This article was written by Dr. Hemant Kalia with the support of Dr. Sahar Elezabi and Dr. Mark Adams. It will be published in the American Journal of Medicine and included in MSSNY Highlights. Click here for the full article. 

Here are the highlights:

A misdiagnosis at the center of cost-control policy

Few facts about the US health system are as well established as its cost. Spending reached $5.26 trillion in 2024—$15,474 per person and 18.0% of the gross domestic product—after roughly tripling in nominal terms over two decades (1). What is less settled is the diagnosis. Much of the policy apparatus built since the mid-2000s rests on an implicit theory of the case: that costs rise because clinicians order too much care and are paid too generously for it. From that premise flow the dominant interventions of the era—prior authorization, medical-necessity review, narrow networks, downward pressure on physician fee schedules, and value-based contracts that place clinicians at financial risk for utilization.

If the premise were correct, two decades of intensifying clinical oversight should have bent the curve. They have not. The purpose of this editorial is to connect several independent bodies of evidence—national expenditure accounts, consumer price data, labor statistics, and international comparisons—and to show that the data point toward a different and largely structural explanation. The biggest drivers of American health care costs lie not in the examination room, but in the pricing systems and administrative machinery surrounding each clinical encounter.

Two decades of growth, before and after inflation

The appropriate first step to level the playing field is to remove economy-wide inflation confounders. Between 2004 and 2024 the Consumer Price Index for All Urban Consumers rose about 66% (2). Deflating national health expenditure to constant 2024 dollars—multiplying each year's spending by the ratio of the 2024 price index to that year's index—reduces, but does not eliminate, the growth. Real health spending still expanded by approximately 71% over the two decades. In other words, even after stripping out general inflation, the health sector grew markedly faster than the broad basket of goods and services against which it is measured.

This excess growth is the quantity that requires explanation. It cannot be attributed to general price inflation, because it survives adjustment for it. The natural next question is whether it reflects a commensurate expansion of clinical capacity—more physicians delivering more care to a growing and aging population?

It is not chiefly the doctors

It does not. The active physician workforce numbered 1,032,365 in 2024 (3), having grown by roughly 29% since 2004—approximately in line with population growth and well short of the ~71% real growth in spending (Table-1). The divergence is the central empirical observation of this editorial and is displayed in the Figure 1: when each series is indexed to its 2004 value, nominal spending, hospital expenditure, and estimated administrative spending all roughly triple, while the physician workforce barely rises above the line of general inflation. Whatever is driving real cost growth, it is not a proportional increase in the number of clinicians.

Where the money goes: prices and administration, not volume

Two converging lines of evidence locate the excess cost. The first is international. In the most cited cross-national comparison of recent years, Papanicolas et al. (2018) found that US utilization—hospital discharges, physician visits, and common procedures—was broadly similar to that of other high-income countries, yet the US spent roughly twice as much. The difference was driven by prices for labor, goods, and pharmaceuticals, and by administrative costs, which consumed about 8% of US spending under a narrow definition versus 1% to 3% elsewhere. The United States does not, on the whole, use conspicuously more care; it pays conspicuously more for each unit and spends far more administering the transaction. (4)

The second line is domestic and structural. Hospital care is, and has remained, the single largest category of national health spending—$1.63 trillion in 2024, about 31% of the total, ahead of physician and clinical services ($1.11 trillion) and retail prescription drugs ($467 billion) (1). Hospital expenditure has grown in close parallel with overall spending (Figure-1), and the literature attributes much of that growth to price rather than to volume, with provider consolidation a recurring mechanism: as regional hospital systems acquire competitors and physician practices, they gain leverage to negotiate higher commercial prices, frequently accompanied by facility fees on services that were previously billed at lower office rates.

An honest accounting of the administrative thesis

The administrative-cost literature is the empirical backbone of this argument, and it should be represented precisely. Himmelstein et al. (2020) estimated that administration costs had risen to 34.2% — about $2,497 per capita, against $551 in single-payer Canada—with the largest US-Canada gaps in insurer overhead, hospital administration, and physicians' insurance-related costs. A meaningful component of the increase since 1999 is attributable to the growing role of private managed-care plans in administering public programs, whose overhead substantially exceeds that of traditional Medicare. (5)

Why the orthodox remedies have underperformed

Seen in this light, several disappointments of the past two decades become coherent. Utilization management did not eliminate spending but relocated it: every prior-authorization requirement calls for a corresponding investment in coding, appeals, and revenue-cycle staff on the provider side, enlarging the very administrative layer that comparative data identified as excessive. Documentation mandates intended to improve quality consumed clinician time and generate demand for scribes and informatics personnel. Payment models that placed independent practices at financial risk accelerated their absorption into larger systems, a structural change that tends to raise, not lower, negotiated prices.

A reorientation of policy

If the diagnosis is structural, the remedies must be as well. Four priorities follow from the evidence assembled here, offered as directions rather than detailed prescriptions:

1. Administrative simplification. Standardized, automated billing and eligibility interfaces, uniform prior-authorization rules, and a common claims format would attack the largest documented source of waste.
2. Price discipline and transparency. Because the US problem is substantially one of unit price, meaningful price transparency, reference pricing, and addressing the site-of-service differential will bend the cost curve.
3. Antitrust enforcement. Scrutiny of horizontal and vertical consolidation among hospitals, insurers, and physician practices targets a well-documented mechanism of price growth and the loss of clinician bargaining power.
4. Recalibrated oversight of clinical care. Utilization management and documentation requirements should be held to an explicit test: do their savings exceed the administrative cost they create on the delivery side?

Conclusion

The United States has spent two decades managing its health care costs as though the problem lay with the people who deliver care. The data assembled here—national expenditure trends adjusted for inflation, a physician workforce that grew only with the population, international comparisons that find ordinary utilization at extraordinary prices, and an administrative apparatus that consumes roughly a third of every dollar—point elsewhere. Reasonable analysts still disagree about the precise weighting of prices, intensity, and administration, and that debate should continue. But the weight of the evidence is sufficient to warrant a change of aim. Until policy confronts prices, consolidation, and administrative complexity directly, the system will continue to spend more while asking clinicians to do more with less.

References

1. Centers for Medicare & Medicaid Services. (2025). National health expenditure accounts: Historical data and NHE fact sheet (2024). U.S. Department of Health and Human Services. https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data date accessed: 5/05/26

2. Bureau of Labor Statistics. (2025). Consumer Price Index for All Urban Consumers (CPI-U): U.S. city average, all items [Data set]. U.S. Department of Labor. https://www.bls.gov/cpi/. date accessed: 5/05/26

3. Association of American Medical Colleges. (2025). 2025 key findings: U.S. physician workforce data dashboard. https://www.aamc.org/data-reports/data/2025-key-findings. date accessed: 5/05/26

4. Papanicolas, I., Woskie, L. R., & Jha, A. K. (2018). Health care spending in the United States and other high-income countries. JAMA, 319(10), 1024–1039. https://doi.org/10.1001/jama.2018.1150

5. Himmelstein, D. U., Campbell, T., & Woolhandler, S. (2020). Health care administrative costs in the United States and Canada, 2017. Annals of Internal Medicine, 172(2), 134–142. https://doi.org/10.7326/M19-2818