The Five Healthcare Affordability Challenges

The Center for Healthcare Affordability has published the most comprehensive, provision-by-provision review of the Affordable Care Act and the top healthcare affordability challenges patients are facing today. In the full reform framework, lawmakers and the public can find detailed analysis of each major ACA component, the specific harms tied to individual provisions, and practical prescriptions to unwind the damage and restore competition.

This one pager is the bird's-eye view. It distills the most urgent reforms into a clear checklist so legislators and staff can quickly see what to fix first, why it matters, and how each change works with the rest of the system. The goal is straightforward: lower costs, expand choice, increase transparency, and put patients back in charge through limited government solutions.

The Full Diagnoses and Prescriptions for Reform

For most families, the most visible impact of the Affordable Care Act (i.e. Obamacare) is their monthly healthcare premium. In the individual market, the ACA did not simply reshuffle who buys coverage, it rewired the rules of the market in ways that predictably drove prices up for many Americans, especially those who are younger, healthier, or simply trying to buy a plan that fits their needs and budget.¹

Heritage Foundation's state-by-state review finds that between 2013 and 2022, the ACA's mandates and regulations more than doubled the average cost of individual market coverage in 40 states, with some states seeing costs more than triple or quadruple over that period.¹ Even after accounting for subsidies that mask sticker shock for some enrollees, the underlying premium trend reflects a market that became less competitive, more standardized, and more fragile.

Diagnoses

Insurance only works when lots of people share risk, including those who are relatively healthy. The ACA disrupted that balance by forcing insurers to "socialize" costs through community rating and strict rating rules. Instead of letting premiums reflect risk in a normal way, the ACA compresses prices so younger and healthier people pay more than actuarially fair rates, while older and higher-cost enrollees pay less than they otherwise would.²

A central example is age-rating compression. Under the ACA, insurers generally cannot charge older adults more than three times what they charge younger adults for the same plan, even though underlying medical costs vary more than that. Heritage notes that natural medical cost variation among adults is closer to about five-to-one, meaning the ACA's three-to-one cap forces insurers to overprice younger adults and underprice older adults.³ Heritage also explains why this matters politically and economically: younger adults tend to be healthier, but they also tend to earn less, making them more price-sensitive and more likely to walk away when premiums rise.³

When healthy people opt out, the remaining pool becomes sicker and more expensive. That triggers the classic premium spiral: insurers raise premiums to cover a higher-cost pool, which drives still more healthy people away, which pushes premiums higher again.

This dynamic worsened when the federal individual mandate penalty was effectively eliminated beginning in 2019. Congress left the mandate language on the books, but zeroed out the penalty that was supposed to force broad participation.⁴

“While younger adults tend to be in better health, they also tend to earn less than older workers with more experience. That combination makes young adults more sensitive to changes in the price of health insurance and more likely to decline coverage if it becomes more expensive.”
— Heritage Foundation

The Affordable Care Act did not just change prices, it also changed what insurers are allowed to sell. The essential health benefits mandate and related benefit rules dramatically narrowed the ability to buy a lower-cost, tailored plan, even for people who would prefer a more basic policy with catastrophic protection. As Cato summarized, a McKinsey analysis commissioned by HHS estimated that the essential health benefits mandate increased premiums for 40-year-old males by up to 23 percent over four years.²

The practical effect is straightforward: when government requires richer coverage and prohibits lower-cost alternatives, premiums rise. Then, as premiums rise, the market becomes less attractive to healthier consumers, which further destabilizes the pool.

“The federal government will not let states pick a menu of essential health benefits … Since less regulation than the federal government would impose is not an option, implementing these parts of the law can only lead to more regulation, fewer choices, and higher costs.”
— CATO Institute

Even today, Americans generally cannot simply shop across state lines the way they do for many other financial products. The lived reality is that most individuals must buy in their home state's regulated market and provider network structure.

The Manhattan Institute has highlighted striking price disparities that track state borders. For example, in northeastern Oklahoma counties, benchmark exchange premiums were cited in the $600 to $700 range, while neighboring counties just across the Arkansas border were cited around $200 to $300 for comparable benchmark plans.⁵ When state lines function as hard walls, consumers cannot vote with their feet, and insurers face less pressure to compete on price and design.

“Health insurance premiums vary substantially between states, and there are often major price disparities in neighboring counties across state borders.”
— Manhattan Institute

The Affordable Care Act's medical loss ratio (MLR) is widely sold as a consumer protection, but it creates a perverse incentive in how insurers make money. The ACA requires insurers to spend at least 80 percent (individual and small group) or 85 percent (large group) of premium revenue on medical claims and quality improvement, with rebates required if they fall short.⁶

Paragon Health Institute argues this design can reduce the business incentive to fight underlying cost growth because the allowed "administration plus profit" amount rises when premiums rise. Put plainly, if an insurer's permitted non-claims share is a percentage of premium, then larger premiums can mean more dollars available for overhead and profit.⁷

This is one reason the insurance sector often adapts to the ACA by managing how costs are classified, shifting functions, and pursuing consolidation, rather than competing to deliver leaner, consumer-driven coverage. It also helps explain why the political system repeatedly reaches for subsidies to mask premium increases instead of fixing the rules that produce them in the first place.

“The ACA regulations drive higher costs. For example, under the medical loss ratio, insurers must spend a minimum share of premium revenue on medical claims. In other words, to increase profits, insurers must increase premiums.”
— Paragon Health

Prescriptions

Congress should repeal the MLR requirement. The goal should be to reward insurers for lowering costs and innovating on value, not to lock in a percentage-based structure that can make premium growth financially tolerable or even advantageous for incumbent carriers. Paragon's warning is simple: under the MLR structure, insurers can face incentives that align with higher premiums rather than lower ones.⁷

Short-term, limited-duration insurance (STLDI) has functioned as an escape valve from the ACA's most inflationary rules. Cato's December 2025 briefing paper describes how the 2018 Trump-era approach clarified that short-term plans could offer initial terms up to 12 months, extend up to 36 months total, and include renewal guarantees so people who get sick are not stranded.⁸

Cato also cites Congressional Budget Office analysis indicating that this relief enabled consumers to purchase a comprehensive major medical policy at premiums as much as 60 percent lower than the lowest-cost bronze exchange plan.⁸

By contrast, the 2024 Biden rule narrowed short-term coverage by restricting duration and limiting renewability, reducing the ability of these plans to function as stable protection for consumers.⁹ Congress should codify the rules implemented by Trump in his first term so they cannot be reversed by the next administration.⁸

A fair concern is that STLDI can draw healthier consumers away from ACA plans, raising premiums inside the exchange. That is not an argument to trap Americans in a broken system. It is an indictment of the ACA's design. If the exchange market cannot survive without restricting consumer exits, lawmakers should be honest about what that says.

Association Health Plans (AHPs) can let small employers and self-employed workers band together to access coverage options that look more like large-group purchasing, which can reduce administrative costs and widen plan design flexibility.

In December 2025, the House passed H.R. 6703, the "Lower Health Care Premiums for All Americans Act," which includes provisions to expand AHP access.¹⁰ ¹¹ Congress should build on this approach so working Americans have more ways to buy coverage outside the ACA's most expensive rule set.

Again, AHP growth can also pull healthier groups from the exchange. That is not a reason to block AHPs. It is further evidence that the ACA's regulated market is not meaningfully competitive and is being propped up by rules and subsidies rather than consumer value.

