Improving our healthcare system to deliver better quality care at lower cost is critically important to our nation’s long-term economic and fiscal well-being. The U.S. currently devotes 18 percent of our economy to healthcare. Without reform, healthcare spending will grow to one-fifth of our total economic output within 10 years, which will make it increasingly difficult to find the resources to invest in other sectors of our economy.

Total U.S. health expenditures (both public and private) are projected to rise to approximately one-quarter of the economy by 2040


There are many reasons why the U.S. spends twice as much on healthcare as other advanced nations do, but it is not because we always have better overall health outcomes. Instead, health policy experts point to excessive waste in our healthcare system as the culprit behind our high costs. The Institute of Medicine, for example, has estimated that 30 percent of total healthcare spending goes to unnecessary, ineffective, overpriced, and wasteful services. That leads many analysts to believe that there are substantial opportunities for the U.S. to maintain or improve our health outcomes, but at lower cost.

Containing the cost of healthcare is difficult because the U.S. pays for healthcare through a number of public and private channels including the federal and state healthcare programs, private insurers, and individual out-of-pocket payments. To avoid simply shifting costs around, system-wide reforms to the delivery and payment system offer the most promising approaches to reducing the rate of cost growth while also preserving healthcare access and quality. To help identify and scale up those approaches, the Foundation launched the Peterson Center on Healthcare in 2014.

Policy Options

The federal government is the largest payer of healthcare expenditures. Its programs insure low-income families and many of the people who have high healthcare costs — older individuals and those in need of long-term care. In addition, the federal government provides direct subsidies to help moderate-income people purchase insurance and uses the tax code to subsidize employment-based health insurance. While containing the growth in healthcare costs is important to our nation’s long-term fiscal future, the federal programs exist to achieve certain policy objectives. Consequently, policymakers cannot simply clamp down on federal costs without the risk of shifting costs to other parts of the healthcare system and potentially disrupting access to good care for intended beneficiaries. Careful federal action can, however, address fiscal concerns while protecting program beneficiaries. Reforms also can influence the overall healthcare system because of the significant federal role.

  • Change the way federal programs pay for healthcare to encourage providers to deliver better care, eliminate unnecessary services and waste, and operate more efficiently. These options include pay-for-performance initiatives, alternative payment arrangements for patient care such as bundled payments and accountable care organizations, and expanded use of capitated payments to Medicaid’s long-term care beneficiaries.
  • Make the cost of healthcare more visible to beneficiaries to encourage them to be more involved in healthcare decisions. These options include designing co-payments and deductibles to make patients more aware of costs, using different amounts of co-pays and deductibles to encourage patients to select higher value care options, and prohibiting “first dollar” coverage so patients have some out-of pocket cost exposure.
  • Reducing federal healthcare subsidies. These options would continue to make the programs available, but would limit federal costs. For Medicare, options include raising the eligibility age or increasing premiums or taxes on benefits, which would reduce the level of financial assistance provided to higher income beneficiaries. Federal costs could also be limited by imposing caps on spending for Medicaid and exchange subsidy programs.
  • Change the structure of federal healthcare programs. These options would fundamentally redesign federal healthcare programs and include: combining Medicare’s Part A hospital care program with Part B ambulatory services; reforming coverage for the low-income individuals who need long-term, high cost care and are eligible for Medicare and Medicaid (known as "dual eligibles"); converting Medicare into a premium support program that would allow beneficiaries to purchase insurance through health insurance exchanges; and converting Medicaid into state block grants.

For more healthcare options:

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