Healthcare Costs: Policy Interventions

In 2023, total U.S. health spending soared to $4.9 trillion, nearly $14,570 per person, and shows no sign of slowing. For businesses, families, and governments, rising healthcare costs threaten budgets, profitability, and access to essential services.

Scope of Rising Expenditures

American health expenditures now exceed a quarter of global spending, with a projected 5% annual increase. These trends force state budgets to trade off between education, infrastructure, and social services. Employers face shrinking margins, and consumers grapple with high out-of-pocket bills.

Without effective intervention, unchecked growth in medical spending will strain every corner of the economy and widen health disparities among vulnerable populations.

Major Drivers of Cost Growth

• Hospital services in consolidated markets: High prices and growing utilization, especially in outpatient settings, drive up facility fees.
• Prescription drugs with limited competition: Specialty and brand-name medications command steep prices and rapid price hikes.
• Provider payment rate increases: Differential reimbursements between hospital outpatient and physician settings boost costs.
• Underinsurance and cost-sharing challenges: Marketplace subsidy expirations and Medicaid disenrollment raise uninsured rates and financial risk.

Federal Policy Interventions

Policymakers have deployed a range of federal tools to rein in costs, from Medicare reforms to transparency mandates. Their collective impact offers lessons on balancing savings, access, and administrative complexity.

• Medicare payment reforms: Equalizing payments regardless of care setting aims to curb unnecessary facility upgrades.
• Prescription drug pricing: The Inflation Reduction Act caps insulin costs, imposes rebates for inflation-linked hikes, and enables price negotiations for high-cost drugs.
• Price transparency mandates: Public reporting of negotiated rates, though consumer engagement remains low and competitive dynamics can backfire.
• Coverage expansions and subsidies: Enhanced premium tax credits reduce consumer costs but may increase overall public spending.
• Medical debt relief programs: Forgiveness initiatives address immediate burdens but leave root drivers largely untouched.

State-Level Strategies

• Global budget spending targets: Maryland and Pennsylvania models have reduced preventable admissions and stabilized growth without harming quality.
• Pricing and consolidation oversight: Caps on provider rate increases and merger reviews in Rhode Island and Oregon protect competition and limit price gouging.
• Insurance rate review: Stricter premium oversight enforces actuarial justification and limits unwarranted hikes.
• Innovative payment models: Population-based payment systems and risk-sharing motivate efficiency over volume.
• Generics and biosimilars promotion: Patent reform and affordability boards drive down drug costs at the state level.
• Community paramedicine and smart shopper programs: Redirect non-emergency demand to cost-effective settings and lower unnecessary emergency visits.

Cost-Effectiveness and Resource Allocation

Cost-effectiveness analysis (CEA) plays a critical role in guiding allocative decisions. By comparing costs and health outcomes, CEA informs policy design and helps prioritize interventions offering the greatest value.

International models, such as the UK’s National Institute for Health and Care Excellence (NICE), showcase rigorous CEA integration. U.S. adoption remains uneven, but targeted reallocation—shifting investments from costly hospital care to expanded primary and preventive services—promises to improve efficiency and equity.

Challenges and Controversies

Despite promising results, many interventions face resistance and unintended effects. Price transparency can inadvertently lead to higher negotiated rates when providers aim to maintain parity. Quality-based payment models sometimes increase administrative burden and offset net savings.

Political and legal opposition from powerful stakeholders, including hospitals, insurers, and pharmaceutical companies, can delay or dilute reforms. State capacity and market structure further influence feasibility and outcomes, leading to uneven progress across the country.

Coverage expansions improve affordability for individuals but may elevate public fiscal burdens. Similarly, aggressive rate cuts risk reducing provider participation, particularly in rural or underserved areas.

Looking Ahead: Balancing Innovation and Equity

Future policy design must harmonize cost containment with access, quality, and equity. Expanding negotiation powers to additional drug classes, refining global budget models, and integrating robust CEA into all levels of decision-making can yield deeper savings.

Ongoing monitoring, stakeholder engagement, and adaptive regulation will be essential to navigate tradeoffs and sustain momentum. By prioritizing value-based care and preventive services, policymakers can build a more efficient, equitable system that controls costs while improving outcomes for all Americans.

Ultimately, reducing the burden of healthcare expenditures requires a coordinated, multi-level approach—one that aligns federal incentives, state innovations, and consumer empowerment to create lasting, positive change.