Congress should reestablish real competition in the individual market by treating health insurance as interstate commerce rather than a set of federally managed state monopolies. In many states, consumers face only a few dominant insurers, and market concentration has increased as competition has weakened.¹² Concentrated markets are widely recognized as a risk to affordability and choice, and federal ACA rules can compound the problem by standardizing plan design and insulating incumbents from new entrants.¹³

The ACA's supposed "across state lines" solution is mostly a mirage because it routes competition through a narrow, bureaucratic pathway. Under ACA Section 1333, states must pass authorizing laws and then navigate a compact framework that still operates inside a federally controlled ACA compliance regime, which is why the mechanism has produced little meaningful interstate shopping in practice.¹⁴ Conservative policy analysis has highlighted that this system is structurally cumbersome and politically unstable, with major regulations frequently reversed between administrations, which deters the long-term investment needed to build multi-state networks and offerings.¹⁵

A serious reform should replace the ACA compact model with simple reciprocity that allows a plan approved in one state to be sold in others without duplicative regulatory regimes, while preserving baseline solvency enforcement, fraud protections, and clear consumer disclosures.¹⁶ Congress should also preempt federal barriers that make "competition" meaningless by forcing every plan into the same Washington-designed box.¹⁷ Properly structured, interstate competition would invite more entrants, pressure legacy carriers to compete on price and service, and give families in high-cost states a real exit option. It will not magically fix every driver of medical costs, but it can break the cartel dynamics that keep premiums elevated and choices narrow.¹⁶ ¹³

One of the deepest distortions in American health care is the tax code's bias toward employer-sponsored insurance over individually chosen coverage. Congress should continue expanding Health Savings Accounts (HSAs), strengthen portability, and move toward equal tax treatment so individuals can buy the coverage that fits their family, not the plan their employer picked.

Separately, the White House Council of Economic Advisers reported in September 2025 that, effective January 1, 2026, the One Big Beautiful Bill Act reclassifies Bronze and Catastrophic ACA marketplace plans as qualifying high-deductible health plans, allowing many more enrollees to open and contribute to HSAs without changing plans.¹⁸ That change moves in the right direction: more personal control, more portability, and less dependence on one-size-fits-all coverage.

Congress should repeal the ACA's essential health benefits mandate and encourage states to unwind the growing list of benefit mandates that function as hidden premium taxes. These requirements force millions of people to buy coverage they do not want, and then Washington acts surprised that premiums rise and healthy consumers exit. The McKinsey estimates cited by Cato provide a concrete window into the premium impact of these mandates.²

A limited government system recognizes personal responsibility. While genetics and many medical conditions are not chosen, some risk drivers are strongly linked to lifestyle choices that materially raise system-wide costs.

For example, CDC data show adult obesity prevalence around 40.3 percent in 2021–2023.¹⁹ The ACA allows tobacco surcharges (within limits), but many jurisdictions restrict even that. Lawmakers should allow insurance markets to reflect certain controllable risk factors, paired with transparent consumer protections, so the system stops penalizing the responsible to subsidize avoidable risk.

Sources

¹Heritage Foundation: The Effects of the ACA on Health Insurance Premiums

²Cato Institute: Trump Executive Order Could Save Millions from Obamacare

³Heritage Foundation: How Obamacare Raised Premiums

⁴Congressional Research Service: Individual Mandate Penalty

⁵Manhattan Institute: The Challenge of Selling Health Insurance Across State Lines

⁶CMS: Medical Loss Ratio

⁷Paragon Health Institute: Testimony on Assessing the Damage Done by Obamacare

⁸Cato Institute: Short-Term Health Insurance Briefing Paper

⁹Federal Register: Short-Term Limited Duration Insurance (2024)

¹⁰House Clerk: Vote on H.R. 6703

¹¹Congress.gov: H.R. 6703 - Lower Health Care Premiums for All Americans Act

¹²AMA: Competition in Health Insurance US Markets

¹³GAO: Health Insurance Costs and Market Concentration

¹⁴Federal Register: Sale of Individual Health Insurance Across State Lines (2019)

¹⁵American Experiment: Health Care Choice Compacts

¹⁶Manhattan Institute: Reforming Health Insurance Competition Across State Lines

¹⁷HHS: Reforming America's Healthcare System Through Choice and Competition

¹⁸White House CEA: Expansion of HSA Eligibility Under OBBA

¹⁹CDC: Adult Obesity Prevalence Data Brief

Americans are facing a sustained rise in the cost of medical care, from hospital stays and outpatient services to physician treatment and prescription medicines. Across the health sector, the price of care is moving upward in ways that are increasingly difficult for households, employers, and taxpayers to absorb. GoodRx reports that prescription drug list prices are about 39 percent higher than they were in 2014. Fortunately, they also report that drug costs have in recent years stabilized and are tracking at or below general inflation levels. In fact, while list prices rose last year, net prices for drugs fell by .7%.² These moderating trends are not the case with many other sectors of healthcare. The greatest cost surge continues to be in hospital and other medical services, where inpatient and outpatient care have risen far faster and are driving a larger share of overall health care inflation.¹

That distinction matters because hospital care is the largest component of health spending. Brian Blase of the Paragon Health Institute has noted that prices for hospital services have risen three times faster than general inflation since the turn of the century, with no major industry experiencing faster price escalation. Yet when treatment costs rise, Washington's instinct is often to focus on the most politically visible manufacturers, especially in pharmaceuticals, and increasingly in medical technology, rather than on the payment structure and market distortions that allow costs to build throughout the system. The result is a recurring push for discount mandates, reimbursement squeezes, and price-control policies that address symptoms while leaving the largest drivers of treatment inflation largely untouched.³

The Affordable Care Act did not create every distortion in the health economy, but it reinforced many of the incentives that now make treatment more expensive and less transparent. In pharmaceuticals, PBMs remain a central problem. Paragon notes that three PBMs control about 80 percent of the market and are vertically integrated with major insurers, while rebate structures can lower premiums on paper even as patients face cost sharing based on higher list prices at the pharmacy counter. More broadly, consolidation among insurers, hospitals, and provider networks has weakened competitive pressure across the system, allowing well-positioned intermediaries and dominant providers to capture more of the financial upside while patients absorb higher premiums, deductibles, and out-of-pocket costs.⁴

Hospitals have also benefited for years from a pricing environment that remains far too opaque. Paragon has argued that federal transparency rules were an important step forward, but compliance has been slow and uneven, leaving patients, employers, and policymakers without clear and usable pricing information for too much routine care. That lack of transparency protects incumbents from scrutiny, makes meaningful comparison shopping far harder, and allows inflated facility charges to persist with too little resistance. A system that obscures the price of treatment until after the bill arrives is not operating as a normal market. It is operating in a way that shields dominant actors from the accountability that real competition would impose.⁵

Diagnoses

The Affordable Care Act did not invent Pharmacy Benefit Managers (PBMs), but its regulations completely transformed the ways they function. What were originally simple claims processors decades ago, PBMs have become dominant profit engines for the insurance industry and a key driver of higher pharmaceutical prices.

1. What are PBMs?:

PBMs administer prescription drug benefits for insurers, employers, Medicare Part D plans, and Medicaid managed care. They design formularies, set tiering and utilization rules, build pharmacy networks, and negotiate discounts and rebates with manufacturers.⁸ PBMs may be thought of as buyers' clubs (such as Costco or Sams Club), obtaining discounts for bulk purchases and using formulary placement as leverage to extract rebates from manufacturers.

2. How Insurers Bypassed the ACA's MLR rule by Merging with PBMs:

The vertical integration in healthcare that has occurred under the ACA is a prime example. In vertical integration, large insurers buy up not only PBMs but also large hospitals, health systems, and physician practices. The restricted competition drives up costs for everyone, yet it is incentivized by ACA provisions that make vertical integration very profitable for larger insurers.

All of the largest PBMs are vertically integrated with healthcare conglomerates. If the healthcare industry was a true free market, such vertical integration would most likely be beneficial to consumers. But of course, the healthcare industry is governed by the ACA, which has introduced significant distortions and inefficiencies into the market that drive up costs for patients and consumers.

In a true free and competitive market, vertical integration typically lowers consumer costs – think Henry Ford and the production of the Model T. In the healthcare industry, vertical integration was not driven by free-market competition but rather through ACA's regulations, resulting in less competition and higher consumer costs.

