← All research Research · Health · No. 21

The Business Model of Healthcare

How the U.S. $5.3-trillion health economy actually makes money, following a single dollar through payers, providers, PBMs and pharma, and finding where the margins really sit.

U.S. healthcare is not one business but a chain of them, each with its own incentives. The U.S. spends $5.3 trillion a year on health, yet where the money is spent and where it is earned are two different maps: the capital-light middlemen earn the best returns, and the system's high prices and mediocre outcomes follow from incentives, not from anyone's design.

Chapters
9
Reading time
31 min
Updated
~$5.3TAnnual health spending2024, CMS National Health Expenditure (up 7.2%)
18.0%Share of GDP2024; the highest of any nation on Earth
$12,555Spend per person, per yearPPP-adjusted, 2022; CMS 2024 nominal: $15,474
~28MUninsured Americans~8% (91.8% insured in 2024)

What this argues

  1. The system is a flow, not a storeTrace the dollar from premiums to profits.
  2. America pays for prices, not volumeThe same care costs more here than anywhere.
  3. The middlemen capture the returnsCapital-light payers and PBMs earn the best ROIC.
  4. Incentives are misalignedFee-for-service rewards volume, not health.
  5. The fixes are structuralValue-based care and integration are the response.
00

What has changed

Updated November 2026

$5.3TU.S. health spending, 2024up 7.2%; 18.0% of GDP (CMS)
$15,474Spend per person, 2024nominal, CMS
$26,993Avg employer family premium, 2025+6%; worker share $6,850 (KFF)
55%Eligible Medicare beneficiaries in Medicare Advantage, 2026KFF
January 2026

National health spending hit $5.3 trillion

  • CMS actuaries (published in Health Affairs, reported by Medical Economics, 14 Jan 2026): 2024 spending rose 7.2% to $5.3 trillion, or $15,474 per person, 18.0% of GDP (17.7% in 2023).
  • Hospital care was $1.6 trillion (31% of the total), physician and clinical services $1.1 trillion (21%), prescription drugs $467 billion (9%).
  • Medicaid enrollment fell to 84.3 million from a 2023 peak of 92.2 million; 91.8% of people were insured, about 28 million uninsured.
February 2026

The largest PBM settled with the FTC

On 4 February 2026 Express Scripts settled the FTC administrative case on its pharmacy benefit model (JD Supra and law-firm summaries, Feb 2026). The consent order sets 10 years of operating commitments covering formularies, pricing, transparency and compensation, moves patient cost-sharing toward net rather than list prices, and includes drug-level reporting. On 3 March 2026 the FTC extended the stay of its case against OptumRx and Caremark Rx to allow settlement talks.

February 2026

Drug pricing deals and TrumpRx

Per Pharmacy Times and The Pharma Letter coverage, the TrumpRx cash-price site launched on 5 February 2026 with 43 brand-name drugs at discounts of 50-70%, and all 17 drugmakers first sent most-favored-nation letters have signed deals; a White House fact sheet puts the total at 26 companies covering about 89% of the branded market. Most announced discounts apply to Medicaid or cash buyers outside insurance.

January 2026

ACA enhanced subsidies lapsed and enrollment fell

The enhanced premium tax credits expired at the end of 2025. Reported CMS data show about 22.8 million 2026 marketplace sign-ups, roughly 1.4 million fewer; KFF found average deductibles rose from $2,759 to $3,786, and a KFF survey of enrollees (Feb-Mar 2026, 1,117 respondents) found 9% had become uninsured. CBO projects about 2 million more uninsured this year.

October 2025

Employer premiums and Medicare Advantage keep climbing

KFF's 2025 Employer Health Benefits Survey (22 Oct 2025) found average family premiums of $26,993, up 6%, with workers paying $6,850. KFF's 2026 analysis shows 55% of eligible Medicare beneficiaries in Medicare Advantage; UnitedHealth and Humana together hold 46% of enrollees.

