at least half the inpatient market in 76% of American metro areas. In 83%, one or two systems controlled more than three-quarters of it. Small towns tend toward outright monopoly.[5] Big cities aren't far behind.
You can see it in a single MRI. A Johns Hopkins and Michigan State study found commercial prices running 2 to 6 times Medicare for identical scans. For example, take a brain MRI. Medicare pays $446 for it. Private insurers pay $1,788, four times more, for the same machine, the same scan.[6] The only variable seems to be who can be squeezed.
The Washington Post just told the story about Marcelle Crago, a nurse in Asheville, North Carolina, who was quoted over $9,000 for meniscus surgery at Mission Hospital. Mission Hospital, by the way, is the only major system in the region since a merger in 1998. Marcelle shopped around and paid a third of that at an independent outpatient center. Mission's own prices run 334% of Medicare.
To put it in perspective, here's the markup on what private insurers actually paid hospitals in 2022, compared to what Medicare pays for the same thing.
To be fair to hospitals, there's a real counterargument: Medicare's own rates run below what many hospitals say it costs them to treat a Medicare patient, so some of that gap is hospitals recouping their costs from privately insured patients.
Regardless, the pattern holds nationally: fewer competitors, higher prices. Hospital mergers that don't even overlap in the same city still tend to raise prices at the acquiring hospital, by an average of 12.9% within six years.[7]
The result is a messy system where, increasingly, hospitals often aren't pricing against competitors. They're pricing against what the market will bear.
There's supposed to be a backstop against that: insurance. But insurance costs are rising too, and the thing that's supposed to protect you from a high price so often doesn't.
Having Insurance Doesn't Mean You Can Afford to Use It
Having insurance is supposed to mean the price of care isn't the thing standing between you and treatment. For a growing number of people, it doesn't work that way.
The average family premium hit $26,993 in 2025, up 53% over the past decade. The average deductible for a single person: $1,886, up 43% over the same ten years. Both have grown far faster than inflation, which rose about 36% over that stretch.[8] What’s happening is the cost of coverage has outrun the cost of everything else…
For someone making $40,000 a year, a $1,886 deductible is a sizable portion of their paycheck.
And if they work for a smaller company, it's worse, the average deductible at small firms runs $2,631, versus $1,670 at large ones.[9] Faced with that bill, a growing number of people are simply opting out, skipping the appointment, delaying the test, not filling the prescription. In 2001, 19% of Americans said they or a family member had put off medical treatment because of cost. By 2022 that number had exactly doubled, to 38%, the sharpest single-year jump in the series.[10]
A more recent survey suggests no relief. In 2024, the Commonwealth Fund found 48% of working-age adults had gone without needed care because of cost, a skipped prescription, test, or specialist visit.[11] Of those, 41% said their health problem got worse as a result.
And the lower the income, the more likely someone went without. In 2022, 34% of households under $40,000 delayed care for a serious condition, versus 29% in the middle and 18% among six-figure earners.[12]
Hospital pricing power is just one of many reasons American healthcare costs are out of control.
Everything about the US healthcare system is complicated. I don’t have space in this letter to cover even a fraction of the contributors. Look at prescription drug cost and the way drugs are sold and distributed. Americans pay roughly three times more than other wealthy nations for our prescriptions. This is also true for medical devices.
Then there is the preposterous billing system, and insurance companies themselves contribute to the problem. And of course, this sector, like education, suffers from administrative bloat.
One source of expense that doesn’t get a lot of attention is leverage. Perhaps a better descriptor would be financial engineering. There is a cottage industry of Private Equity and real estate investment trusts (REITs) that specialize in extracting value from the healthcare system, leaving individual healthcare facilities saddled with permanent debt in the form of leases.
A market with pricing power, very little competition, and near guaranteed payment flow through insurance and government reimbursement attracts the kind of sharks who know how to bleed value from a never-ending supply of customers.
We’ll wrap up our brief look at healthcare next week as we dig deeper into these issues. Until then,
Let me know what you think — reply to this note or drop a comment.
Thanks for reading.
Before we go...
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[1] https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data/nhe-fact-sheet
[2] https://www.healthaffairs.org/doi/10.1377/hlthaff.2018.05144
[3] https://www.healthsystemtracker.org/brief/how-does-medical-inflation-compare-to-inflation-in-the-rest-of-the-economy/
[4] https://www.rand.org/news/press/2024/05/13.html
[5]https://www.kff.org/health-costs/one-or-two-health-systems-controlled-the-entire-market-for-inpatient-hospital-care-in-nearly-half-of-metropolitan-areas/
[6] https://radiologybusiness.com/topics/healthcare-management/healthcare-economics/shoppable-radiology-services-medicare-rates
[7] https://pmc.ncbi.nlm.nih.gov/articles/PMC11782062/
[8] https://www.kff.org/health-costs/annual-family-premiums-for-employer-coverage-rise-6-in-2025-nearing-27000-with-workers-paying-6850-toward-premiums-out-of-their-paychecks/
[9] https://www.kff.org/health-costs/2025-employer-health-benefits-survey/
[10] https://news.gallup.com/poll/468053/record-high-put-off-medical-care-due-cost-2022.aspx
[11] https://www.commonwealthfund.org/publications/surveys/2024/nov/state-health-insurance-coverage-us-2024-biennial-survey
[12] https://news.gallup.com/poll/468053/record-high-put-off-medical-care-due-cost-2022.aspx
Ed D’Agostino
Publisher & COO
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I would like to share some perspective on the financial challenges facing hospitals, particularly regarding healthcare costs and insurance reimbursements.