As detailed earlier, the Affordable Care Act's Medical Loss Ratio rule (the 80 to 85 percent rule) caps what insurers can keep for administration and profit as a percentage of premiums. This mandate made health insurance issuance unprofitable and caused many small insurers to fold not long after enactment of the ACA.

Survival in the market was largely based on the perverse incentive to route more dollars into categories that count as "medical spending."⁶ The ability to treat prescription drug spending as medical spending, provided insurers a powerful reason to expand and vertically integrate into the drug channel, because shifting margin into affiliated PBMs and pharmacies can preserve profits while still appearing compliant with the ACA's accounting rules.⁷

For example, an insurer can pay an affiliated PBM or pharmacy for drugs or administrative services, and those payments flow through as medical spending on the insurance side, while profits can be captured in the PBM or pharmacy business that is not constrained in the same way by the ACA's rebate formula.⁷

The FTC has found that consolidation and vertical integration now define the PBM market, with the six largest PBMs managing nearly 95 percent of prescriptions filled in the United States.¹¹ The result is an ecosystem where the insurer side can look "compliant" while the consolidated PBM side extracts revenue through spread pricing, rebate retention, steering to affiliated pharmacies, and other mechanisms that are opaque to patients and plan sponsors.

3. How PBM Schemes Raise Drug Costs:

The regulatory barriers which drove the consolidation of the entire market into just a handful of PBMs have created market distortions all across the pharmaceutical sector. Victims include not just the Americans purchasing drugs at the pharmacy counter, but every single American taxpayer.

For example, PBMs use formulary placement as leverage to extract rebates.⁹ This matters because the rebate is typically tied to a drug's list price, which encourages a system where list prices rise to finance ever larger rebates demanded by PBMs.

In a free market, these rebates would largely all be passed down to employers and consumers due to competition and market forces. However, that is not the case because of the monopoly-esque system the ACA has created. One analysis cited by America First Policy Institute found that about 40 percent of the list price of drugs in 2019 was devoted to payments to PBMs, meaning higher list prices increasingly fund the rebate and middleman economy rather than lowering costs for patients.¹⁵

The ACA's distortions have become especially damaging since PBMs dominate government-financed programs. Across nearly all government entities, anti-kickback provisions exist to protect taxpayers from enrichment schemes like those being deployed by PBMs. For many decades, Section 1128b of the Social Security Act has prohibited kickbacks and rebates for federal health care programs. However, a loophole was created in 1987 under the Medicare and Medicaid Patient and Program Protection Act that PBMs have since exploited.

Fortunately, Congress finally delinked PBM compensation from the price of a drug in Medicare Part D when in February of 2026 they passed the Consolidated Appropriations Act of 2026. Prior to this critical reform, the National Taxpayers Union noted that PBM practices have a direct effect on taxpayers because public programs and public employees either contract with PBMs directly or contract with plans that own or use PBMs, including Medicaid and Medicare Part D.¹²

Federal watchdogs had also warned that PBM spread pricing can inflate Medicaid drug costs, and that states' inconsistent reporting makes oversight and rate setting harder.¹³ In the FTC's insulin case, the agency alleges PBM rebate practices artificially inflated insulin list prices, impaired access to lower list price products, and shifted costs onto vulnerable patients, especially the uninsured and those facing deductibles and coinsurance.¹⁰

4. Follow the Money Trail – the Enrichment of Insurers and PBMs through an Anti-Free Market:

An expansive report by the Federal Trade Commission adds a concrete example of how things play out when regulations restrict market forces. The FTC found in today's vertically integrated market the "Big 3" PBMs marked up specialty generic drugs at their affiliated pharmacies by hundreds and thousands of percent, generating more than $7.3 billion in dispensing revenue above estimated acquisition costs from 2017 to 2022, and separately earning an estimated $1.4 billion from spread pricing on those drugs.¹⁴

A review of the money trail shows PBMs are now the primary revenue drivers for insurers and their affiliates. In 2022, CVS reported $169.2 billion in revenue from its Pharmacy Services segment, its PBM business, which is more revenue than CVS receives from its entire national retail store operations ($106.6 billion). Cigna shows the same structure. In its Q3 2024 results, Cigna reported Evernorth Health Services adjusted revenues of $52.6 billion versus $13.2 billion for its Cigna Healthcare segment, confirming that the PBM and health services side now dwarfs the traditional insurance business.¹⁶

Heritage has summarized the scale of what this created: PBMs barely existed as a major force a generation ago, but today three PBM affiliated conglomerates sit among the nation's largest corporations, with PBM revenues reaching roughly $1.25 trillion in 2022, much of it tied to taxpayer financed Medicare and Medicaid lives.¹⁷

“The Affordable Care Act incentivized insurers to merge with PBMs and spend more on prescription drugs.”
— America First Policy Institute

One of the clearest signs that the health care market is not functioning normally is that the same service can carry radically different prices depending on where a patient goes, often with little relationship to what the patient can observe about quality or convenience. Heritage notes that hospitals, even those in close geographic proximity, often charge wildly different prices for the same procedures, while AEI has shown that these disparities can stretch into several multiples for common shoppable services. In one AEI example, the cash price for a colonoscopy within ten miles of midtown Manhattan ranged from $580 to $4,355. That is not the kind of price spread one would expect in a genuinely competitive market. It is a sign of opacity, market power, and weak consumer discipline.⁶⁴ ⁶⁵

The problem is not only that prices vary. It is that patients still struggle to discover meaningful prices before care is delivered. In a normal retail market, a family shopping for a television can compare the product, the seller, and the price in one place before making a decision. Health care still does not work that way. Patients must navigate hidden negotiated rates, network rules, cost-sharing formulas, facility fees, and service bundles that are rarely presented in a simple consumer format. AEI has argued that even with new disclosures, discovering pricing earlier in the process still takes substantial effort, while Heritage observes that the plan-provider relationship remains a black box for patients who are often given little usable information to compare competing providers on cost and value. In that environment, the formal existence of data is not the same thing as a workable consumer market.⁶⁵ ⁶⁶

President Trump's first administration took an important step toward breaking that opacity by advancing hospital price transparency rules and the Transparency in Coverage rule, requiring hospitals to post standard charges and shoppable services and requiring health plans to provide personalized cost-sharing information and disclose negotiated rates. Paragon rightly describes those reforms as a dramatic change from decades of hidden pricing. But Paragon, Heritage, and CMS all make clear that the job remains unfinished. Compliance has been slow and uneven, enforcement has been too weak for too long, and the information often remains too technical, fragmented, or incomplete for ordinary patients to use with confidence. If price transparency is going to discipline costs the way competition does in other sectors, Congress and regulators will need to give the rules real teeth, expand them to additional facilities and settings of care, standardize patient-facing price displays, and ensure that patients actually benefit when they choose lower-cost providers. Until then, health care will remain far removed from the kind of straightforward comparison shopping Americans expect in every other major market.⁶⁶ ⁶⁷ ⁶⁸

“With the right rules, transparent pricing for medical services, which has bipartisan support, could lower health care costs without harming quality.”
— American Enterprise Institute

The Failure of Price Controls

When Washington's own policies inflate drug prices and distort the market, the predictable political response is to blame manufacturers and demand government price setting. But price controls have a long track record of failure. When government forces prices below what a market will support, supply contracts, investment dries up, and shortages follow.¹⁸

In pharmaceuticals, the stakes are uniquely high because the real "cost" of a breakthrough drug is not the pill itself. It is the decade-plus of research, the clinical trials that fail, and the regulatory gauntlet that makes only a small share of candidates successful. A system that caps returns on the few drugs that work does not just "punish profits," it reduces the capital available for the next generation of cures.¹⁹

