A Crisis Too Big For Small Fixes

The scale of America’s healthcare affordability crisis is difficult to overstate.

The United States now spends more than $5.6 trillion a year on healthcare, roughly 19% of the nation’s gross domestic product. On a per-person basis, that equates to more than $15,000 annually, nearly double what other developed countries spend.

For employers and employees, the impact is equally stark. The average annual premium for family coverage now approaches $27,000, with workers contributing nearly $7,000 out of pocket each year. Employers, facing cost increases of 7% to 9% annually, are forced to make tradeoffs between wages, benefits and hiring.

Over the past decade, efforts to control healthcare costs have focused on incremental changes. Insurers have expanded the use of prior authorization and claims management to limit medical spending. Employers have shifted more costs to workers through high-deductible health plans. Policymakers and health systems have invested in primary care and care coordination. Each of these approaches has addressed a piece of the problem. But none have tackled its cause: how healthcare is paid for.

The underlying economics of American healthcare run on two dominant payment models: fee-for-service, which rewards volume, and pay-for-value, which promises to reward outcomes. Neither is working as intended. It’s not as though policy experts don’t understand how to accomplish both. It’s that fixing either will require system-wide changes large enough to qualify as a moonshot.

1. The Fee-For-Service Model’s Moonshot

For most working Americans, fee-for-service is the economic engine behind their health plan. More than 90% of private insurance claims are paid through this model.

Under fee-for-service, doctors, hospitals and other providers are reimbursed for each individual service they deliver: every office visit, diagnostic test, procedure and prescription. The more care provided, the more revenue generated.

This approach works well in most industries. In healthcare, it does not. Patients rarely determine how much care they receive or what it will cost. Those decisions are made primarily by clinicians and hospital systems, without clear price transparency. At the same time, the financial incentives are perverse: seeing a patient twice instead of once doubles revenue, and complex procedures pay far more than simpler, equally effective alternatives.

As Charlie Munger observed, “Show me the incentive and I’ll show you the outcome.” In healthcare, those incentives consistently reward doing more, not doing better.

The only ways to counter these counterproductive financial incentives are through (a) ensuring robust market competition or (b) imposing rigid price controls.

But over the past two decades, large segments of the healthcare industry have consolidated, reducing competition across hospitals, physician groups and drug purchasing. In many metropolitan areas, one or two health systems dominate the inpatient market, allowing them to maintain inefficient services and charge high prices.

At the same time, pharmaceutical manufacturers use patent protections and limits on government price negotiation to launch new medications at extraordinarily high prices. The median annual list price now exceeds $370,000, and Americans usually pay more than twice what patients in peer nations pay for the same drugs.

Although Congress has the power to impose price limits and the Department of Justice has the authority to challenge monopolies, the political risk of these actions has long outweighed the cost of doing nothing. That calculus shifts only when inaction becomes more politically dangerous than reform—when voter wrath spills over into the ballot box and unseats elected officials. Until then, elected officials will worry more about losing industry campaign contributions than lowering healthcare costs.

2. The Pay-For-Value Model’s Moonshot

Pay-for-value was designed to solve fee-for-service’s most obvious flaw: rewarding higher volume rather than improved clinical outcomes. In concept, the model is simple. Pay doctors and hospitals for keeping patients healthy rather than for doing more.

In its most advanced form, this approach relies on capitation: a single, fixed payment to a group of providers to manage the care of a defined population. Done well, it should lead to fewer preventable hospitalizations, better control of chronic diseases and lower total costs over time. For employers, healthier workers would mean fewer missed days and slower growth in premiums.

In practice, those results haven’t been achieved.

That’s because the label “value-based care” rarely matches the product. In nearly every case, insurers (not providers) receive the capitated payment. And instead of passing those funds directly to doctors and hospitals, they continue to reimburse providers using a fee-for-service model. And even when insurance plans offer incentives for better outcomes, those payments are far smaller than what providers can earn by increasing admissions or performing more complex procedures.

Research shows that clinicians do not alter how they deliver care until a substantial portion of their revenue (63%, according to one study) comes from fully capitated payments. Below that threshold, the financial pull of fee-for-service remains stronger than the incentives to reduce volume or invest in prevention.

Achieving higher-quality outcomes at lower cost requires physicians to organize into groups large enough to manage the full spectrum of care and implement operational improvements that maximize patient safety and reduce redundancy.

Building that capacity requires leadership, capital and investment in data infrastructure. In practice, that level of investment will likely come from insurers or venture-backed companies willing to fund and scale new care models.

That shift will happen only when the financial opportunity becomes too large to ignore. Rising medical costs and downward pressure on health-plan rates are already creating those conditions, but they have not yet been sufficient to drive system-wide change.

What Would Launch A Healthcare Moonshot?

A healthcare moonshot, like a voyage into space, would involve significant risk.

One possibility is that change will be driven by fear, when enough voters can no longer afford care for their families and begin to unseat incumbents who fail to pass legislation to reduce medical costs. The catalyst would likely be an economic downturn during which employers look for ways to reduce costs and are forced to scale back or eliminate health benefits for the 160 million Americans who depend on job-based coverage.

Alternatively, significant change could be driven by reward, as capitation becomes more lucrative than fee-for-service. CDC data show that up to half of all heart attacks, strokes and kidney failures could be prevented by effectively controlling chronic disease. This would generate almost $1 trillion in savings, which would raise profits for insurers and dramatically lower costs for enrollees.

Moonshots don’t happen because they are necessary or even because they are the right thing to do. They happen when the stakes shift: when fear of loss or the promise of financial gain outweighs the risks involved.

Healthcare has not yet reached that point, but medicine’s growing unaffordability crisis is bringing our nation closer than it has ever been.