A notable example is the closure of Hahnemann University Hospital in Philadelphia in 2019. A primary factor in its closure was a high volume of Medicare and Medicaid patients coupled with an insufficient number of privately insured patients to offset the lower reimbursement rates from government programs. All hospitals are aware of the imbalance between Medicare and Medicaid on one hand and private insurance on the other hand.
To compensate for these low reimbursement rates, hospitals must charge private insurers more. This issue is compounded by the rising cost of advanced treatments for cancer patients, such as immunotherapy. Since Medicare and Medicaid cover only a fraction of these costs, the financial difference is often passed on to private insurance. By contrast, many European systems limit access to these expensive second-line and subsequent line treatments to control healthcare spending. Europe does not want to keep the cancer patients whose cancer returns after first-line treatment alive for many more years to keep the costs low. As a result, they receive subpar care.
Additionally, operational costs continue to rise. Hospital staff, including nurses and technicians, require competitive wages that often increase faster than inflation. Without state subsidies, hospitals have no choice but to rely on higher charges to private insurers to sustain their operations and cover these growing expenses.
interesting article. Where I live, Philadelphia, there had been several major health systems. There now are 2 (Jefferson & Penn) with a couple of smaller choices (1 urban, 1 suburban). I had not noticed the lack of competition in providers until now. I find it fascinating that during the pandemic, hospitals were full, but not profitable. Too many sick people being treated, not enough orthopedic procedures being done. It seems the health systems "product mix" is skewed towards more profitable procedures.
The capialist solution to high prices is high prices doesn't seem to work in this industry. High barriers for new providers to enter a given market. It will be interesting to see how healthcare costs and US Government debt/deficit are resolved in the coming years.
If a business needs subsidies to survive as structured, it is not a viable business. Subsidies cause the base rate of remuneration to rise causing the consumer not to gain on a relative basis. Healthcare, minimum wage, food, tuition, utilities, etc. bear this out. Like many have said, require politicians to live under the laws that they enact and see how quickly things get fixed.
Want to know what drives drug costs?
https://www.youtube.com/watch?v=MoC_mHtEtSs
Clever schemes of payment are never going to be successful unless costs are reduced. I asked CoPilot to tell me why the cost of health care is so much higher in the US than in Western Europe. In other words, where is the money going? Cui bono? After an extended dialogue, l got this answer (summarized, in order of importance):
Health care monopolies and oligopolies are a huge source of extra costs, as above. I had thought that insurance companies had the upper hand when negotiating prices with the big health care organizations. I was just wrong.
Most of that extra money flows to administrative costs, partly caused by the enormous complexity of the insurance market, partly by regulatory complexity at the combined state and federal level, partly by the natural tendency of monopoly and oligopoly organizations to expand head count indefinitely - Parkinson's Law in action. All these factors make each other worse.
Physicians are paid more in the US, but how much more depends. Specialists like cardiologists are paid 2X more or better; internists, pediatricians, and similar are paid more like 1.5X or less. This factor is significant, but secondary to 1. and 2.
Nurses, technicians of all kinds (for example, X-ray techs), and so on are paid more too, but this is a significant factor in higher costs only because there are so many of them.
Prescription drug prices are not a major factor, since the cost of drugs is only about 10% of the total.
So we're never going to get a grip on this problem without tackling 1. and 2, and that means tackling the health care industrial complex at its core through federal legislation that will radically simplify the insurance and regulatory processes. Such legislation will of course be strongly resisted. After all, one person's administrative bloat is another person's rice bowl.
All that said, health care in the US is probably always going to be more expensive per capita than Japan and Western Europe. US eating and drinking habits are on average less healthy, as many other commenters have pointed out, and cultural patterns such as that are almost impossible to change in the short and medium term. Plus, the US has very large rural areas that need health care within driving distance - I was just in Plumas County, California, a mountain county with a population under 20,000. It has two hospitals that I know of, obviously paid for by the federal and state governments. Multiply that across all the vast rural areas of the western half of the country and you get a lot of money that must be spent to treat a very small percentage of the population.
Thank you Ed for tackling this urgent subject. I don’t think there is any question that this, probably more than any other issue, has contributed to the despair and disillusion that Americans feel about their politics, right and left. Our system has destroyed so many lives, with 100 million Americans carrying medical debt and half a million going bankrupt annually on account of those debts—yes that’s right—and then the rest of us expending huge portions of our brains trying to keep track of the dizzying complexity of our coverage, the entire spectacle represents something closer to a medieval torture program than something related to ‘wellness’ or ‘healing’. It’s contributing to the destruction of our politics as well. So Thank You again for reaffirming what everyone knows, but few in power will say: it’s all insane—and murdering us.