The "Most Favored Nation" Price Controls

One recurring proposal is "Most Favored Nation" style price setting, also called international reference pricing. The basic idea is to tie U.S. drug prices to the lowest prices found in other wealthy countries.²⁰ Even when it sounds like simple fairness, importing foreign prices effectively imports foreign rationing. That matters because many of the "low price" countries get there through centralized controls that decide whether a treatment is "worth it." A central tool is health technology assessment, which evaluates whether a medicine delivers enough "value" to justify coverage. In practice, these systems are built to hit budget targets first. That is why countries with heavy price setting often delay access, restrict coverage, or never list certain therapies at all.²¹

If the United States adopted a Most Favored Nation ceiling as a broad model, the short-term effect could be lower sticker prices for some patients. The longer-term effect would be fewer launches, less manufacturing capacity built for the U.S. market, and less investment in high risk research. Investors price political risk fast. A sector subject to government price decrees that can change by administration is a sector that will see capital move elsewhere.²⁰ ¹⁸

Importation of Drugs and Socialist Price Controls

Drug importation proposals are often framed as "buying the same drug cheaper from Canada" or other countries. Economically, that is not like importing cars, where foreign producers compete with domestic producers. With drugs, the product typically comes from the same manufacturer, and the "cheap" foreign price usually exists because that foreign government imposes price controls and is willing to restrict access if companies refuse.²²

That is why foreign systems can appear cheaper on paper while offering fewer options in reality. As a practical matter, a buyer who credibly walks away and denies coverage will get a lower price than a buyer who prioritizes access. Importation tries to pull those controlled prices into the U.S. market without importing the uncomfortable truth that the low prices are paired with tighter access.²³

One consequence is global free riding on American innovation. The United States is often described, even by analysts sympathetic to reform, as the market where returns most reliably fund research that benefits the rest of the world.²² If policymakers convert the U.S. into another price controlled market through importation, they should expect reduced research investment and fewer future breakthroughs.

Shortages Through Forced "Negotiation" With Government

A third path to price controls is what Washington now calls "negotiation," where government sets prices under threat of punitive penalties. Under the Inflation Reduction Act, Medicare is required to negotiate "maximum fair prices" for selected drugs, beginning with 10 drugs for 2026, then 15 additional drugs for 2027 and 2028, and then 20 additional drugs in 2029 and each year after.²⁴ ²⁵

This is not normal negotiation because refusal triggers extreme consequences. The statute relies on large excise tax style penalties that can rise to levels that functionally coerce participation, which is why critics describe it as price setting backed by enforcement power rather than a voluntary bargain.²⁴ ²⁶

Beyond the direct impact on targeted drugs, price controls ripple through the insurance market. Analysts have warned that restructuring incentives in Medicare Part D can reduce plan generosity and choice as plans and manufacturers adapt to the new rules.²⁷ One widely cited data point in this debate is that Part D plan choices fell substantially from 2021 to 2024, while the national average premium rose sharply over the same period.²⁷

Actuaries have warned that these policies do not operate in a vacuum. When Washington changes several parts of Part D at once, the pieces can clash in ways that produce the opposite of what voters are promised. In practice, some seniors can end up paying more, or seeing fewer plan options, even while politicians claim the law is "lowering drug costs."²⁸ ²⁹ And because drug makers and insurers plan years ahead, the mere expectation of tighter price controls can change behavior now, pushing companies to redirect research dollars away from higher risk projects and toward products more likely to survive the new rules.²⁶

“President Biden's so-called Inflation Reduction Act (IRA) imposed new price control mandates, including statutory authorities for 'drug price negotiation' with select private sector drug manufacturers, which has already forced companies to divest from critical drug development and increase prices on new drugs.”
— Republican Policy Committee

Congress created the 340B Drug Pricing Program in 1992, and it was a bad policy from the start because it was built as a coercive mandate, not an honest budgeted subsidy. Instead of funding safety net care through a transparent appropriation that taxpayers could see and debate, the law required drug manufacturers to provide steep discounts as a condition of having their outpatient drugs covered by Medicaid, and by extension maintaining broad access to government dominated markets.³⁰ That structure effectively functions like an off budget levy on one sector of the economy, with costs that get shifted and hidden across the rest of the system.³⁰

In the early years, 340B was more limited. Participation largely centered on certain federally supported clinics and a narrower set of qualifying hospitals. That contained the damage to manufacturer bottom lines and reduced the scale of market distortion, even if the underlying financing model was still fundamentally flawed.

The Affordable Care Act turned a contained distortion into a rapidly expanding profit engine. The ACA expanded eligibility to additional hospital categories, including children's hospitals, cancer treatment facilities, critical access hospitals, rural referral centers, and sole community hospitals.³¹ The Congressional Budget Office has also pointed to increased facility participation after the ACA, integration of hospitals with off site clinics, and expanded use of off site pharmacies as key drivers of program growth and spillover costs.³²

The contract pharmacy explosion supercharged the arbitrage. Starting in 2010, covered entities were effectively able to use virtually unlimited contract pharmacies, and the number of contract pharmacies in the program surged from 503 in 2010 to 34,840 in 2024.³³ Once hospitals could route prescriptions through vast pharmacy networks, they could scale the "buy low, bill high" model far beyond the walls of a true safety net facility.³³

This is where cronyism becomes unavoidable. Medicare reimburses hospitals for certain drugs under a statutory formula regardless of the price the hospital actually paid, which creates a built in spread when hospitals acquire drugs at steep 340B discounts.³⁴ The hospital or affiliated middlemen can then bill insurers and employer plans at market based reimbursement while keeping the difference, often sharing that margin with contract pharmacies and PBM aligned entities.³⁴ ³⁵ The result is a system where manufacturers are forced to compete against their own discounted product: hospitals can acquire the drug at an effectively manufacturer level cost, then resell into the same commercial market at much higher reimbursement, profiting from the gap rather than delivering targeted relief to indigent patients.³⁴ ³⁵

The scale is no longer small. GAO has reported that roughly 40 percent of U.S. hospitals participate in 340B.³⁴ HRSA reports that 340B covered entities purchased $53.7 billion in outpatient drugs under the program in 2022.³⁶ Independent 340B purchase estimates find that the difference between list price value and discounted 340B purchases was about $52.3 billion in 2022, with hospitals accounting for the vast majority of 340B purchases.³⁷ These are massive off budget transfers that entrench politically powerful beneficiaries and make reform harder each year, even as the costs are pushed into premiums, employer spending, and patient out of pocket burdens.³⁴ ³⁵ ³⁷ ³⁸

“The 340B program is supposed to help hospitals provide care to indigent populations at low or no cost, but it is now routinely used fraudulently.”
— American Commitment

Prescriptions

As detailed above, the Affordable Care Act's Medical Loss Ratio rule (MLR) forces insurers to spend at least 80% (individual and small group) or 85% (large group) of premium dollars on "medical claims" and quality improvement, limiting what can be kept for administration and profit.³⁹ ⁴⁰ In practice, that creates a powerful incentive to shift revenue and margin into categories that qualify as "medical spending," including pharmacy claims that flow through PBM contracting structures.⁴¹ This helps explain why PBMs became an increasingly central "escape valve" for insurer profits as the ACA era matured, especially as insurers and PBMs consolidated under common corporate umbrellas.⁴² ⁴³

The FTC has documented how concentrated, vertically integrated PBMs can inflate costs and steer prescriptions to affiliated pharmacies, generating significant excess revenue through markups and related tactics.⁴⁴ ⁴⁵ When market forces are blocked by ACA regulation, the normal corrective mechanism of new entrants competing away abnormal profits is muted.

Ultimately, the conservative, limited government response is not to ignore crony incentives created by statute that artificially drive-up costs and harm taxpayers, but to unwind them. Regulatory elimination or reduction should always be the first solution sought by lawmakers. Therefore, the cleanest fix to solve the PBM enrichment scheme is to repeal the MLR rule entirely.³⁹ ⁴⁰ Short of repeal, lawmakers should close the loophole directly by treating PBM spread pricing, retained rebates, and other forms of PBM compensation as administrative costs for MLR purposes, not as medical claims. This reform aligns incentives with transparency: insurers should not be able to meet MLR requirements while routing hidden profits through a middleman.