October 2026

UnitedHealth: Optum rebounds, and the cost trend stays high

  • Q3 2026 (reported 13 Oct 2026, via Pulse 2.0 and Fierce Healthcare): revenue $112.7 billion, earnings from operations $6.6 billion (from $4.3 billion), medical care ratio 88.4% (from 89.9%, including $610 million of favorable prior-period reserve development).
  • Optum Health earned $735 million (from $41 million) while exiting value-based care markets where it lacked scale; Optum Insight $1.28 billion; Optum Rx $1.72 billion on $39.9 billion revenue. Together about 57% of group operating earnings.
  • Full-year adjusted EPS guidance was raised to at least $20.50; management said commercial cost trend is running above the 11% it first expected.

Not refreshed: the CVS Caremark and OptumRx settlement status (sources conflict), commercial/government coverage shares, PBM market shares, margin and ROIC by sector (2017 data), the spending-share chart (2021 mix), international per-person comparisons (2022), Medicare outlays after 2022, and the Humana value-based care figures. Medicaid changes in the 2025 budget law could not be verified.

Test yourself

UnitedHealth's medical care ratio improved from 89.9% to 88.4%, including $610 million of favorable reserve development. What is the sensible reading?

Optum Health earned $735 million, Optum Insight $1.28 billion and Optum Rx $1.72 billion, against group operating earnings of $6.6 billion. Roughly what share is Optum?

01

Why the Bill Is So Big

The most expensive system on Earth

Orientation

How to read this deck

  • Follow the dollar. We trace one healthcare dollar from premium to profit, not the biology.
  • Three actors, one system. Payers pay, providers deliver, patients receive, but rarely choose.
  • Margins are the point. We always ask who actually keeps the money, and why.
  • Every figure is sourced. Costs, shares and returns come from CMS, KFF, CBO and OECD, dated.
The long climb

Health went from 7% of the economy to nearly a fifth

U.S. health spending, % of GDP %
View the data
Health spend, % of GDP
19707
19809
199012
200013.3
201017.2
202019.7
202217.6
202317.7
202418.0

Source: CMS/WHO National Health Expenditure data · values read from the chart, approximate

Priced apart

Americans pay roughly 1.5x the next-richest country

Health spending per person, PPP-adjusted (2022) $
View the data
Per person
U.S.12555
Switzerland8049
Germany8011
Netherlands6729
France6630
Canada6319
U.K.5493
Japan5251

Source: Peterson-KFF Health System Tracker, PPP-adjusted (2022)

Two philosophies

Mostly public vs mostly private: the core trade-off

Mostly public (UK, Canada)Mostly private (the U.S.)
Financingtaxes; one dominant payeremployers, individuals, government
Priceslow, set administrativelyhigh, negotiated in fragments
Innovationweak financial incentivestrong profit incentive
Spend~10-11% of GDP~17-18% of GDP
The diagnosis

Prices and fragmentation, not sicker patients, drive the bill

  • Prices, not quantity. Americans don't use much more care, they are charged far more per unit.
  • A fragmented market. Thousands of payers cannot bargain like one national buyer.
  • Administrative overhead. Billing, coding and middlemen add cost at every hand-off.
  • Fee-for-service. Paying per procedure rewards doing more, not keeping people well.

Test yourself

The U.S. spends $12,555 per person against $8,049 in Switzerland. According to the chapter, what mainly explains the gap?

Why do mostly public systems like the UK and Canada tend to spend less of GDP on health than the U.S.?

02

Follow the Dollar

Who pays whom, and for what

The structural difference

One buyer, or thousands

Single-payer systemsThe U.S. multi-payer maze
StructureOne government buyer sets prices for everyone (UK, Canada, most of Europe)Thousands of insurers, employers, PBMs and providers negotiate separately, each taking a cut
The dollar's journey

From your paycheck to a provider's revenue

  1. Money in: employers, workers and taxpayers fund premiums and payroll taxes.
  2. Payers pool it: insurers and government programs hold the pooled risk.
  3. Middlemen route it: PBMs and networks negotiate what is actually paid.
  4. Providers earn it: hospitals, physicians, pharma and device makers deliver the care.
  5. Margin settles: where the dollar sticks is not where the care happens.
Where it goes

Hospitals swallow the largest share of every dollar

Share of U.S. health spending %
View the data
Share of spending
Hospital care31
Physician & clinical20
Prescription drugs9
Nursing & home care7
Insurance & admin8
Everything else25

Source: AMA / CMS National Health Expenditure (2021)

Test yourself

Drugs are about 9% of health spending. If a policy cut all drug spending by 10%, roughly what happens to total health spending?

