The Low Return on Investment of US Healthcare
The Center for Medicare and Medicaid Services recently released data showing that US health expenditure rose by 7.5% in 2023 to $4.867 trillion in 2023, representing 17.6% of GDP and $14,570 per capita. Per capita health expenditure in the United States was 89% higher than the average for developed countries and 56% higher than Switzerland, the second-highest spender.
Despite this seismic spending, the United States lags behind all OECD countries in several key health metrics, including infant mortality, the prevalence of chronic conditions, and life expectancy. Thus, the US healthcare system—characterized by exceptionally high financial investment and poor outcomes—delivers a strikingly disappointing ROI as compared to the developed world.
This inefficiency is a problem on a macroeconomic scale, but it is particularly painful in the daily life of US citizens. On top of employer contributions, the average worker personally spends $6,296 per year on health insurance for family coverage, up 20% from five years ago. Despite these high insurance costs, health outcomes in the United States continue to degrade, causing an estimated $3.2 trillion in lost economic gains due to reduced productivity.
For businesses of all sizes and aspiring entrepreneurs alike, premiums have become a barrier to growth and prosperity, draining funds that could otherwise be reinvested or used to raise wages. The cost of employer-sponsored health insurance plans has risen to $24,572 per worker for family coverage, a burden that firms in competing countries typically do not face. Combined with a financially strained and unhealthy population, this economic pressure undermines the United States’ ability to maintain a competitive and flourishing workforce, compromises its economy, and jeopardizes its national interest and global dominance.
Root Causes of the Low Return on Investment of US Healthcare
At the root of the US’ low healthcare ROI are policy failures that prevent market forces from achieving optimal outcomes for US patients and taxpayers. Previous major healthcare policies, including the Affordable Care Act and the Inflation Reduction Act, have followed a recurring cycle: detaching individuals from their healthcare dollars, regulating providers and insurers in ways that limit competition and drive up costs, attributing rising prices to greed and market failures, and then claiming that the law did not go far enough to protect consumers. This ultimately further reduces individual control over healthcare spending and substitutes private healthcare spending with public subsidies.
This government-centered paradigm inevitably leads to higher spending and poorer outcomes because legislative and regulatory processes are typically captured by industry groups seeking government-granted monopolies and government-erected entry barriers. Additionally, the compliance burden is inherently regressive as it imposes fixed costs across all players, disproportionately disadvantaging small players and new entrants, incentivizing consolidation, and hurting low-income consumers. As a result, revenue is increasingly is obtained through compliance with regulations for government and private programs rather than by competing to provide lower-priced, higher quality products or services to patients.
By shielding large health systems through government-imposed entry barriers and competitive advantages, these regulations incentivize hospitals to consolidate and gain pricing power in insurance negotiations. At the same time, these regulations have contributed to the rapid closure of rural hospitals and small practices at an accelerating pace. These anticompetitive policies have stifled innovation in care delivery, led to a substantial decline in independent physician practices, and eroded physician job satisfaction and autonomy. As incentives become increasingly distorted, prices continue to rise, government spending crowds out private spending, and interest groups compete for taxpayer dollars and regulatorily protected monopolies, creating substantial clinical and financial repercussions for patients and society.
How to Improve US Healthcare ROI?
It is understandably appealing to attribute the low ROI of US healthcare to the lack of government control and to advocate for a single-payer system, one that would ensure all costs are covered by a public authority. However, evidence warns that a single-payer system would exacerbate the supply shortages and access limitations that American patients covered by public insurance programs are already frustrated with.
Research has shown that cash prices transacted directly between patients and hospitals are often lower than insurance-negotiated prices, even for “unshoppable” services like trauma activation fees. This is not surprising, as patients become price-conscious when they gain control over their healthcare dollars, forcing providers to compete on both price and quality to attract business. Therefore, a more efficient healthcare system can emerge by incentivizing patient-centered decision-making and rolling back against anti-competitive regulations, ultimately maximizing the interests of patients and taxpayers.
Patient-Centered Healthcare Decision-Making
Patient-centered healthcare implies a system that empowers patients to make the right decisions for themselves and their families, giving them control over their healthcare dollars to spend on the care that they want. Patients should be the arbiters of quality and value, as individuals making decisions about their own healthcare reduces the chance of misaligned incentives. Ultimately, healthcare is patients’ lives and others’ business. Information asymmetries exist in transactions across many markets. However, under competitive pressure, facing the prospect of repeated future interactions, and concerned about reputational capital, sellers are compelled to serve consumers’ best interests to advance their own, thereby fostering innovation, affordability, and consumer welfare. In healthcare, giving patients the agency to select which medication, which treatment, which provider, or which hospital makes most sense for them would steer the market in the right direction. To achieve this goal, regulatory barriers must be addressed by policymakers to allow individuals to directly benefit from lower prices and allow insurers and providers to freely deliver products and services that meet the diversified needs of patients.
First, plan sponsors should have the option to offer catastrophic insurance plans that cover only major medical episodes (i.e., insurable events), excluding routine and low-cost items (i.e., uninsurable events) and returning insurance to its core function: pooling only meaningful and insurable financial risks. Due to administrative complexities, misaligned incentives, and moral hazards associated with using insurance—such as pursuing unnecessary or excessive tests and treatments while shielded from costs—the covering of routine and low-cost events has led to expensive premiums, steep patient cost-sharing, and massive taxpayer subsidies.
