Ending health care’s affordability crisis begins with actions to fix state markets

The affordability of health care in the U.S.—or rather the stunning lack thereof—is a significant challenge facing employers, families, taxpayers and patients. Preliminary estimates indicate that the nation spent $4.7 trillion on health care in 2023, or just under 20% of the national economy, and nearly double the average of other wealthy countries. 

For this extraordinary sum, Americans should have access to the best quality care in the world. The reality is quite different, as we now know. In 2023, for the first time in two decades, a majority of Americans believed U.S. health care quality was subpar, and half of Americans report that it was hard for them to afford their health care costs. In comparing the health care quality of the United States against other wealthy countries, the Peterson-KFF Health System Tracker reported lower life expectancy, a higher mortality and maternal mortality rate, and numerous other indicators pointing worryingly in the wrong direction. In November 2023, Americans identified health care affordability as the second most important issue, after inflation, for the 2024 election.

To make health care more affordable for everyone, America needs a radical new approach that addresses flaws in existing marketplaces, which have kept prices high and rising. Developing market-driven solutions requires adopting an entirely new way of thinking—one that has not been a priority until recently. It relies heavily on fiscal responsibility—setting concrete budgets for health care spending, changing the incentives for health care businesses, and innovating in new and targeted ways to manage growth in prices and spending.

For far too long, health care markets have failed to rein in high prices and unsustainable spending, making reform efforts difficult. Today, with limited attention to health care costs outside of pharmaceuticals in Congress and, because many aspects of U.S. health care are regulated at the state level, state policymakers are in the best position to examine and act upon the unique spending and delivery system trends in their markets. In many states, only a handful of large health care institutions are driving prices upward. Moreover, states can more easily engage with local employer organizations, providers and payers to identify politically feasible solutions. Since most states are required to balance their budget each year, they cannot afford to have their financial house in disrepair.

States have begun to take bold actions. A handful, like Rhode Island, Oregon and Washington, are working with the Peterson-Milbank Program for Sustainable Health Care Costs to set targets for reasonable spending increases. They are collecting data on annual health care spending and analyzing it to find what is driving costs. Then, stakeholders are collaborating to identify locally driven solutions. For example, Oregon has established one of the strongest merger oversight programs in the country.

Equally important are innovations that reduce the prices purchasers pay for their constituents’ care. For example, nonprofit generic drug manufacturer Civica Rx partnered with the state of California, supported by the Peterson Center, to create an affordable pipeline of insulin for residents. The company says insulin manufactured for Californians is expected to have a manufacturer suggested retail price of no more than $30 per 10 mL vial, a significant discount. What’s more: Adding Civica Rx to California’s marketplace has helped to stimulate other manufacturers to reduce prices and innovate.

Finally, America’s increasing adoption of health care technology has tremendous potential to drive better health system performance and efficiency, by addressing staffing shortages, improving management of chronic diseases and making care more accessible and convenient. However, since the COVID-19 pandemic, a “wild west” of innovators has flooded the market with thousands of products and services, leaving purchasers guessing about which technologies are most clinically and financially effective. The Peterson Health Technology Institute, founded by the Peterson Center on Healthcare in 2023, is bringing clarity to this market by introducing independent assessments that will help purchasers, like health plans, employers and providers, make the best, most affordable investments in health.

The Affordable Care Act made noteworthy gains in access and coverage but failed to control run-away health care spending or reduce the cost of services. Now, the consequences have become all too apparent. As health care costs rise, purchasers are spending more to provide health insurance coverage for the people they serve. This drives down wages; limits funds available for important priorities like education, housing and infrastructure; and makes the United States less competitive globally. 

Today, most Americans suffer from unaffordable, subpar health care. Continued overinvestment without getting the results Americans pay for comes at great expense to other economic sectors and to American competitiveness. A more clearly defined path to functional health care markets is urgently needed so the United States can afford the higher-quality, equitable health care we’ve sought for decades. Let’s not miss out on opportunities to learn from states that are leading with bold solutions.

Caroline Pearson is executive director of the Peterson Center on Healthcare and the Peterson Health Technology Institute.