Why Healthcare is So Expensive and What to Do About It: Part I
Commentary # 39 by Paul Francis
Part I: Why Healthcare is So Expensive
PDF available here:
Introduction
As much as any other issue, the Democrats’ sweeping victory in the midterm elections was driven by widespread anger about the high cost of living during a time of stagnant incomes and widening inequality. After housing, healthcare was the category of cost of living that was cited most often as evidence of this crisis of affordability.
The Step Two Policy Project has written several papers over the last three years on the question of the affordability of healthcare. In my 2024 Commentary “The Affordability of Healthcare in New York,” I made the point that a threshold question in this area is “affordable for whom.” Many Americans – and more than 55% of New Yorkers, in particular – are covered by public insurance programs, i.e., Medicare, Medicaid, Child Health Plus, or the Essential Plan, that require at most a modest level of cost sharing.
As a result, the challenge of affordability of healthcare falls most heavily on the middle class, unions who trade off wage increases for generous health benefit packages, and employers who offer employer-sponsored coverage. As The Wall Street Journal reported:
“New data shows that this year, the average cost of a family health plan crossed $28,000, rising by 5%, according to an annual survey from the nonprofit KFF, which provides the broadest picture of U.S. employer health coverage. The share coming out of employees’ paychecks shot up even faster—to $7,471, an increase of 9% from 2025.”
Strictly speaking, making healthcare more affordable doesn’t necessarily require reducing the cost of delivering care. Expanding government programs like Medicare or increasing the Affordable Care Act’s (ACA) premium subsidies could make healthcare more affordable for those affected without making healthcare delivery less expensive – increased government spending just picks up the tab. But with the federal government already running a $2 trillion annual budget deficit and the annual growth of health expenditures exceeding the general rate of inflation by an average of 3.6% annually over the last 20 years,[1] reducing the underlying cost of the healthcare delivery system is necessary to make healthcare more affordable on a sustainable basis.
Few topics of public policy have received as much attention from think tanks and academics as the diagnosis of why expenditures on healthcare in the United States are so much higher than in peer countries without producing better health outcomes. There is a broad consensus among health economists about the contributing factors to this phenomenon, although there is still some disagreement about the relative weight of various factors. More significantly perhaps, there is no consensus about policies and programs that would materially reduce healthcare costs while preserving access to care and maintaining a high quality of services.
In Part I of this Commentary, I want to begin by summarizing the consensus view about the causes of the high cost of healthcare in the United States, particularly when compared to spending on healthcare in peer nations. Part II will review the major strategies and initiatives that are being discussed by health economists and policymakers to reduce the cost of delivering care and the trade-offs involved in doing so. As with all Step Two Policy Project work, I will attempt to make specific reference to New York where possible.
What Makes Healthcare in the U.S. So Expensive?
Overview
The two primary metrics used to demonstrate that healthcare in the U.S. is, indeed, expensive are per capita healthcare consumption and the relative share of GDP that the U.S. spends compared to peer countries.
The consensus analysis is that prices are a much larger factor than higher utilization of services in producing relatively higher healthcare costs in the U.S. Higher prices in the U.S. are attributable to many factors, including provider consolidation and vertical integration within the healthcare market that concentrates market power, a regulatory environment that constrains competition, and a culture that supports much higher physician fees than in other countries.
Higher administrative costs among both payers and providers are another factor contributing to higher costs in the U.S. Administrative costs are lower in countries with a single-payer system and countries that prohibit for-profit insurance companies. Multiple factors contribute to higher administrative costs in the U.S., including the arms race between providers and payers to take advantage of complexity to maximize “revenue optimization” or to deny claims.
“Waste, fraud and abuse” also contribute to the high level of healthcare expenditures in the U.S. As I noted in my commentary “Medicaid Fraud, Waste, and Abuse,” these three factors are often conflated – with abuse in the form of gaming the system being a larger contributor than outright fraud and waste – at least in the view of many experts.
Insurance product design is an important element of the affordability of healthcare for consumers (although arguably less significant than the aggregate cost of healthcare delivery). Public policy mandates about insurance product design have the effect of shifting costs from one group of consumers to another. For example, state community rating laws prohibit insurance companies from basing premium rates on risk factors such as pre-existing conditions. The ACA includes many protections that make health insurance more costly for healthier people to cross-subsidize insurance policies for actuarially riskier people. This policy philosophy reflects partisan differences to some extent, with Republicans more prone to seek to reduce costs for healthy people by reducing cross-subsidization, while Democrats focus on improving the affordability of insurance for those whose health needs are greatest.
