Why Is Health Care So Expensive?
How prices work, who really pays, and the policies that push health care demand up and hold supply back
How Prices Work
It’s easy to blame greedy drug companies, hospitals, or insurers for high health care bills. But they wanted to earn money in 2000, too, and so do drug companies and hospitals in other countries, where prices are far lower. To explain high prices, look for what’s different and what changed. Start with how economists describe a market economy.
In health care, prices often can’t do their job. Insurers, employers, and government pay most bills, so patients rarely see or compare prices. Patients also know less than their doctors, and when you’re sick or hurt you can’t easily shop around. When buyers can’t see prices and sellers don’t compete on them, prices send weaker signals.
Work through five questions whenever a price changes:
| The Price Detective Checklist | What to look for | In the health care market |
|---|---|---|
| 1. Supply and demand. What shifted, and how strongly do buyers and sellers respond? | Shifts in supply or demand; price elasticities of demand and supply | An aging population, new treatments, and patients who see little of the price |
| 2. Government. Did a price control, tax, subsidy, quota, or tariff change? | Policies that push demand up or hold supply back | Tax break for job-based insurance, Medicare and Medicaid, licensing and facility rules |
| 3. Market power. How competitive is the market? | Number of sellers, barriers to entry, and how many alternatives buyers have | Hospital mergers, drug patents, and a few large drug middlemen |
| 4. Price discrimination. Do different buyers pay different prices for the same thing? | Price differences by customer that costs don’t explain | Private insurers pay far more than Medicare for the same hospital stay |
| 5. Inflation. Is it one price, or nearly all prices? | Monetary policy of the Federal Reserve and fiscal policy of the federal government | Hospital prices rose about twice as fast as prices overall |
Start Here: What Changed?
Not every health care price rose fast. Hospital prices far outpaced overall inflation, while doctors’ prices rose more slowly than prices overall:
| Consumer price index | Sept. 2000 | Sept. 2026 | Change |
|---|---|---|---|
| Hospital services | 100 | 393 | nearly quadrupled |
| All consumer prices | 100 | 194 | nearly doubled |
| Prescription drugs | 100 | 189 | nearly doubled |
| Physicians’ services | 100 | 178 | up 78% |
Each index is set to 100 in September 2000. The drug index tracks list prices, not rebates.
Americans spend much more on health care than people in other rich countries, and they pay little of it directly:
| Health spending | Amount |
|---|---|
| U.S. total, 2024 | $5.3 trillion (18% of GDP) |
| U.S. per person, 2024 (peer-comparison basis) | $14,775 |
| Average of comparable rich countries, per person | $7,860 |
| Share paid out of pocket by patients | 11% |
| Average family job-based premium, 2025 (worker pays) | $26,993 ($6,850) |
What changed, and what didn’t? A major study comparing the U.S. with 10 rich countries found Americans use about as much care, such as doctor visits and hospital stays. The difference is mainly prices: for labor, drugs, and devices, plus higher administrative costs. So the question is why U.S. prices are so high.
Running the Checklist on Health Care
1 Supply and demand: more demand, slow-growing supply
- Demand rose. An aging population needs more care: Medicare covered 66.6 million people in 2024. New treatments also add value people want to buy, from cancer drugs to joint replacements.
- Patients see little of the price. When insurance pays most of the bill, patients use more care than they would if they paid the full price. One study found the spread of insurance explains at least 40% of the rise in real health spending per person from 1950 to 1990.
- Supply responds slowly. It takes more than a decade to train a doctor, and caring for patients is hard to automate. A medical school association projects a shortage of 13,500 to 86,000 physicians by 2036.
READ How Do People Respond to Prices?, section ①. When insurance pays most of the bill, the price a patient sees is low, but the full price also includes time.
2 Government: policies that push demand up and hold supply back
Government is a huge buyer of care, with Medicare alone paying about 21% of all health spending, and it writes many of the rules. Many of these policies help people get care. But when demand rises and supply is held back, prices rise.