From a political standpoint, the repeal of any core ACA provision like the MLR is unlikely – especially considering a handful of powerful PBMs are capitalizing off the anti-competitive regulations to generate tens of billions of dollars in lucrative profits. The PBM lobby has spent enormous sums countering any meaningful reform from being implemented federally.

Absent regulatory repeal, the only other option to protect taxpayers and consumers is to fight regulations with other regulations to help counter-act the negative effects. The most popular approach to combatting the crony capitalism is requiring all rebates captured by PBMs to be passed onto consumers.⁴³ Such actions would lower drug costs by ensuring the pharmaceutical market could no longer be abused by insurers seeking to circumvent the MLR rule.

Shifting insurance costs (and profits) back into the insurance sector would most likely lead to higher premiums unless insurers craft another workaround scheme. But if the ACA's structure collapses when the PBM workaround is removed, that is an argument for deeper ACA reform, not for preserving a scheme that quietly taxes patients at the pharmacy counter to stabilize a failing law.

A functioning market requires that consumers can see prices before they buy. In most industries, hidden pricing would be treated as a basic consumer protection problem. Healthcare should not be exempt simply because government policy helped create the opacity.

Congress should codify and strengthen the first Trump-era Hospital Price Transparency rule and close enforcement gaps, while also incorporating the additional transparency reforms President Trump directed in February 2025. Under the federal rule, hospitals must post a machine readable file of standard charges and a consumer friendly display of at least 300 shoppable services.⁶⁹ ⁷⁰ The February 2025 Executive Order directed the relevant agencies to rapidly implement and enforce those rules, ensure that hospitals and insurers disclose actual prices rather than estimates, and make prices more comparable across hospitals and insurers.⁷¹ ⁷⁵

Those reforms matter because the gains from transparency are not theoretical. The White House noted that prices can vary dramatically between providers in the same region, including one Wisconsin patient who saved $1,095 by shopping for two tests between two hospitals located within 30 minutes of one another. It also cited an economic analysis finding that President Trump's original transparency rules, if fully implemented, could deliver $80 billion in savings for consumers, employers, and insurers by 2025, while employers could lower healthcare costs by an average of 27 percent across 500 common services by better shopping for care.⁷⁵

In January 2026, President Trump announced The Great Healthcare Plan and called on Congress to enact a framework requiring healthcare providers and insurers to answer to patients up front on the prices they will be charged, restoring accountability and giving patients more power to make cost-conscious choices. The plan also called for any provider or insurer accepting Medicare or Medicaid to prominently post pricing and fees and to comply fully with transparency requirements.⁷⁶

Transparency should also move beyond hospitals. Price disclosure rules should be updated so physicians and other major service providers participate in standardized, all in pricing for common scheduled procedures, with clearly defined bundles that allow apples to apples comparisons across a local market. This is not price fixing. It is disclosure that makes competition possible, especially in a sector where the ACA's complexity and third party payment have stripped patients of usable price signals.⁷²

Congress should also remove regulatory penalties that discourage insurers from investing in real shopping tools. The ACA's medical loss ratio structure can treat investments that help patients find better value as "administration" rather than consumer benefit. Heritage policy analysts have argued Congress should clarify that spending to incentivize shopping and value seeking can count as quality improving activity, so plans are not punished for building transparency tools and offering cash rewards for choosing better value care.⁷³

Finally, lawmakers should be wary of "benchmarking" style proposals that substitute an insurance designed price formula for real transparency and competition. Some industry backed surprise billing proposals have used benchmarking as a backdoor price setting mechanism rather than a transparency driven fix.⁷⁴

Price controls are politically tempting because they promise quick savings, but they predictably reduce supply and weaken investment incentives over time.⁴⁶ Conservative critics have warned that importing foreign-style price controls into U.S. programs risks fewer launches, tighter access, and diminished innovation.⁴⁶

A better path is to expand channels that bypass the PBM cartel and restore real price competition. Drug makers are increasingly testing direct-to-consumer purchasing models that let patients buy at transparent cash prices, often far below the inflated list prices that exist to feed the rebate system. Novartis and Boehringer Ingelheim have launched direct purchasing platforms, and multiple other manufacturers have moved in the same direction.⁴⁷ In one high-profile example, Novartis said a new channel would offer an auto-injector at a 55% discount to its roughly $8,000 per month list price, explicitly stating the lower cash price "reflects the average savings that insurers and pharmacy benefit managers receive."⁴⁸

Industry has also begun building shared infrastructure to make these direct options easier to find. For example, in early 2026 PhRMA launched AmericasMedicines.com, which connects patients to manufacturers via a direct purchase programs.⁴⁹

The federal government has also promoted a parallel approach through TrumpRx, a government portal intended to connect patients to discounted manufacturer offerings.⁵⁰ ⁵¹ While the policy goal of bypassing middlemen can be constructive, a permanent, government-run purchasing portal is not the ideal limited government solution. The preferable outcome is private-sector scaling of transparent DTC purchasing, with policymakers removing barriers that prevent full deployment, such as anti-competitive contracting rules, restrictions that block cash-pay options, and opaque benefit designs that punish patients for bypassing PBM channels.

America's patients should not be forced to subsidize the world's pharmaceutical innovation. The Trump Administration has explicitly framed foreign price suppression as "free-riding" and has directed trade and health agencies to pursue policies that push wealthy countries to pay more realistic prices for innovative medicines.⁵² ⁵³ This is not a rejection of free trade. It is a demand for fair trade, where trading partners do not use price controls, compulsory licensing, and weak IP enforcement to shift the cost of R&D onto Americans.⁵⁴

Trade tools already exist. USTR's annual Special 301 process highlights persistent IP and market-access problems in trading partners and provides a framework for enforcement pressure.⁵⁴ Targeted trade negotiations should prioritize stronger patent protections, tighter limits on compulsory licensing abuse, and mechanisms that discourage price suppression that effectively exports foreign healthcare costs to the United States.⁵² ⁵⁴

At the same time, Congress should address a second vulnerability: the offshoring of generic and active-ingredient production. The FDA notes that generic drugs account for the overwhelming majority of U.S. prescriptions.⁵⁵ Yet supply chains are heavily dependent on foreign manufacturing, and the FDA has stated that only 9% of API producers supplying the U.S. market are based in the United States.⁵⁶ This dependence becomes especially dangerous when combined with weak oversight and uneven inspection regimes.

The Heritage Foundation has documented a troubling imbalance: FDA's own Office of Pharmaceutical Quality reportedly conducted independent quality-control testing on only 79 products in 2023, a tiny fraction of the universe it oversees, while domestic producers can face more frequent and less predictable scrutiny.⁵⁷ Whatever one's view of the agency's intent, the outcome is a system that can be simultaneously harsh on smaller domestic producers and insufficiently verifying the quality of the imported drug supply.

Policymakers should align incentives for domestic production without building a permanent industrial policy bureaucracy. Predictable regulation, faster review for high-quality domestic manufacturing, and credible inspection parity for foreign facilities can shift investment back toward U.S. resilience. The uncertainty of future regulatory whiplash also matters: manufacturers make multi-year capital decisions, and unstable enforcement environments discourage reshoring even when a reform-minded administration is in place.

Drug development is a high-risk investment. If policymakers undermine intellectual property protections, they reduce the expected return that makes investment in life-saving research possible. Conservative analysts have warned that seizing or weakening drug IP, including expansive use of Section 1498 or misuse of "march-in" concepts, is not a serious plan for prosperity or innovation.⁶¹

America's innovation advantage is real. Heritage has cited clinical trial pipeline data showing the U.S. leading the world in medicines in development, far outpacing peer countries.⁶² Preserving that edge requires resisting policies that confiscate returns after the fact.