Why does splitting who uses care, who pays and who chooses shape incentives?

03

The Payers

Insurers, PBMs and the business of risk

Who is covered

Most Americans are insured through a job, not the state

56%Commercial insurancemostly employer-sponsored
36%GovernmentMedicare, Medicaid, VA
8%Uninsured~28 million people (2024)
90%Of commercial is employer-paidthe workplace is America's main insurer

Insurance is not saving for a rainy day: it is pooling everyone's rain so that no single family drowns in a bill.

A $150k cancer diagnosis is unaffordable alone; split across a pool of the healthy and the sick, it becomes a manageable monthly premium.

How insurers make money

Insurers profit four ways, most bearing little medical risk

  • Underwriting profit: premiums earned minus the claims paid out, the core spread.
  • Investment income: premiums are invested in bonds before claims come due, the float.
  • ASO admin fees: fee-based management for self-insured employers, with no claims risk.
  • Medicare Advantage: ~$1,200 per member per month from government, keep what you don't spend.
Two arrangements

Fully insured vs self-funded: who holds the risk

Risk-based (fully insured)ASO (self-funded)
Bears the riskthe insurerthe employer
Earns fromunderwriting spread + floatflat admin fees
Popular withsmaller employerslarge employers (~65% of workers)
Regulationcapped by the ACA medical-loss rationo MLR cap; more control
The MLR paradox

The rule meant to cap insurer profits quietly rewards higher costs

Low-cost yearHigh-cost year
Premium revenue$100$120
MLR floor (must spend on care)80%80%
Paid out in medical claims$80$96
Fixed admin & overhead$10$10
Insurer profit$10$14
Plan design

More freedom costs more money

  1. HMO (rigid and cheap): strict network, PCP gatekeeper, 13% of enrollment.
  2. POS: HMO plus out-of-network option, 10%.
  3. PPO: broad network, no gatekeeper, 47%.
  4. CDHP: HSA plus high deductible, 29%.
  5. Conventional (flexible and costly): any provider, any bill, 1%.
The other giant payer

Medicare grew from $8 billion to nearly $1 trillion

Medicare outlays $B
View the data
Medicare outlays, $B
19708
1990110
2000220
2010520
2022900

Source: CMS; Statista · values read from the chart, approximate

The economics of coverage

Government members are bigger, and more profitable

~$1,730MA gross margin per enrollee~2.5x employer-sponsored (2021)
$14,405Medicare spend per enrolleevs $6,157 employer-sponsored
55%Seniors in Medicare Advantageof eligible beneficiaries, 2026 (KFF); private plans are the majority
~$1,200Paid per MA member / monthinsurer keeps what it doesn't spend

Test yourself

In the chapter's example, premiums rise from $100 to $120 with an 80% MLR floor and $10 of fixed overhead. What does it show?

A large employer runs a self-funded (ASO) plan and claims come in far above expectations. Who bears the extra cost?

04

The Providers

Hospitals, clinics and the cost of delivery

Hospitals, decoded

A hospital is a hotel that happens to do surgery

  • High fixed cost. Land, building, equipment and staff must be paid whether beds are full or empty.
  • Location is destiny. It sets competition, labour cost and, crucially, payer mix.
  • Volume pays it back. Empty beds still cost money; throughput is everything.
  • Payer mix decides profit. Commercial pays ~2x Medicare; Medicaid pays less than cost.
The reimbursement gap

The same care, three very different prices

Payment for identical services, as % of the Medicare rate %
View the data
% of Medicare rate
Private insurer199
Medicare100
Medicaid78

Source: KFF; American College of Radiology (2010-17 avg.)