| Pushes demand up | How it raises prices | What the evidence shows |
|---|---|---|
| Tax break for job-based insurance | Insurance from an employer isn’t taxed as income, so workers get more generous plans in place of wages. | The tax break will cost about $290 billion in income taxes in 2026. The Congressional Budget Office says it encourages plans with lower out-of-pocket costs, raising total spending. |
| Medicare and Medicaid | Covering more people means more care purchased, much of it by people who otherwise couldn’t afford it. | After Medicare began in 1966, hospital spending rose sharply, a major piece of the 40% insurance effect. |
| Holds supply back | How it raises prices | What the evidence shows |
|---|---|---|
| Certificate of need laws | Hospitals and clinics must get state approval to open or expand, and rivals can object. | Federal antitrust agencies told South Carolina these laws “create barriers to expansion, limit consumer choice, and stifle innovation.” SC’s hospital rule ends in 2027. |
| Limits on doctor training | Since 1997, Medicare has capped the residency slots it funds near 1996 levels. | Fewer new doctors than demand calls for; projected shortages through 2036. |
| Scope-of-practice rules | States limit what nurse practitioners can do without a doctor. | The Federal Trade Commission found these limits reduce the supply of primary care. |
| Drug approval costs | Testing new drugs is long and expensive, and few succeed. | About 12% of drugs entering trials are approved; costs run from under $1 billion to over $2 billion per new drug. |
3 Market power: fewer rivals, higher prices
- Hospitals. Hospitals with no nearby rivals charge about 12% more than those in markets with four or more.
- Drug patents. Patents give new drugs years without competition. That reward pays for research, but it means high prices until generics arrive. Generics, about 90% of U.S. prescriptions, are cheaper here than in most other rich countries.
- Middlemen. Three companies manage most prescription drug benefits. The Federal Trade Commission found they marked up some specialty generic drugs by $7.3 billion over their cost from 2017 to 2022.
4 Price discrimination: who pays matters
The same hospital stay has very different prices depending on who pays. In 2022, private insurers paid hospitals about 254% of what Medicare paid for the same services. Brand-name drugs cost at least three times as much in the U.S. as in other rich countries, even after rebates. Higher expected revenue also gives drug makers more reason to invest in research, and most new drugs launch in the U.S. first.
5 Inflation: why hospital prices rise faster
Hospital prices nearly quadrupled from 2000 to 2026, while prices overall nearly doubled. That isn’t general inflation; it’s a change in hospital prices compared with other prices. Hospitals run on skilled labor that is hard to replace with machines, and with fewer rivals, they can pass those costs on.
What Can Government Do?
| Tool | How it works | The catch | What the evidence shows |
|---|---|---|---|
| Repeal certificate of need laws | Lets hospitals and clinics open or expand without state approval. | New facilities may serve profitable patients, leaving rural hospitals less revenue. | 12 states have repealed; SC is phasing its law out |
| Train more providers | Funds more residency slots; lets nurse practitioners do more. | Costs taxpayers, and training takes years. | FTC finds limits reduce primary care supply |
| Limit the tax break | Caps how much job-based insurance escapes taxes. | Raises taxes on many workers. | CBO says total spending would fall |
| Negotiate drug prices | Medicare negotiates prices for some high-cost drugs. | Lower prices may mean slightly fewer new drugs. | 22% lower net spending on 10 drugs in 2026 |
| Enforce antitrust | Blocks hospital mergers; reviews drug middlemen. | Slow and costly; some mergers may improve care. | Monopoly hospitals charge about 12% more |
Fair Challenges
Decide what you think of each challenge first, then open the response.
“Greedy drug companies are the problem.”
“Insurers are the problem.”
“Just adopt single payer.”
“Nonprofit hospitals don’t care about profit.”
“Just make prices public.”
“Health care isn’t a normal market.”
The Normative Question
Economics can show how insurance, taxes, licensing, and competition affect prices, spending, and access to care. It can’t decide whether health care is mainly a right or a service people buy, how much to trade lower prices for faster access to new treatments, or who should pay. Every choice, including keeping today’s system, puts the cost on someone.
Key Terms in Plain Words
- Third-party payment
- When an insurer, employer, or government pays the bill.
- Out-of-pocket cost
- What a patient pays directly for care.
- Moral hazard
- Using more of something when someone else pays for it.
- Asymmetric information
- When one side of a deal knows much more than the other.
- Certificate of need
- State approval required to open or expand a health facility.
- Scope of practice
- Rules on what each type of provider may legally do.
- Residency slot
- A paid training position new doctors need before they practice.
- Patent
- A legal right to be the only seller of an invention for a time.
- Generic drug
- A copy of a brand-name drug sold after its patent ends.
- Pharmacy benefit manager
- A middleman that manages drug benefits for insurers.
- Tax exclusion
- Income that isn’t taxed, like job-based insurance.
- Price discrimination
- Charging different buyers different prices for the same thing.
Sources
- Figures in this sheet come from the sources below, current as of late October 2026.