Finally, the U.S. population is aging and both the underlying level of certain chronic diseases (such as diabetes) as well as the prevalence of treatment are rising. This does not explain most of the variance in spending with peer countries (which are aging at an even faster rate than the US) and advances in treating cardiovascular disease offset increased prevalence of certain other chronic diseases. Nevertheless, treating an older population costs more than treating a younger one, so future demographic trends portend further upward pressure on healthcare spending.
Core metrics of the relative cost of healthcare
As noted above, the two primary metrics used to evaluate the costliness of healthcare in the United States are the share of gross domestic product (GDP) accounted for by healthcare expenditures compared to peer countries and the level and growth rate of per capita spending on healthcare. The fact that the US spends so much more of GDP on healthcare than peer countries without generally having better healthcare outcomes creates the presumption that we must be doing something wrong. At the same time, the absolute level of spending and the rate of growth help explain why the public finds paying for healthcare increasingly unaffordable.
The tables below from the Peterson-KFF Health System Tracker illustrate these two primary metrics. The first graph shows the level of per capita expenditures on healthcare services in the U.S. compared to peer countries, while the second graph shows healthcare expenditures as a percentage of each country’s GDP.
Whatever the underlying causes of the higher level of spending on healthcare in the U.S., the evidence suggests that this much higher level of spending in the U.S. reflects structural differences that began to expand nearly 40 years ago. These structural differences widened the large gap in spending levels between the U.S. and peer countries for at least three decades, although in recent years the growth rate of healthcare expenditures in the U.S. is about in the middle of that of other peer nations. As described by the Peterson-KFF Health Tracker:
“In 1970, the U.S. spent 6.0% of its GDP on health, similar to spending in several comparable countries (the 1970 average of comparably wealthy countries was 4.9% of GDP). The U.S. was relatively on pace with other countries until the 1980s, when health spending in the U.S. began to grow at a significantly faster rate relative to its GDP. Since then, health spending as a share of the economy grew faster in the U.S. than in peer nations until the 2020s.”[2]
The percentage rate of growth in the U.S. of spending on healthcare is now at or below that of peer nations. But even if the growth rates have become comparable, the U.S. is starting with such a larger base that the gap, in absolute dollars, continues to widen.
Higher prices are the single largest contributor to higher health expenditures in the U.S.
Comparisons of U.S. healthcare expenditures with peer countries inherently reflect both price and utilization. For example, a 2024 analysis by the Peterson-KFF Health System Tracker found that almost 80% of the difference in per capita health spending between the U.S. and peer nations came from inpatient and outpatient care – a category encompassing hospitals, physicians, clinics, and related services – but did not distinguish the relative contribution of price and volume.
Nevertheless, although the data is less clean, most health economists have found that the single largest factor in explaining the high cost of healthcare in the U.S. involves the price of services rather than higher utilization.