That is also why 340B matters. Whatever its original intent, the program has grown dramatically and, in practice, can function as a de facto extraction mechanism from manufacturers without a transparent congressional appropriation. CBO documented rapid growth in 340B drug purchases from 2010 to 2021 and examined the factors driving expansion, including participation and contract pharmacy dynamics.⁶³ The further 340B drifts from true safety-net targeting, the more it becomes a profit center for powerful institutions rather than a patient-focused aid program.

At minimum, lawmakers should roll 340B back toward its pre-ACA footprint, tighten eligibility, require transparent reporting of where the discount value actually goes, and end arrangements that turn mandatory discounts into institutional revenue streams untethered from charity care.⁶³

Sources

¹GoodRx: Drug Prices Growing Faster Than Commodities and Services

²Drug Channels: US Brand-Name Drug Prices Fell in 2025

³Paragon Health Institute: Testimony on the Rising Cost of Health Care

⁴Paragon Health Institute: PBM 101 — What They Are and How They Affect Drug Prices

⁵Paragon Health Institute: Health Care Price Transparency

⁶EPIC: One Regulation Incentivizes Insurance Companies to Increase Costs

⁷PhRMA: Vertical Integration May Allow Insurers to Skirt MLR Requirements

⁸GAO: Pharmacy Benefit Managers Report

⁹FTC: Interim Staff Report on Prescription Drug Middlemen (July 2024)

¹⁰FTC: Sues PBMs for Artificially Inflating Insulin Prices

¹¹FTC: Interim Staff Report on Prescription Drug Middlemen

¹²NTU: How PBMs Impact Taxpayers and Government Spending

¹³HHS OIG: Medicaid Managed Care Drug Claims Data Validation

¹⁴FTC: Second Interim Staff Report on Prescription Drug Middlemen (2025)

¹⁵America First Policy Institute: Middlemen Favor Unaffordable Prescription Drugs

¹⁶Cigna Group: Q3 2024 Results

¹⁷Heritage Foundation: Mail-Order Meds Quality Concerns

¹⁸Cato Institute: Why Forty Centuries of Price Controls

¹⁹Science Direct: Tufts CSDD Cost of Drug Development Study

²⁰American Action Forum: Most Favored Nation Drug Pricing

²¹AEI: Foreign Drug Pricing Models Leave Patients Behind

²²Committee to Unleash Prosperity: International Drug Price Comparison

²³Heritage Foundation: American Healthcare Gets a Lot Right

²⁴CRS: Medicare Drug Price Negotiation

²⁵CMS: Drug Price Negotiation Timeline 2026

²⁶Republican Policy Committee: Drug Price Controls Brief

²⁷Heritage Foundation: Key Health Care Trends Report

²⁸AEI: Milliman Medicare Drug Benefit Study

²⁹Milliman: Expected OOP Cost Impact of Drug Price Negotiation

³⁰GAO: 340B Drug Pricing Program Report

³¹CRS: 340B Drug Pricing Program In Focus

³²CBO: 340B Drug Pricing Program Publication

³³Paragon Institute: 340B Contract Pharmacy Growth

³⁴GAO: 340B Program High Risk Report

³⁵Heritage Foundation: Transparency and Accountability in Indigent Care

³⁶HRSA: 2022 340B Covered Entity Purchases

³⁷Drug Channels: 340B Program Reached $54 Billion

³⁸American Commitment: Hospital Joint Letter on 340B

³⁹CMS: Medical Loss Ratio

⁴⁰U.S. Code: Section 300gg-18

⁴¹Milliman: PhRMA MLR Paper

⁴²FTC: Interim Staff Report on Prescription Drug Middlemen

⁴³USC Schaeffer: PBM Delinking Drug Cost Savings

⁴⁴FTC: Second Interim Staff Report on PBMs

⁴⁵Reuters: FTC Finds PBMs Inflated Drug Prices $7.3 Billion

⁴⁶Heritage Action: Drug Price Controls

⁴⁷FirstWord PHARMA: Novartis and Boehringer DTC Initiatives

⁴⁸Novartis: Direct Patient Program for Cosentyx

⁴⁹PhRMA: AmericasMedicines.com Announcement

⁵⁰TrumpRx Government Portal

⁵¹Axios: TrumpRx Website Drug Prices

⁵²White House: Putting American Patients First

⁵³White House: Most Favored Nation Pricing

⁵⁴USTR: 2025 Special 301 Report

⁵⁵FDA: Office of Generic Drugs 2022 Annual Report

⁵⁶FDA: Onshoring Manufacturing of Drugs and Biological Products

⁵⁷Heritage Foundation: FDA Drug Quality from China and India

⁶¹AEI: Seizing IP for Medicines Is Not a Path to Prosperity

⁶²Heritage Foundation: American Healthcare Gets a Lot Right

⁶³CBO: 340B Program Report

⁶⁴Heritage Foundation: Federal Price Transparency Rules

⁶⁵AEI: Price Transparency in Health Care — The Consumer Opportunity

⁶⁶Heritage Foundation: Health Care Price Transparency Reward Patients Shopping

⁶⁷Paragon Health Institute: Health Care Price Transparency

⁶⁸CMS: Transparency

⁶⁹CMS: Hospital Price Transparency MLN

⁷⁰eCFR: Hospital Price Transparency Requirements

⁷¹CMS: Hospital Price Transparency Enforcement Actions

⁷²Heritage Foundation: How Congress Can Help Open Americas Healthcare Markets

⁷³Heritage Foundation: Health Care Price Transparency Reward Patients Shopping

⁷⁴The Hill: Group Launches Ads Opposing Bipartisan Surprise Billing Fix

⁷⁵White House: Actions to Make Healthcare Prices Transparent (Feb 2025)

⁷⁶White House: The Great Healthcare Plan (Jan 2026)

Across the country, patients are increasingly encountering a health care system organized around fewer, larger entities, with less independent physicians and smaller community facilities available as alternatives. That trend toward vertical integration is not inherently bad. In some cases, integrated systems can improve care coordination and help better manage complex medical conditions. The problem is not integration itself, but the policy environment that has made integration feel less like an option and more like a survival strategy.

Much of this consolidation reflects the consequences of the Affordable Care Act and the broader regulatory structure surrounding modern healthcare. Doctor-owned practices are often least able to absorb the ACA's reporting mandates, payment rules, compliance burdens, and administrative overhead. Large hospital systems and corporate entities, by contrast, are better positioned to spread those costs across larger organizations. As a result, federal overreach has tilted the playing field away from independent physicians and toward institutional ownership.

The physician workforce reflects this shift. In 2024, the American Medical Association found that only 42.2 percent of physicians worked in physician-owned private practices, down from 60.1 percent in 2012. Over that same period, the share of physicians working in hospital-owned practices rose to 34.5 percent, while the share directly employed by or contracted with hospitals rose to 12 percent.¹ These figures do not prove that vertical integration is always harmful. They do, however, show that independent practice is becoming harder to sustain under the weight of today's regulatory and payment environment.

The same pressure is visible at the facility level. From 2010 through 2023, national hospital data show that 300 hospitals closed while only 192 opened, a net loss of 108 hospitals.² Surgical capacity has also declined. A national study found a net loss of 298 hospitals capable of performing surgery from 2010 to 2020, a 6.36 percent decline, with closures concentrated in communities already facing high poverty and social vulnerability.³ In rural America, the warning signs are especially serious: a 2025 rural hospital analysis found that 46 percent of rural hospitals were operating with negative margins, with hundreds considered vulnerable to closure.⁴

Diagnoses

The Affordable Care Act accelerated a compliance-heavy model of health care financing that favors organizations with economies of scale. Payment formulas, reporting mandates, and "value-based" program participation require expensive administrative infrastructure, specialized billing and coding staff, and sophisticated IT systems that small practices often cannot sustain. Hospitals and health systems are better positioned to absorb these fixed costs, so the regulatory design itself nudges consolidation.

