April 7, 2025
As national discussions increasingly turn to reducing the size of the federal government, GHPIA continues to emphasize a critical issue: the federal debt, which has surged by more than $10 trillion since early 2020 – driven by persistent budget deficits – and is now approaching $29 trillion. Although recent media attention has emphasized workforce reductions and program cuts, these measures alone are insufficient for meaningfully addressing the deficit. True progress in reducing spending will require policymakers to address mandatory spending programs, particularly healthcare, now among the largest categories of federal expenditures and central to any serious effort to control costs. An economic analysis provides hope that improvements in pricing transparency could lead to meaningful cost reductions across the system without necessarily sacrificing quality or access.
The rapid escalation of mandatory healthcare programs like Medicare and Medicaid puts them on a collision course with rising interest expenses, which recently surpassed defense spending and are projected to double over the next decade.
In 2024 alone, the federal government healthcare spent $1.68 trillion on Medicare and Medicaid ($1.04 trillion and $637 billion respectively). Although businesses and households still cover the largest share of overall healthcare costs – about 52% of the $4.9 trillion spent in 2023, including out-of-pocket expenses, copays, deductibles, and premiums – that share has fallen sharply from 67% in 1990. Over the same period, the federal government’s share has climbed to 32%, up from just 17% 35 years ago (see gold bars in Chart 1 below).
While total healthcare spending has consistently outpaced U.S. GDP growth, the federal government’s share has grown even faster. As shown in Chart 2, federal healthcare expenditures have risen at a compound annual growth rate (CAGR) of 7.95% since 1990, well above the 5.97% growth for total national healthcare spending and far exceeding the 4.8% of nominal U.S. GDP growth over the same period. This widening gap underscores the increasing fiscal pressure federal healthcare programs are placing on the federal budget and illuminates an obvious disconnect between the inflation felt by households compared to total cost incurred.
A major driver of rising healthcare spending by the federal government is the dramatic expansion of Medicaid enrollment over the past four decades. In 1985, just 9.7% of the population was enrolled in Medicaid; today, that figure has grown to approximately 26%, or 79 million people, when including the Children’s Health Insurance Program (CHIP). As of October 2024, seven states had more than 30% of their residents enrolled in Medicaid and CHIP (see Map 1).
While Medicaid was originally established to support individuals and families living below the poverty line, the program’s rapid growth raises questions about whether some are taking advantage of the system. Major economic disruptions like the Global Financial Crisis and the COVID-19 pandemic understandably contributed to rising enrollment. However, the pace and scale of the increase suggest that broader eligibility standards and limited oversight may be encouraging enrollment beyond the program’s original intent. Of course, it’s critical that people who truly need Medicaid continue to have access to it. But the resulting strain on the federal budget cannot be ignored, as the program has become one of the largest drivers of government deficits. One way to help contain costs without reducing access is through greater pricing transparency, ensuring that the federal government, as a sponsor of Medicaid, isn’t overpaying for services due to opaque or inflated healthcare pricing.
“There are no solutions, only trade-offs,” — Economist Thomas Sowell
Last year, when vetting contractors to rebuild my garage, one offered speed, quality, and low cost, but with the caveat that I could only choose two. Healthcare works much the same way, balancing competing priorities: access, choice, quality, and cost.
Compared to other countries, the U.S. places a much higher value on access and choice. Patients benefit from widespread availability of advanced technologies, quicker access to specialists, and shorter wait times for elective procedures and diagnostics. The U.S. also offers broader access to experimental treatments and subspecialists.
Healthcare costs occupy a unique position compared to other marketplaces in the U.S. with regard to lack of price transparency. Representing approximately 58% of total healthcare expenditures, or nearly $8,500 per person in 2023, hospital and doctor visits are among the few services consumers routinely agree to purchase without knowing costs upfront. Most medical professionals admit to knowing little or nothing of the prices for tests, supplies, and procedures they order on behalf of patients, and even itemized bills are often confusing and largely irrelevant to the final payment due by the patient.
The insulation from direct healthcare costs has become institutionalized. Since 1954, employer-sponsored health insurance premiums have been tax-deductible for businesses, cementing workplace-managed health coverage rather than individual policies. Unlike other types of insurance where individuals that make more costly or more frequent claims share the financial responsibility directly through higher premiums or potential coverage loss, for the average middle-class person, rising healthcare costs are usually only felt indirectly through limited wage growth as employers offset their cost of higher insurance premiums.
Given such lack of transparency around the true societal cost, and an indifference towards running up the federal deficit, it’s no wonder our system is more analogous to the Whole Foods of healthcare than Trader Joe’s. However, both public and private sectors have begun shifting toward cost containment. Private insurers increasingly adopt value-based care models such as pay-for-performance and capitation. Narrow network plans restrict patient access to select high-quality, cost-effective providers. Employers increasingly offer high-deductible health plans (HDHPs) paired with Health Savings Accounts (HSAs), promoting consumer-driven healthcare decisions.
The Inflation Reduction Act of 2022 enabled Medicare to negotiate drug prices for the first time, targeting expensive medications. The Affordable Care Act (ACA) introduced cost control measures like value-based payments, incentivizing quality over quantity. Medicare payment reforms, including bundled payments and Accountable Care Organizations (ACOs), have shifted payments from fee-for-service toward rewarding efficiency and improved patient outcomes.
These measures may have contributed to stabilizing health expenditures as a percentage of GDP since 2009.
Technological advances also foster efficiencies. Currently, administrative and insurance costs consume 10–15 cents of every healthcare dollar, several times higher than in other developed countries. Fortunately, innovations such as electronic health records (EHRs) and telemedicine can help drive greater efficiency by curbing excess procedures and costs. In addition, artificial intelligence and predictive analytics help hospitals minimize waste and identify cost-saving opportunities. Although imperfect, Medicare does not stand out as a greater threat than Medicaid, given its relatively lower administrative costs, offering some optimism for an aging generation concerned that Medicare will be a primary target for deficit hawks in Washington.
Healthcare has become a central driver of rising federal deficits, with Medicare and Medicaid among the largest categories of government spending. Federal healthcare costs have grown far faster than the economy, fueled by expanding enrollment, opaque pricing, and structural inefficiencies. Despite offering high levels of access and choice, the U.S. healthcare system lacks cost transparency and consumer accountability. Encouragingly, reforms – ranging from value-based care models to Medicare drug negotiations and technological efficiencies – offer a path toward meaningful cost containment without sacrificing quality. Historically, the U.S. has excelled at innovation, especially when industry and policy align to solve complex challenges, giving us optimism that affordable, high-quality care is achievable without continuing to bloat the debt and deficit. Change will likely come gradually, not suddenly, making vigilance, adaptability, and proactive risk management essential. GHPIA is responding accordingly, our investment committee is evaluating companies exposed to government reimbursement risk while leaning into innovative firms delivering better value. On the planning side, we use conservative healthcare inflation assumptions, stress-test for long-term resilience, and guide clients toward effective tools like Health Savings Accounts. Ultimately, we believe the most meaningful cost savings come from staying healthy, and we aim to give clients the financial clarity and peace of mind to prioritize just that.
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