This consensus view is reflected in the following statement from the Peterson-KFF Health System Tracker:
“According to the most updated internationally comparable data available, the U.S. has higher prices—particularly among private health plans—for many healthcare services. Meanwhile, utilization of many services, including doctor’s visits, number and length of hospital stays, and a variety of inpatient surgeries, is lower than in many comparable countries. As a result, the evidence continues to support the finding that higher prices – as opposed to higher utilization – explain the United States’ high health spending relative to other high-income countries.”[3]
A major 2011 study titled "Higher fees paid to U.S. physicians drive higher spending for physician services compared to other countries,” by Mariam Laugeson and Sherry Glied (coincidentally, the chairperson of Gov. Hochul’s New York State Commission on the Future of Health Care), attributed much of the price variation to higher physician fees. The abstract of the study states:
“Public and private payers paid somewhat higher fees to U.S. primary care physicians for office visits (27 percent more for public, 70 percent more for private) and much higher fees to orthopedic physicians for hip replacements (70 percent more for public, 120 percent more for private) than public and private payers paid these physicians' counterparts in other countries. U.S. primary care and orthopedic physicians also earned higher incomes ($186,582 and $442,450, respectively) than their foreign counterparts. We conclude that the higher fees, rather than factors such as higher practice costs, volume of services, or tuition expenses, were the main drivers of higher U.S. spending, particularly in orthopedics.”[4]
Hospital pricing is often cited by critics of the costliness of healthcare in the U.S. because hospitals account for the largest share of healthcare expenditures. According to the most recent information on healthcare expenditures released by CMS, in 2024 hospital care accounted for 31% of U.S. health expenditures, physician and clinical services accounted for another 21%, while retail prescription drugs accounted for 9% of total health expenditures.[5]
The substantially higher reimbursement rates that hospitals command from commercial insurers account for most of the price premium. A major study by the RAND Corporation found:
“In 2022, across all hospital inpatient and outpatient services (including both facility and related professional claims), employers and private insurers paid, on average, 254 percent of what Medicare would have paid for the same services at the same facilities.”[6]
In New York, reimbursement rates from commercial insurers are often higher than the national average price premium of approximately 250% – especially among the leading hospital systems that have significant market power with commercial insurers and self-insured unions and employers. As we will discuss in Part II of this Commentary, this pricing premium is leading to growing pressure in New York City and the New York State legislature to cap hospital pricing, at least for certain procedures.
Provider consolidation creates market power that leads to higher prices
As for what creates the market power capable of commanding this price premium, Adrienne Anderson of the Step Two Policy Project wrote in 2024:
“There are many reasons for price inflation, including providers with significant market power extracting ever-higher prices in certain markets (a phenomenon heightened by growing horizontal and vertical integration), growth in clinical procedures involving expensive technology,[7] and revenue maximization strategies such as up-coding to capture increased reimbursement.[8]” (State Healthcare Cost Growth Benchmarks)
A leading health economist, Zach Cooper of Yale, traces much of the responsibility for price increases to the hospital sector. In a recent New York Times op-ed, he wrote:
“Hospital prices are the leading driver of the 320 percent increase in insurance premiums that Americans have experienced over the past 25 years. Since 2000, prices at hospitals have grown faster than prices in virtually any other sector of the economy. They have grown three times as fast as inflation and twice as fast as prescription drugs and doctor visits.”
Cooper, along with antitrust-focused elected officials—including progressives such as Sen. Elizabeth Warren and conservatives such as Sen. Josh Hawley— attribute part of this increase to increased hospital consolidation. An academic paper of which Cooper was a co-author concluded that “from 2010 to 2015, predictably anticompetitive mergers resulted in price increases over 5 percent.”
The Community Services Society of New York (CSS) recently released a study that advanced a similar argument that consolidation was an important factor leading to higher hospital prices, although CSS’s lack of access to the underlying contracted payment data (as opposed to the face amount of hospital “charges”) limits the empirical value of the study.
The market power that comes from consolidation is not limited to hospitals. In recent years, private equity (PE) firms have consolidated specialty physician practices in growing numbers. Numerous studies have found increased pricing power stemming from these consolidations. A 2023 study by antitrust experts and health economists found:
“Price increases associated with PE acquisitions are exceptionally high where a PE firm controls a competitively significant share of the local market. When we focus our analysis on markets where a single PE firm controls more than 30% of the market, we find further elevated prices associated with PE acquisitions in each of the 3 specialties with statistically significant results, for gastroenterology (18%), obstetrics and gynecology (16%), and dermatology (13%).”[9]
Hospital acquisitions of physician practices represent an even larger factor in developing the market power that often leads to higher prices. By 2024, an AMA survey found that approximately 35% of physicians worked for hospital-owned practices and another 12% were directly employed by or under contract with hospitals. In addition to increasing market power, hospital acquisitions of physician practices also enable hospitals to charge a facility fee that is unavailable to unaffiliated physician practices.
Vertical integration of insurance plans with provider groups creates further opportunities for pricing power within the healthcare ecosystem. In addition to the potential for excluding from the insurance network competitors of the captive subsidiary, vertical integration could give the insurance company the ability to manipulate transfer pricing between the provider groups and the insurance company in order to circumvent regulatory requirements that a minimum amount of a plan’s premiums be spent on medical claims.