The administrative burden is enormous. The American Hospital Association has estimated that hospitals and related providers spend nearly $39 billion per year on the administrative activities tied to regulatory compliance.⁵ The ACA also produced major paperwork demands across the system. One American Action Forum analysis estimated roughly 80 million hours of ACA paperwork, equivalent to nearly 39,822 full-time employees spending an entire work year on paperwork rather than productive activity.⁶

This burden does not just raise costs. It also changes how medicine is practiced. When compliance and documentation consume clinician time, patient-facing care loses out. A Heritage Foundation review of time-motion research summarized the reality bluntly: medical trainees can spend only a small fraction of the day in direct patient care, with the rest absorbed by indirect tasks and documentation.⁷ This is the opposite of the "patient-centered" marketing used to sell the ACA, and it helps explain why independent practices often feel forced to sell or affiliate simply to survive.

“ACA's 80 million hours of paperwork is the equivalent of 39,822 employees working an entire year filling out the law's new paperwork (assuming a 2,000-hour work year).”
— American Action Forum

The rise of larger health care systems should be viewed less as an indictment of consolidation itself and more as evidence that federal health care policy has made it harder for smaller and independent providers to survive. Vertical integration can offer real benefits, including better care coordination, improved administrative capacity, and economies of scale. But when independent practices and community-based providers increasingly feel they must sell, merge, or affiliate with a larger system simply to keep operating, the problem is not integration alone. The problem is a regulatory structure, accelerated by the Affordable Care Act, that rewards scale and punishes smaller competitors.

The Heritage Foundation warned that the ACA would fuel health care market consolidation by reinforcing incentives for hospitals, physicians, and insurers to merge into larger entities better able to manage federal mandates, compliance costs, and payment rules.⁹ The American Medical Association's market concentration research similarly shows that many health care markets are already highly concentrated by federal antitrust standards. In its latest health insurance competition analysis, AMA reviewed 384 metropolitan statistical areas, all 50 states, and the District of Columbia, finding that 97 percent of commercial markets and 97 percent of Medicare Advantage markets met the threshold for "highly concentrated." AMA also found that in nearly half of commercial markets, a single insurer controlled at least half of the market.⁸

This concentration means patients and providers in many parts of the country face fewer meaningful choices and less competitive pressure. But the answer is not to simply stop consolidation or punish integration where it improves care or helps providers operate more efficiently. The answer is to restore competition by removing the barriers that make consolidation the only realistic option.

Policymakers should focus on rolling back ACA-era mandates and federal regulatory burdens that disproportionately harm small practices, reforming payment rules that favor large hospital systems, and removing state and federal barriers that prevent independent physicians, physician-owned practices, ambulatory surgical centers, rural providers, and community-based facilities from entering or remaining in the market. A competitive health care system should allow large integrated systems to exist where they provide value, while also ensuring that as many small and independent providers as possible can survive, compete, and give patients real choices.

“The only effective way to resolve persistent problems in health care is to leverage the power of personal choice and market competition.”
— The Heritage Foundation

Prescriptions

Federal healthcare regulation has exploded, much of it tied to Affordable Care Act mandates, "value-based" payment schemes, and compliance regimes. The Paragon Health Institute has outlined how Congress can cut federal healthcare regulations by further reforming payment rules, limiting administrative mandates, and expanding flexibility for providers.¹¹ The Heritage Foundation's analysis of the REINS Act underscores why requiring congressional approval for major regulations is essential to restoring accountability and preventing unelected agencies from imposing costly mandates.¹²

The goal is not to eliminate oversight. It is to stop punishing small providers with rules designed around large hospital systems, and to shift regulatory burden away from providers who are trying to compete on patient value.

Reimbursement reform matters too. Current Medicare payment models channel physicians into "value based" arrangements that favor large organizations with administrative capacity to track metrics and file paperwork. The Mercatus Center has noted how financial risk accelerates physician consolidation into larger groups and hospital systems.¹³ Congress should revisit these payment structures and create pathways that reward efficiency without mandating participation in bureaucratic "accountable care" schemes that effectively lock out independent competitors.¹⁴

Certificate of Need laws are a classic central planning relic. In CON states, healthcare providers must seek government permission before building new facilities, expanding capacity, buying major equipment, or adding certain services. These laws began at the state level, were later encouraged by federal policy, and then persisted long after federal policymakers conceded they did not deliver on their promises.¹⁵

CON laws function as government enforced protectionism: they let incumbent hospitals block new entrants, suppress new facilities and beds, and limit lower cost alternatives like ambulatory surgical centers. Research from Mercatus and the Manhattan Institute links CON regimes to weaker competition, reduced access, higher costs, and poorer quality, even when communities would benefit from added capacity.¹⁶ ¹⁷

Repeal should be the goal, but lawmakers can be smart about sequencing. Some hospitals argue that, because they shoulder broader obligations, new entrants can "cherry pick" profitable services. That concern should be addressed directly through targeted reforms to subsidy design and reimbursement rules, not by preserving a barrier that harms the entire market. States can phase out CON in stages, prioritizing repeal for ambulatory surgical centers, imaging, and other outpatient services first, while simultaneously improving transparency around indigent care funding and moving toward patient based support.¹⁶

Telehealth is one of the most practical ways to expand access, especially for rural communities, seniors with mobility challenges, and working families who cannot spend half a day traveling for routine care. But the United States still treats telehealth like a temporary exception rather than a normal tool of modern medicine.

Congress should permanently modernize Medicare's telehealth rules by removing outdated geographic and "originating site" restrictions and ending the cycle of temporary waivers and short term extensions. When access hinges on expiring policies, patients face uncertainty and providers hesitate to invest in scalable telehealth models, even when virtual care could improve convenience, expand access in underserved areas, and reduce avoidable costs.

Separately, states should modernize licensing rules that block cross border telehealth. Patients near state lines often have fewer options because clinicians must hold a license in the patient's state, even when the clinician is fully qualified and the visit is virtual. A practical pathway is expanded reciprocity through licensure compacts, paired with stronger transparency and enforcement against bad actors.¹⁸ ¹⁹ The principle is simple: patients should be able to access qualified clinicians across state lines without bureaucracy being used as a protectionist shield.

Lawmakers should also resist telehealth "parity" mandates that require payment at the same rate as in person visits regardless of context. Telehealth should be priced through competition and contract negotiation, not fixed by statute. Finally, Congress should make it easier for employer plans to offer standalone telehealth coverage as an excepted benefit so workers can access low-cost virtual care without triggering unrelated coverage mandates.

America does not have a healthcare scarcity problem so much as a workforce utilization problem. Restrictive scope of practice rules prevent many highly trained clinicians, such as nurse practitioners, physician assistants, and pharmacists, from practicing to the full extent of their education and training. Those restrictions create bottlenecks, reduce competition, and keep routine care artificially expensive.

States should expand full practice authority for nurse practitioners and rationalize supervision requirements that function more like occupational protection than patient safety. Market oriented research from the Mercatus Center finds broader scope of practice tends to increase access and can reduce costs without clear evidence of harm to quality.²⁰ A Cato Institute research brief similarly finds no evidence that moving to full practice authority harms patients when measured through malpractice and adverse action indicators.²¹ The American Action Forum has also outlined how scope of practice reform can improve access and ease workforce constraints, particularly as physician shortages persist.²²

This is not about replacing physicians. It is about aligning tasks to skill, freeing physicians to focus on complex care, and expanding care capacity for routine visits, preventive care, and chronic disease management. Scope modernization becomes even more powerful when paired with telehealth, retail clinics, and team-based care models that compete on convenience and price.