How incentives were set

Five moments that shaped provider economics

  1. Medicare & Medicaid: federal insurance for the elderly and poor is created.
  2. Prospective Payment System: Medicare pays fixed rates per stay, not costs incurred.
  3. The outpatient shift: care flees expensive inpatient beds for cheaper settings.
  4. Affordable Care Act: coverage expands; the MLR reshapes payer incentives.
  5. Vertical integration: payers buy providers to escape the margin cap.
Cheaper by setting

Outpatient sites do the same work for a fraction of the cost

A dot plot compares the cost of the same visit at an emergency room versus an urgent care clinic for five conditions: urinary tract infection, sinusitis, strep throat, sore throat and earache. For each, the urgent-care dot sits far to the left of the emergency-room dot. Exact dollar values are not labelled on the chart.

The private-equity playbook

How financial owners re-engineer a clinic

  1. Buy with leverage: debt funds the deal and magnifies the equity return.
  2. Roll up: combine facilities for pricing power over insurers.
  3. Cut costs: consolidate admin, IT and headcount.
  4. Raise utilization: push more billable services through the same assets.
  5. Raise prices: NBER finds PE-acquired practices charge measurably more.
  6. Exit: sell the enlarged platform at a higher multiple.
The evidence on PE

Higher returns, and a real human cost

>5xGrowth in PE outpatient deals2012-2021
HigherPrices after PE buyoutsNBER matched-practice study
+10%Mortality at PE nursing homesvs non-PE peers
+25%COVID infection rateat PE-owned nursing homes

Test yourself

Two identical hospitals differ only in payer mix: one treats mostly commercially insured patients, the other mostly Medicaid. Which statement fits the chapter?

After 1983 Medicare paid a fixed rate per stay instead of costs incurred. What did this do to a hospital that kept a patient extra days?

05

The Drug Channel

Pharma, pharmacies and the PBM in the middle

The supply chain

How a pill reaches a patient, and who decides its price

  1. Manufacturer: makes the drug, sets the sticker 'list' price.
  2. Wholesaler: distributes to pharmacies at national scale.
  3. Pharmacy: dispenses the drug to the patient.
  4. PBM & insurer: decide coverage, rebates and copays behind the counter.
~80%Price collapse when a small-molecule drug loses its patentbiosimilars cut biologics ~50%

A patent buys ~7-12 years of monopoly after approval; the day it expires, generics enter and cut the price ~80% (biosimilars cut biologics ~50%). Pharma's whole model is to earn back its ~$1.5B average development cost before that cliff arrives.

The company that never touches a pill often sets its price: the pharmacy benefit manager sits between drugmaker and insurer, and is paid by both.

PBMs build the formulary (the list of covered drugs) and collect rebates from manufacturers for good placement on it.

The formulary

Coverage tiers that steer what you're prescribed

TierWhat it covers
Tier 4: Specialtybiologics and specialty drugs; ~20% coinsurance
Tier 3: Non-preferred brandbrand-name drugs off the preferred list; ~$60 copay
Tier 2: Preferred brand & genericfavoured brands and pricier generics; ~$30 copay
Tier 1: Genericscheapest, mostly generic drugs; ~$0-10 copay
List vs net

The gap the middlemen keep is widening

Humalog price, $ per vial $
View the data
List priceNet price to insurer
2014390148
2015480160
2016540135
2017590138
2018595137

Source: Eli Lilly & Co. disclosures (2014-18) · values read from the chart, approximate

Three firms, most of the scripts

The PBM market is an oligopoly

PBM market share %
View the data
Share
CVS Caremark33
Express Scripts (Cigna)24
OptumRx (UNH)22
Humana8
Prime Therapeutics5
Other8

Source: Statista (2022)

Test yourself

Humalog's list price rose from about $390 to $595 while the net price insurers paid fell from $148 to $137. What does this show?

A small-molecule drug selling at $100 loses its patent. Using the chapter's figures, about what does a generic version cost, and a comparable biologic after biosimilars?