Statutes and regulations inhibit healthcare competition
Another source of market power in both inpatient and outpatient care involves statutes and regulations that restrict competition. These statutes and regulations ostensibly are designed to protect patients, but often evolve to protect incumbent market participants – a practice that is sometimes called “regulatory capture.”
Anticompetitive statutes and regulations include scope of practice restrictions that ostensibly protect different guilds in the healthcare ecosystem. Such statutes and regulations protect physicians from competition from advanced practice nurses, such as nurse anesthetists. Similarly, statutes and regulations protect nurses from competition, such as from medication aides in nursing homes or medical assistants administering flu vaccines.
Certificate of Need laws can also have an anticompetitive impact. Certificate of Need regulations may have benefits in terms of transparency, but their stated purpose when adopted was to serve as a barrier to entry for new market participants when regulators believe that more supply would lead to unnecessary utilization.
Statutes and regulations also dictate whether the savings from technology solutions that reduce the cost of care will be captured by payers or simply accrue to providers to support their economics. “Hospital at Home,” biosimilar substitution for patented specialty drugs, and telehealth are three examples of efficiencies from new technologies, the benefits of which generally are accruing to providers rather than reducing healthcare costs.
Moreover, new technology tends to increase costs when it increases total utilization rather than substitutes for more expensive care. In some cases, this added care stemming from new technologies may produce health outcome benefits by increasing access to necessary care. In others, a less invasive new technology may expand the number of patients proactively receiving a procedure compared to a “waiting and watching” approach. In both cases, however, the new technology increases costs.
Patient protections and industry pricing practices contribute to high drug prices
The price that Americans pay for specialty pharmaceutical drugs compared to consumers in other countries is another factor that contributes to higher healthcare costs in the United States. The OECD reported that in 2023 the U.S. spent $1,713 per capita on retail pharmaceuticals, compared with an OECD average of $766. RAND and other experts point out that this is mostly attributable to the U.S. paying much higher prices for branded and patent-protected specialty pharmaceuticals rather than differences in utilization.
The business model of the pharmaceutical industry rests on the proposition that patented drugs will command much higher prices in the U.S. than in other jurisdictions. Whether this is the result of other countries having the ability to negotiate price on a nationwide basis or some other factor, it is now baked into the structure of the industry and is not easily changed – despite bipartisan calls to address this inequity. The Wall Street Journal recently reported that the initiative of the Trump administration to require pharmaceutical manufacturers to offer “most favored nation” pricing in the U.S. when indexed against other countries is leading manufacturers to postpone the introduction of high-priced drugs to other countries in order to preserve their high U.S. pricing.
In addition, pharmacy benefit managers (PBMs), which negotiate drug prices and rebates on behalf of insurers, have also been blamed for high prices of pharmaceutical drugs in the U.S. and now face significant regulatory headwinds.
Administrative costs
The Commonwealth Fund, perhaps the leading healthcare think tank in the U.S., concluded in a 2023 study that 30% of the “excess spending” on healthcare in the U.S. compared to peer countries is attributable to administrative costs. The report does not explicitly define “excess” spending but implies that it refers to the fact that per capita healthcare expenditures in the U.S. are roughly twice that of peer countries. The study stated:
“We estimate that higher administrative costs associated with health insurance — for example, those related to eligibility, coding, submission, and rework — represent approximately 15 percent of excess U.S. health spending. Higher administrative burden on providers — for example, general administration, human resources, and quality reporting and accreditation — represents an additional 15 percent of the excess. This makes administrative complexity the single biggest component of excess U.S. spending estimated in this study. The large impact of administrative costs is consistent with previous research that found 39 percent of the difference between U.S. and Canadian spending on hospital and physician care was administration.[10]”[11]
Other health economists have raised methodological objections to the study’s conclusions, but there is agreement that the decentralized payment structure in the U.S. – as well as the fact that the insurance industry in the U.S. is dominated by for-profit companies – makes administrative costs materially higher than in peer countries. Another well-respected 2019 study – titled Administrative Simplification and the Potential for Saving a Quarter-Trillion Dollars in Health Care – that was more conservative than the Commonwealth Fund study nevertheless concluded that an:
“estimated $265 billion [i.e., about half the Commonwealth Fund estimate], or approximately 28% of annual administrative spending, could be saved without compromising quality or access by implementing about 30 interventions that could be carried out….within the structure of today’s U.S. health care system in order to preserve its market nature (e.g., multipayer, multiclinician, multi–health care center) and the associated benefits (e.g., world-leading innovation in care delivery).”[12]
Waste, Fraud, And Abuse
Any attempt to explain the high cost of healthcare in the U.S. must reckon with the contention that spending is significantly inflated by “waste, fraud and abuse.” I define fraud as intentional violation of rules and regulations: I’m confident that fraud is the smallest of the three categories in this litany, but it is not a trivial amount. Examples of outright fraud – whether it’s hospice centers in Los Angeles or adult day care centers in Brooklyn – undermine public confidence in government, and governors should continue to redouble their efforts to identify and prevent fraud. But simply stamping out fraud won’t solve the healthcare affordability crisis.
