Why is healthcare so expensive
Executive summary
Healthcare is expensive because prices for services, drugs, and labor have risen faster than general inflation while utilization of costly treatments and new technologies has increased, and public policy and market structures fail to diffuse those costs broadly across the system [1] [2] [3]. Recent insurer filings and analyses show 2026 premiums are surging largely because hospitals and providers are charging more, specialty drugs and popular GLP‑1 medications are driving pharmacy spending, and insurers are pricing in higher utilization and the potential loss of federal subsidies [4] [2] [5].
1. Price-setting and high unit costs: markets that tolerate markups
A central reason Americans pay more is that unit prices for common services — hospital stays, outpatient procedures and physician visits — are substantially higher in the U.S. than in peer countries, and those higher prices have been rising, pushing per‑person spending far above international norms [1] [2]. Insurers repeatedly point to “increasing prices charged by providers” as a primary driver of medical cost trends, and actuaries project persistent double‑digit pressures into 2026, reflecting negotiated rates that often favor large hospital systems and specialized centers [3] [2].
2. Prescription drugs and the GLP‑1 shock
Pharmacy costs are a major upward force: the arrival and popular off‑label use of very expensive GLP‑1 drugs (like those used for diabetes and obesity) along with costly biologics and one‑time gene therapies are concentrating spending in a small set of high‑priced medicines, and insurers say this is materially lifting premiums for 2026 [4] [2] [6]. While some federal actions — notably Medicare drug negotiation under the Inflation Reduction Act — may blunt prices for seniors, other policies and market responses have sometimes increased list prices for new medicines, complicating employer and marketplace cost dynamics [7] [6].
3. More use, deferred care, and chronic disease
Utilization is rising as deferred care from the pandemic rebounds and chronic conditions remain widespread: consultants and industry analyses expect outpatient volumes to stay above pre‑pandemic levels and employers report rising mental‑health and chronic‑care use, which raises claim totals even without per‑unit price increases [8] [9] [2]. Insurers explicitly attribute part of their premium increases to higher utilization of services and medications, a trend that combines with price growth to elevate total spending [2] [5].
4. Labor, staffing shortages and operating costs
Providers are pushing for higher reimbursements as hospitals and clinics face persistent clinical workforce shortages and rising wages and staffing costs; insurers incorporate those increased provider cost demands into pricing models for 2026, driving up premiums and out‑of‑pocket burdens [2] [10]. Industry surveys and filings repeatedly list “rising labor expenses” and post‑pandemic financial strain on providers as concrete reasons insurers cite when requesting rate increases [10] [9].
5. Policy choices, subsidies and distributional effects
Federal policy choices amplify what looks like a simple price problem: the expiration of enhanced premium tax credits and shifts in Medicaid funding will push more costs onto individuals in ACA Marketplaces and make insurers price for a sicker enrollee mix, even as federal actions like Medicare negotiation may lower costs for some [5] [11] [12]. Analysts warn that policy instability — lawmakers’ decisions on subsidies, tariffs, and drug pricing — changes who pays and when, which can magnify headline premium spikes without addressing underlying provider and drug prices [5] [4].
6. Structural incentives, consolidation and weak deflators
Consolidation across hospitals, provider groups and specialty pharmacies can strengthen negotiating leverage and sustain higher prices, while the system lacks strong, uniform deflators: transparency, competitive pressures, and some technologies (including AI) are cited as possible future moderators, but insurers and analysts see few immediate forces to push prices down in 2026 [3] [8]. Stakeholders’ incentives — hospitals seeking margin, pharma protecting launch prices, insurers protecting solvency — create an equilibrium where cost‑containment is hard without coordinated policy or market changes [3] [1].
7. Bottom line: expensive care is multi‑causal and politically charged
The short answer is that healthcare is expensive because higher prices for services and drugs, rising utilization of costly treatments, increasing labor costs, and policy shifts (like subsidy expirations) all interact in a fragmented market that rewards higher charges and diffuses responsibility for paying them [1] [2] [5]. Different actors promote different fixes — providers blame reimbursement levels, pharma blames regulation and innovation costs, insurers blame utilization and policy churn — and those conflicting interests, noted across insurer rate filings and policy analyses, help explain why systemic solutions are politically difficult even as costs keep climbing [2] [5] [3].