Second, everyone should have access to Health Savings Accounts (HSAs). HSAs, with their triple tax benefits, are fully controlled by individuals to pay for cash-based healthcare expenses and the cost-sharing for insurance-covered items. However, HSA contributions and distributions are strictly regulated (partially due to their tax implications), limiting patients’ access to HSAs and preventing them from fully realizing the benefits of HSAs. For example, government plans and plans without high deductibles are not permitted to establish HSAs, gig workers cannot receive contributions from multiple employers to their HSAs, and HSAs cannot be used to pay for premiums, among other restrictions.
Making HSAs and low-premium insurance plans accessible to all Americans is essential for patient-centered healthcare. The savings from low premiums translate into larger contributions to HSAs. To protect financially disadvantaged patients, government subsidies and tax-deductible cash transfers from employers, other entities, and individuals should flow directly into recipients’ HSAs. Additionally, the scope of HSA-eligible purchases should be expanded to include health-improving activities, enabling individuals to use their healthcare dollars, both earned and subsidized, for self-directed purposes to address their health needs.29 This deregulation would empower American patients as consumer-customers and unleash a profound surge of innovative American startups in fields ranging from primary care to surgical services and pharmaceuticals.
A patient-centered system that deregulates insurance plans and HSAs would allow insurers and providers to focus on offering what patients want. Employers and workers could embrace more flexible and responsive solutions for purchasing healthcare, through individual coverage health reimbursement arrangements (ICHRAs). ICHRAs allow workers to purchase insurance at the local level and receive reimbursements from employers. Greater adoption of ICHRAs would enhance labor mobility and relieve employers of the burden of managing healthcare purchasing for their workers, while giving workers more options. More importantly, it would address the inherent inefficiencies of employer-based insurance purchases: employers with a dispersed labor force often lack meaningful patient volume at the local level to generate meaningful negotiating power, and workers’ diverse preferences cannot be met by the limited options offered by employers.
Additionally, restrictions on short-term plans and health health-sharing ministry plans, which flexibly design benefits and offer low premiums, should be lifted. Association health plans (AHPs) should also be expanded to allow small employers or self-employed individuals in similar industries across wide geographic regions to pool their risks and purchasing power. By addressing a vexed system through deregulation, employers and workers could embrace more flexible and responsive solutions for purchasing healthcare, namely through individual coverage health reimbursement arrangements (ICHRAs). ICHRAs allow workers to purchase insurance at the local level and receive reimbursements from employers. Greater adoption of ICHRAs relieves employers of the burden of managing healthcare purchasing, while giving workers another alternative. Patients and employers, not regulators, should be self-determined.
Free Market Competition
The current healthcare regulatory landscape protects incumbent players from competition, incentivizes hospital consolidation, and leads to increasing healthcare costs and a weaker local economy.
The regulatory landscape has been built over decades to ‘set’ prices from the top. However, government-centered decision-making, which reflects the views of a select few, inevitably compromises the market’s ability to serve everyone efficiently. As new signals, developments, and preferences emerge, bureaucrats and experts are unable to make the optimal pricing, investing, production, or distribution decisions that maximize societal interests. These functions belong to the free market. Continuing this government-centered approach will only add temporary solutions, endangering small players, discouraging innovation, and imposing substantial opportunity costs for patients and society.
The only approach that can improve healthcare ROI is to rely on free market competition, which drives down prices, enhances quality, fosters innovation to meet diverse needs, and rewards players who deliver the best value for patients. This approach especially benefits the vulnerable—taxpayer subsidies flow directly to low-income, high-risk individuals rather than to providers, insurance companies or other parties. The current system, which does the opposite, erects access barriers and confines the most vulnerable patients to inferior care. Equal access becomes possible only when patients—not others—control their healthcare dollars. In a deregulated landscape where patients control their healthcare dollars, hospitals, alternative facilities, and physicians would face competition and focus on satisfying patients rather than regulators, generating enormous and sustainable momentum to improve healthcare ROI and benefit all.
Looking Forward
An efficient patient-centered US healthcare system would look very different from the status quo, with its aligned incentives, fair and vigorous competition, downward pricing pressure, upward quality pressure, and transparent and non-discriminatory prices. As a result, employers would achieve savings. Reducing the economic drag on employers would facilitate hiring, accelerate wage gains for labor, and reduce barriers to small business creation. Patients would benefit from medical innovations, expanded access, greater flexibility in receiving care, lower premiums, higher take-home wages, and ultimately better health. Providers and other healthcare players would be unshackled from regulatory burdens while transparent and immediate pricing—divorced from bureaucratic negotiation and delayed billing cycles—allows stable expansion of hospitals and practices throughout the country.
Improving healthcare ROI is a national priority with global implications. A healthy and powerful America is essential not only for the United States’ national interest but also for global stability and prosperity. A patient-centered approach is the key to making it happen.
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Joseph Puthumana, MD, is a physician at the Johns Hopkins School of Medicine. He is the recipient of the Fulbright-Austrian Marshall Plan Foundation Award for Graduate Studies in Science and Technology.
Joseph Grogan, JD is a senior scholar at the USC Schaeffer Institute, former director of the United States Domestic Policy Council, and assistant to President Donald J. Trump.
Ge Bai, PhD, CPA, is a professor of accounting at Johns Hopkins Carey Business School and a professor of health policy and management at the Johns Hopkins Bloomberg School of Public Health.
Image Credit: Çağlar Oskay, Unsplash Content Liscence, via Unsplash.