06

Where the Margins Sit

Following the money to its resting place

Margins, by link in the chain

Pharma earns the fat margin; everyone else is thin

Profit margin by link in the chain %
View the data
Profit margin
Health insurers3
Hospitals8
Medical devices12
Pharma makers26
PBMs2
Pharmacies6

Source: American Progress (multi-source)

Returns tell a different story

The thin-margin middlemen earn the best returns on capital

Return on invested capital by link in the chain %
View the data
Return on invested capital
Health insurers12
Hospitals6.1
Medical devices9.9
Pharma makers11.9
PBMs12.1
Pharmacies17.8

Source: Deloitte analysis of SEC filings (2017)

The real map of profit

Capital intensity, not margin, decides who wins

A scatter plot maps profit margin (horizontal axis) against return on capital (vertical axis), in four quadrants: thin margin with fat returns (top-left), the best of both (top-right), squeezed (bottom-left), and fat margin with thin returns (bottom-right). Pharmacies, PBMs and health insurers sit in the top-left, thin margin and fat returns. Pharma sits at the far right, near the middle vertically, labelled the best of both. Medical devices sit near the centre. Hospitals sit low and slightly left of centre, with weak returns.

In healthcare, the businesses that touch the least care often earn the highest returns on the least capital.

The pharmacy counter and the PBM's spreadsheet out-earn the hospital's operating theatre, which is why capital keeps flowing to the middle of the chain.

Test yourself

Pharmacies have a 6% margin and about 17.8% return on invested capital, while hospitals have an 8% margin and about 6.1% ROIC. What explains the difference?

Pharma has a 26% margin and about 11.9% ROIC. PBMs have a 2% margin and about 12.1% ROIC. What is the best conclusion?

07

Fixing the Incentives

Value-based care, integration and disruption

Realigning the deal

Shifting risk from the payer onto the provider

  1. Paid per procedure; rewards doing more. Paid for volume.
  2. Fees plus quality bonuses.
  3. One price for an episode of care.
  4. Keep part of what you don't spend.
  5. A fixed sum per patient; provider owns the risk. Paid for value.
The evidence it works

Humana's full-risk model, measured

+20%Underwriting profitvs fee-for-service
+33%Quality scoresbetter measured outcomes
-21%Avoidable hospital admissionsprevention over treatment
+24%Net promoter scorepatients prefer it
The integration prize

Optum now earns half of UnitedHealth's profit

Optum share of UNH operating profit %
View the data
Optum % of UNH operating profit
201216
201432
201642
201848
202045
202249
Q3 202657

Source: Hospitalogy; company filings · values read from the chart, approximate

The flywheel

Vertical integration is a self-reinforcing loop

  1. Collect premiums under the MLR cap.
  2. Own the PBM, clinics and data.
  3. Keep the spend in-house.
  4. Capture margin the cap forbids.
  5. Reinvest in more providers.

The diagram is titled 'The Optum playbook' and shows the five steps above in a loop.

The disruptors

Six forces trying to bend the cost curve

  • Value-based care: paying for outcomes instead of volume.
  • Vertical integration: payers owning providers, PBMs and data.
  • Telehealth: virtual visits run ~72% cheaper than in-person.
  • Retail clinics: CVS MinuteClinic and grocery-store primary care.
  • Generative AI: ambient scribes reclaim the ~62% of time lost to paperwork.
  • Cost-plus pharmacies: Mark Cuban's model bypasses the PBM entirely.
The price of the model

America pays the most for its medicines too

Drug spending per person $
View the data
Per person
U.S.1432
Germany1042
Canada914
Switzerland803
France766

Source: OECD (2022)

Test yourself

Under full-risk capitation a provider receives a fixed sum per patient. What happens if the provider keeps the patient healthy and spends less than that sum?

An insurer must spend about 80% of premiums on care, but it owns the clinics that receive the money. What is the effect?

