By Jay Eisenstock, Founder, JE Consulting
LinkedIn: Jay Eisenstock
The shocking execution of the CEO of America’s largest health insurer has reignited widespread criticism of the health insurance industry, often viewed as primarily responsible for the high cost of healthcare. While these companies bear some responsibility, the issue is far more complex with blame shared across the entire system. The price of healthcare is a multifaceted problem with no easy solution. As a veteran of the health insurance industry with 30 years of experience, I’m often asked why healthcare is so expensive. My enigmatic answer: the cost of healthcare is the cost of healthcare.
Factors Driving the High Cost of Care
Many factors contribute to the cost of healthcare, including increased wages across the sector, the aging population with increasing medical needs, and soaring hospital expenses. Much has been written about how the United States spends more per capita on healthcare than any other country, yet we experience worse health outcomes, including lower life expectancy and higher rates of chronic disease.
We spend more because we expect the best without compromise. For instance, hospital wards are rare in the U.S.; instead, we prioritize semi-private or private rooms. Wait times for advanced testing and imaging are significantly shorter than other countries. Our hospitals are among the best equipped, most technologically advanced, and better staffed globally.
In numerous cities, hospitals are the largest employers and own significant real estate. Many are not-for-profit organizations, granting them special tax status that allows them to grow their infrastructure, staff, and investments. To compete for patients, hospitals offer a better patient experience with more services such as state-of-the-art testing, and advanced procedures – all of which come at a cost.
The Changing Landscape of Care Delivery
Historically, specialized medical services were offered within hospital departments. However, our market-driven healthcare system has fostered the growth of standalone facilities such as imaging centers, physical therapy clinics, dialysis centers, and outpatient surgical facilities. While these specialized centers expand patient options, they also contribute to the fragmented and costly landscape of modern healthcare delivery.
Doctors increasingly order more tests and procedures, influenced by the fee-for-service model that rewards quantity over quality and the need to protect themselves from potential malpractice claims. A growing trend is the acquisition of physician groups by private equity firms and others who seek profit opportunities in the healthcare sector.
Pharmacy benefit managers (PBMs) have faced criticism for their lack of transparency in negotiating discounts with pharmaceutical companies and their role in determining the prices patients pay for medications. Critics argue the administrative fees charged by PBMs contribute to the high cost of healthcare.
Who Pays for Healthcare?
In the United States, most of the insured population is covered by employer-sponsored healthcare or enrolled in government programs. Only about 5% of the population purchases their own insurance through the marketplace or non-group coverage. This means that decisions about coverage and costs are made by third-party payers – either government programs or commercial entities. Importantly, these payers do not deny care, they decide what services they will pay for.
Post-World War II, many large employers fully covered health insurance premiums to attract and retain talent. Many of these plans offered comprehensive benefits which included medical, dental, pharmacy and vision. As the cost of care continued to rise, employees began to shoulder more of the cost of premiums. By the 1980s, managed care plans (HMOs and PPOs) emerged to control rising healthcare costs, yet premiums continued to rise. According to data from the Kaiser Family Foundation, the average annual premium for family coverage increased from $5,800 in 1999 to $24,000 in 2023, a staggering rise of over 300%.
Cost-Control Strategies and Their Challenges
Healthcare payers have limited options for controlling costs. They can offset the cost of premiums by utilizing co-insurance and deductibles. This increases the cost share and theoretically encourages consumers to weigh “buying decisions.” However, healthcare is unlike any other buying experience. People don’t want healthcare; they need healthcare and view this practice as a penalty. Payers also institute practices to limit tests and procedures by utilizing primary care physicians as gate keepers before authorizing specialist visits and requiring approvals known as prior authorization for the costliest drugs, procedures and tests. Prior authorization is controversial as physicians feel they are being micro-managed by healthcare payers; patients feel they are being denied care, yet healthcare payers believe it helps control costs.
This is not to say health insurers are without fault. By and large, they are profitable businesses that in many ways have helped create and benefit from the healthcare system we have today.
Value-Based Care: A Partial Solution
There have been attempts to address the cost issue, most notably through the introduction of value-based care (VBC). Under VBC, providers receive predetermined payments for managing patient populations, with additional incentives tied to quality metrics and improved health outcomes. Since most of the cost is driven by the sickest, VBC programs look to bend the cost curve by emphasizing preventive care and early intervention for high-risk patients. While VBC shows promise, it’s not the panacea some have hoped for. Success depends heavily on patient engagement and adherence to treatment plans. Healthcare organizations must also invest in substantial data collection and reporting an added expense not always offset by bonus payments.
The Debate Over Single-Payer Healthcare
Some have called for a single payer, government-run health insurer. For that to work, radical changes to the healthcare system would need to occur. For example, Medicare, and especially Medicaid, pay providers substantially less than commercial insurers. Hospitals negotiate higher contractual fees with commercial insurers partly to offset the lower reimbursement from these government programs. Under a government-run model for all, physicians and hospitals would see lower fees, service delivery would likely be impacted, and the patient experience would ultimately suffer.
A Path Forward
Although the challenges are substantial, many are hopeful that a resolution to this problem is possible. By making thoughtful compromises, we, as consumers, can sustain the high-quality healthcare system we know and expect, while ensuring that costs remain manageable.