HEALTH CARE COSTS 101: WHAT'S DRIVING PREMIUMS HIGHER AND HOW TO MAKE COVERAGE MORE AFFORDABLE

The following information was released by the America's Health Insurance Plans (AHIP):

Families across the country are struggling with health care costs that continue to rise far faster than wages. A new report by the Centers for Medicare and Medicaid Services (CMS) shows that health care spending nationwide grew by 7.2% in 2024, reaching a record $5.3 trillion. The costs Americans paid "for hospital care, physician and clinical services, and retail prescription drugs all contributed more to overall growth in 2024 than during the 201419 period," the report finds.

As policymakers discuss ways to address the affordability crisis affecting millions of Americans, research and data provide important clarity regarding the root causes of rising health care costs.

Health insurance premiums directly reflect the cost of medical care, with nearly 85 percent of Americans' premium dollars directly going to cover the cost of hospital-based services, prescription drugs, physician fees and other medical services. When prices for these treatments and services go up, the premium consumers pay for their coverage must rise to keep pace.

For example, as one prominent lawmaker noted in POLITICO, "'Insurance companies are dependent on what hospitals charge...I used to run the largest hospital company so I can tell you, insurance can't charge a whole bunch less if the hospitals charge more.'"

So why do the prices set by drugmakers, hospital systems and physician groups continue to rise? Here are a few reasons:

Hospital consolidation: Decades of research underscores the impact of hospital consolidation on rising costs for Americans. Hospital markets are increasingly dominated by a few large systems, with three-fourths of U.S. metro areas classified as highly or very highly concentrated. Consolidation increases hospital systems' market power, allowing them to demand higher prices from health plans and employers that in turn contribute directly to higher premiums. Total hospitals costs, including inpatient, outpatient and emergency department care, now account for 40% of every health care dollar Americans spend.

Site-of-care price differences: The prices providers charge for identical services and treatments vary wildly depending on location, ownership or provider market power. Medicare payment regulations vary reimbursement depending on location, often paying considerably more for the same outpatient services at certain locations such as hospital outpatient departments. Facility fees and ownership-driven billing by providers inflate costs, often without any corresponding increase in quality of care.

Prescription drug pricing: Drug spending is expected to be a key driver of premium growth in 2026, due to rising unit prices, costly new gene and cell therapies, and growing demand for weight-loss medications (GLP-1s). More than 24 cents of every premium dollar goes toward prescription drug costs more than any other individual category. Prescription drug prices are set by pharmaceutical manufacturers. Yet brand drugmakers continue to raise prices on Americans multiple times a year including increases already planned for 350 prescription drugs in 2026 with a median list-price hike of 4% fueling premium increases and higher out-of-pocket costs for patients.

Private e quity d riven b illing p ractices : A fragmented health care system combined with the rapid expansion of private equity ownership has intensified out-of-network billing, balance billing and opaque pricing that harms consumers. Private equity-backed provider groups often rely on aggressive billing strategies, including remaining out-of-network or exploiting payment disputes, to maximize their revenue at the expense of American consumers. A recent analysis shows how implementation of the No Surprises Act bipartisan legislation enacted to protect consumers has been manipulated by private equity to drive $5 billion in wasteful spending. These practices contribute to surprise medical bills, medical debt and financial instability for individuals, families, and employers.

Common-sense, bipartisan solutions to improve patient affordability

Health plans are doing everything in their power to shield Americans from the high and rising costs of medical care, and we welcome any opportunity to discuss common-sense solutions to lower costs for everyone.

Health plans are the only part of the health care system whose profits and administrative costs are capped under federal law. Health plans' profit margin was 0.8% in 2024, NAIC data show. In 2023, the net income of health plans accounted for about 0.5% of U.S. health expenditures ($4.9 trillion that year, per CMS data). By comparison, the pharmaceutical industry averages 15-20% margins.

By focusing on addressing the root causes of higher health care costs and corresponding premiums, policymakers can take meaningful steps to make coverage and care more affordable for Americans.

From addressing brand drugmakers' relentless abuse of the patent system to continue overcharging Americans, to enacting common-sense site-neutral reforms, to stopping private equity's abuse of the No Surprises Act and other targeted policy changes, these solutions would address the market loopholes and misaligned incentives that lead to higher costs for every American. Learn more.