Americans everywhere are frustrated with high prices—for gas, groceries and especially healthcare. In poll after poll, they rank healthcare affordability among their top concerns, and it’s easy to understand why. Healthcare costs are crushing family budgets, squeezing employers and draining taxpayer dollars—consuming an ever-larger share of public resources that could go to priorities like education, infrastructure and public safety.
But our debate about the solutions is too focused on who pays for care rather than why care costs so much in the first place. Take the current fight in Washington over healthcare funding. Democrats are right that coverage has to stay affordable for families; no serious path forward can ask households to absorb even more. Republicans are right that ever-growing federal subsidies are not sustainable, fiscally or politically, on top of a system this expensive. But neither side offers a real solution. The response to the affordability issue cannot be a blank check, and it cannot be kicking people off coverage. Both of those answers ignore the root causes of high costs.
America spends $5.6 trillion on healthcare annually, roughly one-fifth of the economy. Family premiums for employer coverage hit nearly $27,000 last year, rising at more than twice the rate of inflation for three straight years. As long as those costs keep climbing, no subsidy will ever be enough, and every fight over who pays will only get harder.
So why does care cost so much? Because we have built a market where it is simply easier to raise prices than to operate more efficiently or deliver better care—and every actor in it, from hospitals to health plans to drug companies to employers, is responding rationally to that incentive. That is a structural problem, and it requires a structural answer: change the incentives that reward higher prices and put real purchasing power in the hands of those who pay for care—employers, states and public programs—so they can demand better and drive change.
Three opportunities to actually impact our spending trajectory
Start with employers. More than 154 million Americans get their coverage through their job, and employers spend $1 trillion annually providing it. If employers used their purchasing power the way the largest, most sophisticated buyers do, the savings would be immediate and substantial. Yet most cannot reliably determine whether they are paying competitive prices, whether their providers deliver good value or whether their health plans and brokers are negotiating effectively on their behalf. Research shows that employers and private insurers pay hospitals an average of 254% of what Medicare pays for the same services.
When employers do get access to independent data, the results are striking: prices for identical procedures vary enormously across markets and there is little to no relationship between price and quality of care. Employers who have analyzed their own claims data and acted on it have cut healthcare costs by as much as 20% through smarter contracting alone. A 3% to 5% reduction in what employers spend on healthcare would generate $29 to $48 billion in annual savings—money that flows directly back to workers in the form of higher wages and better benefits. Employers who demand better data and act on it can start driving costs down today, without waiting for Washington.
States are the second major lever. State governments are uniquely positioned to act—as regulators, as employers and as the administrators of Medicaid programs that together represent $860 billion in annual healthcare spending. A 3% to 5% reduction in that spending through smarter purchasing and stronger market oversight would yield $26 to $43 billion in annual savings.
As regulators, they have authority to curb anti-competitive behavior and foster markets that reward value. Research shows that consolidation drives up prices—monopoly hospitals charge 12.5% more than those facing real competition, and that addressing it could reduce private health spending by 2%, roughly $30 billion annually. As employers, states purchase coverage for millions of public workers, giving them still-untapped power to demand better prices and outcomes. As Medicaid administrators, states manage what is often the single largest item in their budgets, with significant room to improve procurement, hold vendors accountable and shift toward performance-based contracting.
The third lever is technology. Independent assessments of high-value digital health solutions for three common chronic conditions—hypertension, musculoskeletal problems and depression and anxiety—suggest combined savings potential of roughly $4 billion annually across Medicare and Medicaid alone. AI carries genuine promise for reducing healthcare spending, but that promise is largely unrealized. Administrative tools designed to reduce burden are instead increasing billing intensity. Clinical tools with real potential to cut unnecessary care sit unused because the payment models to support them don’t exist.
When purchasers—public programs, employers, health insurers and health systems alike—define clear outcome standards and pay for results rather than activity, the market responds. The tools that actually improve outcomes and reduce spending win. Technology follows incentives. Point it in the right direction and it becomes one of the most powerful tools available to expand access to care and reduce healthcare spending.
A more honest conversation
Americans have been waiting decades for the cost of care to come down. It hasn't, because we keep having the wrong conversation, focused on who to blame rather than what to change. The payment structures, market concentration and misaligned incentives that push healthcare spending higher don't respond to finger-pointing. They respond to purchasing power, regulatory authority, and accountability for outcomes.
When employers get real data, they make different purchasing decisions. When states use their authority, markets respond. When technology is held to outcome standards, vendors compete to meet them. Together, employers and states control nearly $2 trillion in annual healthcare spending. The question is whether we build the conditions to put that power to work.
Caroline Pearson is executive director of the Peterson Center on Healthcare.