I define “abuse” as gaming the system within the letter, if not the spirit, of rules and regulations: I’m confident this is a larger category than criminal fraud. I have described examples of this type of gaming the system, such as abuse of “risk adjustment” by insurance plans and abuse of the independent dispute resolution process, in two earlier commentaries.
I remain confident that legal “abuse” in the form of gaming the system accounts for greater drain on healthcare resources than intentional fraud. Eliminating this form of abuse means changing the rules of the game so that it can’t be so easily fixed. The frequent exposés by The Wall Street Journal of the abuse of the Independent Dispute Resolution process in the federal No Surprises Act provide vivid examples that are easily understood by the general public. Other examples, such as manipulation of the risk adjustment process by Medicare Advantage plans, are more difficult to understand but probably represent a larger opportunity to reduce costs if these practices could be eliminated.
Academic estimates of “waste” – which typically incorporate fraud and abuse – are stunningly high, but suspect because of the inherent subjectivity of what counts as waste. Some academic studies have claimed that “waste” accounts for as much as 25% of all healthcare spending in the U.S.[13] In this context, “waste” is being used to mean “unnecessary services” or “inefficient” aspects of the healthcare delivery system. Appendix A describes how one major academic study arrived at this estimate and the subcategories involved.
Excess utilization of certain services certainly accounts for some amount of “waste,” although it is currently thought to be less of a factor than the “Dartmouth Atlas” research that began in the 1970s on regional variation in the level of services. Overutilization is concentrated in discretionary, “gray-area” care where the clinical evidence of efficacy is weak, including end-of-life intensity, post-acute care, high-tech imaging, and certain elective procedures. Academic studies have found that the use of most services in the U.S. is similar to peer countries, with the limited exceptions cited above.
Medical malpractice expense is an example of the subjective nature of what constitutes “waste.” The wide variation of malpractice costs in different jurisdictions primarily reflects policy choices, with the trade-off being fairly clear between individual compensation for injury and the general interest in lower health costs. Even so, jurisdictions with more expansive malpractice damages standards could be considered “waste” relative to a more efficient model of healthcare delivery.
The striking difference in malpractice costs among different states suggests this is a topic worth highlighting. Much if not most of the difference is attributable to the fact that New York has no general statutory limit on non-economic malpractice damages, while California has a cap that averages slightly more than $500,000 and Texas has a cap of $250,000 for a single institution. The following table produced using OpenAI shows the difference in total malpractice premiums among New York, California and Texas:
Source: Insurance Information Institute, based on NAIC statutory insurance data. Per-resident calculations use 2024 Census population estimates.
Individual Insurance Product Design
Policy choices about individual insurance product design may have less impact on the aggregate amount of health expenditures in the U.S., but they certainly affect affordability at the individual level. The individual insurance product design mandated by the Affordable Care Act (ACA) reflects the philosophy of the Democratic Party of making healthcare more affordable for actuarially riskier populations. The cross-subsidization inherent in that philosophy makes ACA individual insurance policies less affordable for everyone else.
The problem with this approach – particularly when the “individual mandate” that was initially part of the ACA design was eliminated – is that the value proposition for the healthier population is not attractive enough to induce enough healthier people to purchase coverage to balance out the higher costs of the less healthy population, who have a greater motivation to purchase health insurance. This in turn leads to the doom loop of an ever-weaker risk pool leading to ever-higher premiums.