“GLP-1s are shrinking our friends right in front of our eyes. How many of you have gotten together with someone you haven’t seen in a few months, to find them half the size they were? Incredible! The long-term benefits to human health and our healthcare system will be enormous.”
I would urge caution where the long term benefits of this class of drugs are concerned — there’s more going on here than meets the eye.
In 1883 flaming liberal commie German Reich chancellor Otto von Bismarck introduced the first national health insurance system based on private companies, many mutuals and guild-based. A watered-down version became Hilarycare, and then later Obamacare. In 140 years the world has only come up with one other system that works on a large scale—single payer.
Hence, when Obama switched his position from single payer to the German system, the Heritage Foundation had to disavow their previous support without offering an alternative, because there is no functional one to the right of Bismarck. For the same reason, Republicans, in over 50 repeal and replace attempts, have not offered an actual replacement. There isn’t one other than let them eat cake, go bankrupt, or die.
What do the two working systems, adopted by over 130 countries, have in common? Registries. The German one specifies the reimbursement rates for seven thousand procedures, devices, and medications.
Because, in large measure, health care doesn't follow market rules.
Yes, companies can advertise over-the-counter medication and give consumers choices. But even something as seemingly simple as pain medication can have bad reactions. There's a reason every doctor I see makes me fill out pages of forms including every prescription and OTC medication and every supplement I take. They're all chemicals that can interact in bad ways. I couldn't tell you if I can safely take aspirin, ibuprofen, or Tylenol. I have no real market choice.
It's even worse on the expensive end, because most people in great pain or facing death don't care what it costs. Roughly 10% of US health care spending goes to end-of-life care for the 1% of the population that die every year. As you pointed out, providers have the pricing power in many of the most expensive situations like emergencies. And frankly, somebody unconscious can't shop for the best deal.
Because particularly Republicans actively work against price controls (see the prohibition on Medicare negotiating drug prices passed under W), the US has an inefficient and unfair patchwork of negotiated prices. Never mind the administrative overhead of figuring out what to charge any patient and the bloat added by intermediaries like benefits managers. The poorest and weakest groups usually have the worst outcomes in this morass.
The two functional systems acknowledge these market problems and shift the negotiating power to government. That of course causes problems in the other direction. The more market-oriented German system establishes a framework for the stakeholders to work it out with each other similar to the laws governing labor negotiations, known for their benign labor disputes. Not surprisingly, doctors unionize, drug manufacturers, pharmacies, and hospitals have trade organizations, and consolidation has led to four insurance groups representing 2/3 of the insured. For most parts, it produces prices that reflect the value of a treatment as determined by industry people.
A doctor doesn't have to do a lot of paperwork to decide on treatment. If she thinks a CAT scan is in order, she knows the requirements stipulated in the registry and what the statutory health insurance will cover. Private insurers (for self-employed and those willing to pay the much higher premiums) have their own registries, like US insurers, but make up only 15% of the market.
Yes, doctors grumble about caps on what they can make, but so do those that work for corporate entities like HMOs. The wait times are comparable, as is the limited coverage in rural areas. On a service level, it doesn't matter who implements the price controls.
If you're willing to pay for it, you can have better service. The much-maligned foreign systems like Canada or Germany offer private insurance for those with money, while ensuring a standard level of reliable service for most of the population. The US ends up with a capricious and unequal hodge-podge subject to random chance. As a critic mentioned, there's a reason the BBC didn't produce Breaking Bad. The premise of cancer treatment bankrupting a family couldn't happen in the UK.
So if the US spent $5.3T on healthcare in 2024, then that's 12% more than the entire GDP of Germany in 2024 ($4.69T)*. The US health care system produces more value than 80 million Germans? Or looking at it the other way, the entire output of Germany is what it costs to run the US healthcare system, plus 12%. I know it's an apples to oranges comparison, but it's instructive nonetheless.
https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=DE
The fundamental problem is that we do not have a healthcare syetem; we have an injury & illness repair system that is dependant on people remaining unwell to keep the money flowing. Instead of focusing on lifestyle and wellness, we use expensive medical technology, equipment and facilities, costly pharmaceuticals, highly paid medical professionals and a ravenous insurance industry. There is no incentive to rein in this expensive system; quite the reverse, it depends on ever increasing spending without any regard that it produces the worst health outcomes of any developed country. A classic case right now is the explosive use of GLP-1s to manage weight and obesity instead of dealing with lifestyle that is the root cause of the problem. Even more insidious is that the lifestyle that is the root cause also feeds - pun intended - major industries such as processed foods & beverages, computer gaming, social media, TV & streaming, etc., all things designed to keep people overfed and indolent as future consumers of the injury and illness repair system. Until we recognize that managing our health starts with us making proper lifestyle decisions, and demanding a cost-effective system focused on wellness, the current system will continue its avaricious growth.