08

Reference

Glossary, conclusions and sources

Reference

Plain-language glossary

  • Payer: whoever pays the bill, a private insurer or a government program.
  • Provider: whoever delivers care, a hospital, physician or pharmacy.
  • PBM: pharmacy benefit manager, the middleman that sets drug coverage and prices.
  • Formulary: the list of drugs an insurer covers, organised into cost tiers.
  • MLR: medical-loss ratio, the ACA rule that insurers spend ~80-85% of premiums on care.
  • ASO: administrative-services-only, a self-funded plan where the employer bears the risk.
  • Medicare Advantage: privately-run Medicare, paid a fixed sum per member per month.
  • Value-based care: paying providers for outcomes and prevention, not volume of services.

America built a healthcare system that spends the most, insures fewer, and lives shorter, not because anyone designed it that way, but because everyone in the chain is behaving exactly as their incentives demand.

Key takeaways

The five conclusions to take away

  1. Follow the dollar, not the headlines: the money and the outrage point different ways.
  2. Prices, not usage, drive the bill: fragmentation and fee-for-service are the causes.
  3. Margin hides where value is captured: capital-light middlemen earn the best returns.
  4. Incentives explain the outcomes: volume-based pay produces volume, not health.
  5. Integration is the system's answer: payers are becoming providers to keep the margin.
Reference

Sources & Further Reading

  • CMS: National Health Expenditure Accounts (2021-23).
  • Peterson-KFF Health System Tracker: spending, prices and outcomes.
  • Kaiser Family Foundation: insurance coverage, Medicare Advantage and Medicaid analyses.
  • CBO: drug development cost and R&D intensity analyses.
  • OECD: comparative health and pharmaceutical spending (2019-22).
  • Deloitte: Return on Capital Performance in Life Sciences & Health Care (SEC filings, 2017).
  • NBER; American Antitrust Institute: private equity in healthcare.
  • Company disclosures (UnitedHealth, Eli Lilly) and industry data; figures marked 'est.' are compilations.

Test yourself

Which best matches the closing quote's explanation of why U.S. healthcare spends the most yet insures fewer people?

In the glossary, what does a formulary do?

Sources cited

CMS National Health Expenditure · KFF · OECD · CMS/WHO · Peterson-KFF Health System Tracker · New Zealand Trade & Enterprise · CBO · AMA · Statista · KFF/HRET Employer Health Benefits Survey · ACA medical-loss ratio (Tufts Health Plan) · KFF Employer Health Benefits Survey · CMS · Bank of America Research · Maryland hospital financials · American College of Radiology · Deloitte · Debt.org · Healthcare Finance News · Commonwealth Fund · NBER · American Antitrust Institute · TIME · JCO Oncology Practice · Eli Lilly & Co. disclosures · American Progress · Deloitte analysis of SEC filings · American Heart Association Journal · Humana Investor Day · Hospitalogy · Company filings · McKinsey · Definitive Healthcare · Cost Plus Drugs · CMS Office of the Actuary / Health Affairs (via Medical Economics, Jan 2026) · KFF Employer Health Benefits Survey, Oct 2025 · KFF Medicare Advantage 2026 analysis · JD Supra FTC/Express Scripts settlement summaries, Feb 2026 · Pharmacy Times and The Pharma Letter (MFN/TrumpRx), 2026 · KFF ACA enrollee survey and CBO (reported), 2026 · UnitedHealth Group Q3 2026 results (via Pulse 2.0, Oct 2026)

Keep reading

Research, not investment advice. Figures as of , from the sources cited.

Legal information and disclosures

These are my own views as of the update shown on this page. They can change without notice, and I have no duty to update them. Past performance does not indicate future results, and any investment can lose money.

This is for education only. It is not investment, legal, tax, medical or accounting advice, and it is not an offer to sell or a solicitation to buy any security in any jurisdiction. It does not consider your goals or circumstances.

Figures from company filings, public agencies and other third parties are believed to be reliable, but I have not independently verified them and cannot guarantee them. Forecasts and anything marked as an estimate rest on assumptions that may prove wrong.

Please do not copy or republish this material without my written consent.