Although any legislative changes will require negotiations to survive a veto, Democratic leaders have made clear that one of their priorities in the new Congress will be to restore the enhanced ACA tax credits that were allowed to lapse at the end of 2025. This will make healthcare more affordable for the roughly 20% of ACA enrollees who dropped coverage once the enhanced premium tax credits expired, but will not do anything to address the affordability issue for the large number of people who find the ACA value proposition unappealing even with lower upfront premiums.
In an earlier Brief, we examined the Republican proposal to spread subsidies more widely among healthier populations by subsidizing Health Savings Accounts that consumers would have more discretion about how to use. This effort, led by outgoing Sen. Bill Cassidy, failed to advance in the Senate when it was proposed in late 2025 as an alternative to the expiring enhanced premium tax credits. Our Brief explained why this idea should not be dismissed out of hand – even by Democrats.
What role does an aging and sicker population play in the growth of health expenditures?
It may be counterintuitive, but health economists have generally found that the demographic shift of the U.S. population to an older and sicker population is a relatively minor factor in the rate of growth in healthcare spending in the U.S. over the last few decades.[14] Even clearer is the conclusion that demographics do not explain why healthcare expenditures in the U.S. are so much higher than in peer countries, because the percentage of the population older than 65 is smaller in the U.S. than in most peer countries in Europe and Asia. Although the prevalence of obesity and diabetes has increased in the U.S. in recent decades, its effect on spending growth has been largely offset by declines in cardiovascular disease.[15]
There are a few caveats to the conclusion that an older and sicker population plays only a minor role. First, the rate of growth in “treated prevalence” is faster than the epidemiological rate of growth in underlying conditions including diabetes, hypertension, and hyperlipidemia, which suggests that changes in how conditions are diagnosed and treated, not just how common they are, have driven some of the growth.[16] Second, the level of spending on obesity related conditions is significantly higher in the U.S. than in peer countries. The OECD in a 2019 study projected that between 2020 and 2050 the U.S. will spend approximately 14% of its health budget treating diseases associated with obesity and overweight compared to an OECD average of 8.4%.
A more important caveat may be that the aging population in the U.S. is expected to account for a growing share of total U.S. healthcare expenditures – especially government-funded healthcare expenditures. According to the Congressional Budget Office:
“As the population ages and health care costs grow, outlays for the major health care programs measured in relation to the economy also rise over the next three decades, by 2.3 percentage points between 2025 and 2055. That year, outlays for Social Security, Medicare, and Medicaid for people age 65 or older account for more than 50 percent of all noninterest spending.”
The aging of the population combined with policy changes that significantly expanded Medicaid funding for personal care has had a substantial impact on the growth of Medicaid expenditures in New York. In fiscal year 2026, long-term care spending by just 6 percent of Medicaid recipients accounted for approximately 60% of all Medicaid spending.[17] While the amount of spending is affected by program design and other factors, the fact that New York’s population 65 and over grew from 9% of the population to 17% of the population between 2000 and 2025 – and is expected to grow from 3.4 million New Yorkers in 2020 to 4.2 million New Yorkers in 2030 – is a major reason for the growth in long-term care spending.
Conclusion
There is a line in the 2008 book In Defense of Food by Michael Pollan that has stuck with me over the years. He writes:
“Is it just a coincidence that as the portion of our income spent on food has declined, spending on health care has soared? In 1960 Americans spent 17.5 percent of their income on food and 5.2 percent of national income on health care. Since then, those numbers have flipped: Spending on food has fallen to 9.9 percent, while spending on health care has climbed to 16 percent of national income. I have to think that by spending a little more on healthier food we could reduce the amount we have to spend on heath care.”
The broader interpretation I take from this is that society makes substantial trade-offs in spending on other social determinants of health, including housing, education, food and other forces, when spending on healthcare absorbs so much of our economy’s spending. Healthcare spending in the U.S. is not just a question of affordability in the abstract, but rather what is left over to pay for other social needs.
This paper summarizes the academic research about the reasons why healthcare spending in the U.S. is as high as it is. The complexity and scale of this issue lead to a focus on broad factors that influence spending. In reality, these broad factors represent the sum of thousands of individual inputs, which are much more difficult to identify.