- The Framework: Peter Boettke, George Mason University
- Peter J. Boettke, Rosolino A. Candela, and Tegan L. Truitt, The Socialist Calculation Debate: Theory, History, and Contemporary Relevance, Cambridge University Press, 2024 doi.org
- EconTalk, “Who Won the Socialist Calculation Debate (with Peter Boettke),” Library of Economics and Liberty, February 17, 2025 econtalk.org
- Start Here: What Changed
- Bureau of Labor Statistics, Consumer Price Index: hospital services (CUUR0000SEMD01) data.bls.gov
- Bureau of Labor Statistics, Consumer Price Index: physicians’ services (CUUR0000SEMC01) data.bls.gov
- Bureau of Labor Statistics, Consumer Price Index: prescription drugs (CUUR0000SEMF01) data.bls.gov
- Bureau of Labor Statistics, Consumer Price Index: all items (CUUR0000SA0) data.bls.gov
- Centers for Medicare & Medicaid Services, National Health Expenditure Fact Sheet cms.gov
- Peterson-KFF Health System Tracker, “How does health spending in the U.S. compare to other countries?” healthsystemtracker.org
- KFF, 2025 Employer Health Benefits Survey kff.org
- Papanicolas, Woskie, and Jha, “Health Care Spending in the United States and Other High-Income Countries,” JAMA, 2018 jamanetwork.com
- 1. Supply And Demand
- Centers for Medicare & Medicaid Services, CMS Fast Facts / program highlights edit.cms.gov
- Finkelstein, “The Aggregate Effects of Health Insurance: Evidence from the Introduction of Medicare,” NBER Working Paper 11619 nber.org
- Association of American Medical Colleges, The Complexities of Physician Supply and Demand: Projections From 2021 to 2036 aamc.org
- 2. Government: Demand And Supply
- U.S. Department of the Treasury, Tax Expenditures, FY 2025 home.treasury.gov
- Congressional Budget Office, “Reduce Tax Subsidies for Employment-Based Health Insurance,” budget option cbo.gov
- Federal Trade Commission and U.S. Department of Justice, joint statement on certificate-of-need laws in South Carolina, 2016 ftc.gov
- National Conference of State Legislatures, Certificate of Need State Laws ncsl.org
- South Carolina Department of Public Health, Regulation 60-15, Certificate of Need dph.sc.gov
- Congressional Research Service, Federal Support for Graduate Medical Education (R44376) congress.gov
- Federal Trade Commission, Policy Perspectives: Competition and the Regulation of Advanced Practice Nurses, 2014 ftc.gov
- Congressional Budget Office, Research and Development in the Pharmaceutical Industry, 2021 cbo.gov
- Arrow, “Uncertainty and the Welfare Economics of Medical Care,” American Economic Review, 1963 assets.aeaweb.org
- 3–5. Market Power, Price Discrimination, And Costs
- Cooper, Craig, Gaynor, and Van Reenen, “The Price Ain’t Right? Hospital Prices and Health Spending on the Privately Insured,” NBER Working Paper 21815 nber.org
- Federal Trade Commission, second interim staff report on pharmacy benefit managers, January 2025 ftc.gov
- Whaley and coauthors (RAND), prices paid to hospitals by private health plans, Round 5.1 pmc.ncbi.nlm.nih.gov
- Office of the Assistant Secretary for Planning and Evaluation (HHS), Comparing Prescription Drugs in the U.S. and Other Countries aspe.hhs.gov
- RAND Corporation, International Prescription Drug Price Comparisons (report for HHS), 2024 rand.org
- Commonwealth Fund, International Health Care System Profiles: Switzerland commonwealthfund.org
- Commonwealth Fund, International Health Care System Profiles: Netherlands commonwealthfund.org
- Commonwealth Fund, International Health Care System Profiles: England commonwealthfund.org
- Commonwealth Fund, International Health Care System Profiles: Canada commonwealthfund.org
- Government Options And Fair Challenges
- Centers for Medicare & Medicaid Services, negotiated prices fact sheet, initial price applicability year 2026 cms.gov
- KFF, explaining the prescription drug provisions in the Inflation Reduction Act (CBO estimates) kff.org
- Congressional Budget Office, How CBO Analyzes the Costs of Proposals for Single-Payer Health Care Systems, 2020 cbo.gov
- KFF, Key Facts About Hospitals kff.org
- Health Care Cost Institute, shoppable services and health care spending healthcostinstitute.org
- Centers for Medicare & Medicaid Services, No Surprises: Understand your rights against surprise medical bills cms.gov