As a result, the solutions to addressing these cost drivers often resort to blunt instruments – in particular, price controls that are inherent in policy proposals such as Medicare for All. In the second part of this Commentary, I will discuss the prescriptions being advanced by both health economists and policymakers and try to make clear both the efficacy of the proposed solutions and the trade-offs involved.
Appendix A
This Appendix appeared in an earlier commentary: Medicaid Fraud, Waste, and Abuse.
A landmark study of waste in American healthcare published in the Journal of the American Medical Association in 2019 estimated total waste at approximately $760 billion to $935 billion annually (in 2019 dollars), or 25% of total healthcare spending, attributing this expense across six domains first established by the Institute of Medicine in 2010 and revised in 2012 by Don Berwick and Andrew Hackbarth:
Waste Category | Estimated Annual Cost |
Administrative Complexity | $265.6 billion |
Pricing Failures | $230.7 billion to $240.5 billion |
Failure of Care Delivery | $102.4 billion to $165.7 billion |
Overtreatment (Low-Value Care) | $75.7 billion to $101.2 billion |
Fraud and Abuse | $58.5 billion to $83.9 billion |
Failure of Care Coordination | $27.2 billion to $78.2 billion |
The authors provide a detailed table of cost estimates by specific areas within each domain, excerpted here from p. 4 of the article:
They also published a table of expected savings from relevant interventions to curb waste:
Endnotes
[1] Charted: Healthcare costs for families almost tripled in last 20 years. Advisory Board. June 9, 2025.
[2] International Comparison of Health Systems. Emma Wager and Cynthia Cox. KFF. October 8, 2025.
[3] How do healthcare prices and utilization in the United States compare to peer nations? Delaney Tevis, Matt McGough, Juliette Cubanski, Matthew Rae Twitter, and Cynthia Cox. KFF. September 4, 2025.
[4] Higher fees paid to US physicians drive higher spending for physician services compared to other countries. Miriam Laugesen and Sherry Glied. Health Affairs. September 2011.
[5] National Health Expenditures 2024 Highlights. Centers for Medicare and Medicaid Services. 2024. Long-term care and administration make up the largest part of the remaining 40% of expenditures.
[6] Prices Paid to Hospitals by Private Health Plans. Christopher M. Whaley, Rose Kerber, Daniel Wang, Aaron Kofner, Brian Briscombe. RAND. December 10, 2024. vii.
[7] Cooper, Z. (2019). High prices drive high health care spending in the U.S., but so too do other factors: A response to Anderson and colleagues. Health Affairs Forefront.
[8] Massachusetts Health Policy Commission. (2020). 2019 Health Care Cost Trends Report. p. 21.
[9] Monetizing Medicine: Private Equity and Competition in Physician Practice Markets. Richard M. Scheffler, Laura Alexander, Brent D. Fulton, Daniel R. Arnold, Ola A. Abdelhadi. American Antitrust Institute, the Nicholas C. Petris Center on Health Care Markets and Consumer Welfare, UC Berkeley, and the Washington Center for Equitable Growth. July 10, 2023.
[10] Commonwealth Fund citation: Alexis Pozen and David M. Cutler, “Medical Spending Differences in the United States and Canada: The Role of Prices, Procedures, and Administrative Expenses,” Inquiry 47, no. 2 (Summer 2010): 124–34.
[11] High U.S. Health Care Spending: Where Is It All Going? Ani Turner, George Miller, Elise Lowry. The Commonwealth Fund. October 4, 2023.
[12] Administrative Simplification and the Potential for Saving a Quarter-Trillion Dollars in Health Care. Nikhil R. Sahni, Brandon Carrus, and David M. Cutler. JAMA 326.17 (2021): 1677-1678.
[13] Shrank, William H., Teresa L. Rogstad, and Natasha Parekh. "Waste in the US health care system: estimated costs and potential for savings." Jama 322.15 (2019): 1501-1509.
[14] Factors associated with increases in US health care spending, 1996-2013. Joseph L. Dieleman, et al. JAMA. 2017;318(17):1668-1678.
[15] Ibid.
[16] Treated Disease Prevalence and Spending per Treated Case Drove Most of the Growth in Health Care Spending in 1987–2009. Ken Thorpe. Health Affairs. 2013;32(5):851–858.
[17] FY2026 Executive Budget Briefing Book. NYS Governor Kathy Hochul. p. 69.