Rigid labor mandates can lock in high costs and prevent providers from adapting care models to local realities. Policymakers should oppose one size fits all staffing ratio mandates and instead allow staffing to be driven by patient acuity, clinical judgment, and outcomes. The American Organization for Nursing Leadership argues mandated ratios treat staffing as static and remove flexibility needed to match resources to real time patient needs.²³

The nursing home staffing fight shows why federal micromanagement is so risky. The Biden administration finalized a 2024 rule imposing nationwide minimum staffing requirements on long term care facilities, a mandate that would have forced major operational and hiring changes even in areas already facing severe workforce shortages.²⁴ The Trump administration has since moved to repeal the numerical minimums, effectively reversing course. That kind of policy whiplash creates huge uncertainty for providers and investors: facilities cannot responsibly plan staffing pipelines, capital spending, or new care models when the rules can flip every time the White House changes hands. If mandates like these are implemented, they can be financially devastating in hard to staff regions and may reduce access by pushing facilities to cut services or close rather than comply.

On labor policy, states and Congress should also remove rules that entrench monopoly bargaining power in publicly run healthcare settings, which can restrict reform and raise costs. Cato has long argued public sector collective bargaining reduces managerial flexibility and makes efficiency reforms harder to implement.²⁵ At minimum, lawmakers should protect worker freedom through right to work style reforms where applicable, prevent closed shop practices in publicly funded systems, and ensure hospitals can use flexible staffing models, including contract labor and team based care, to meet demand without triggering artificial constraints.

Finally, policymakers should ensure that adoption of automation and clinical decision support tools is not blocked by anti-competitive restrictions designed to protect incumbents rather than patients. The goal should be patient safety and transparency, not job protectionism disguised as regulation.

Sources

¹AMA: More Physicians Move Practices Owned by Hospitals, Private Equity

²KFF: Key Facts About Hospitals

³FACS: Hospital Closures Disproportionately Affect Socioeconomically Disadvantaged Communities

⁴Chartis: 2025 Rural Health State of the State

⁵AHA: Regulatory Overload Report Executive Summary

⁶American Action Forum: How the ACA and Employer Mandate Impact Employers

⁷Heritage Foundation: Time to Roll Back Excessive Regulation of Medical Practices

⁸AMA: Competition in Health Insurance US Markets

⁹Heritage Foundation: Why Expanding Obamacare Is Not the Answer

¹⁰Medicare Payment Advisory Commission: 2024 Report to Congress

¹¹Paragon Health Institute: Advancing Choice, Competition, and Fiscal Sustainability in Medicare

¹²Heritage Foundation: Taking the REINS on Regulation

¹³Mercatus Center: Addressing Anticompetitive Conduct and Consolidation in Healthcare Markets

¹⁴CMS: Quality Payment Program Overview

¹⁵NCSL: Certificate of Need State Laws

¹⁶Mercatus: Certificate of Need Laws - Healthcare Access, Quality and Cost

¹⁷Manhattan Institute: Certificate of Need Reform

¹⁸IMLCC: Interstate Medical Licensure Compact

¹⁹NCSBN: Nurse Licensure Compact

²⁰Mercatus: Healthcare License Turf Wars - Effects of Expanded Nurse Practitioner

²¹Cato: Nurse Practitioner Scope of Practice and Patient Harm

²²American Action Forum: Scope of Practice Reform Opportunities

²³AONL: Policy Statement on Nurse Staffing

²⁴AHA: CMS Repeals Minimum Staffing Requirements

²⁵Cato: Public Sector Collective Bargaining

Health care innovation in the United States is still producing breakthroughs, but the trend lines show a system losing momentum. FDA approved 50 novel drugs in 2024, including 26 rare-disease therapies, and also approved a record 18 biosimilars.¹ Those are real gains. But they are happening in a system where America's broader innovation lead is narrowing: the National Science Board reports that the U.S. share of global R&D fell from 39.0 percent in 2000 to 30.1 percent in 2022, while China's share rose from 4.8 percent to 26.5 percent.² In health care, that stagnation is made worse by government policy. Heritage has warned that excessive government intervention has made health care more costly, complex, and inefficient, while government-driven consolidation has left patients with fewer choices and higher costs.³ That also means fewer independent providers with the margin and flexibility to invest in new diagnostics, modern facilities, advanced surgical tools, and the newest life-saving technology.

Medicare is one of the clearest examples of how government rules can slow innovation even after a product is developed. Paragon Health Institute argues that Medicare's coverage and reimbursement policies increase uncertainty, mismeasure the value of new services and technologies, create excessive regulatory burdens, raise barriers to entry, and distort incentives for innovators.⁴ CMS and FDA effectively acknowledged this problem when they announced the RAPID Coverage Pathway, explaining that the program is meant to reduce delays that have historically occurred between FDA market authorization and Medicare national coverage decisions.⁵ That delay matters. If innovators cannot predict whether Medicare will cover a breakthrough device, and hospitals cannot predict whether they will be paid for using it, investment slows and patients wait longer for better care.

Diagnoses

American health care still produces extraordinary scientific breakthroughs, but much of the system has become far less dynamic where patients actually experience care. Heritage has argued that the United States continues to lead in discovery while falling short on the kind of organizational innovation that improves how hospitals and other providers deliver care in practice. AEI has similarly observed that the hospital sector has shown flat or negative labor-productivity growth, suggesting that administrative and regulatory complexity are accumulating faster than patient-facing improvement.⁶ ⁷

That stagnation is reinforced by the sheer length, cost, and uncertainty of bringing new treatments to market. FDA's own framework requires a long path through preclinical work, human trials, agency review, and post-market oversight, and GAO has reported that development and approval of a new drug can take 15 years or more. The Manhattan Institute has further argued that Phase III trials alone typically account for 90 percent or more of the development costs of an approved drug. When a company must spend enormous sums over more than a decade, with a substantial chance of failure at the end, it becomes far harder for smaller entrants or newer firms to survive the process.⁸ ⁹ ¹⁰

The obstacle does not end with FDA approval. For many therapies, devices, and diagnostics, innovators must then navigate CMS coverage and payment rules before they can achieve a workable path to patient access, especially in Medicare. AEI describes this as a "Valley of Death" between FDA approval and CMS coverage, where regulatory risk continues even after a product is found safe and effective enough to enter the market. In practice, that means innovators often face a second federal gate after the first one has already been cleared.¹¹

That second gate is not a minor administrative detail. Paragon argues that Medicare's coverage and reimbursement policies increase uncertainty without producing better evidence, while creating excessive regulatory burden, increased barriers to entry, and misaligned incentives for innovators. Instead of providing a predictable bridge from approval to patient use, the CMS process can delay adoption, complicate investment decisions, and make reimbursement itself another hurdle in the development cycle. The result is a system in which regulatory layering, first at FDA and then again at CMS, favors firms with the deepest capital reserves and the greatest ability to absorb delay, rather than the firms with the most promising new ideas.¹²

States then add another level of complexity, especially in the hospital sector and physician practice. Heritage warns that independent medical practices are being smothered by costly regulation, while Mercatus notes that multi-state licensure remains unnecessarily redundant and that state scope-of-practice restrictions can limit how quickly qualified professionals begin practicing and what services they may provide. When those state-level barriers are added on top of federal delay and reimbursement uncertainty, the cumulative effect is to make the health care system slower, less adaptive, and less open to new competitors, new practice models, and new forms of treatment.¹³ ¹⁴

“The FDA and CMS have different missions and, consequently, differing standards which has created an economically disastrous regulatory gap between FDA approval and CMS coverage determination forebodingly called the "Valley of Death."”
— American Enterprise Institute

Prescriptions

The most durable way to lower medical prices is not to dictate them from Washington, but to make it easier for more competitors to enter the market. That begins with reducing the time, cost, and uncertainty imposed by federal policy. CBO reports that the expected cost of developing a new drug, including failures and capital costs, has been estimated to range from under $1 billion to more than $2 billion.¹⁵ In that environment, every avoidable delay and every unnecessary regulatory hurdle narrows the pool of firms that can compete. Congress should therefore treat FDA, NIH, and CMS reform as a competition agenda: one designed to lower entry barriers, shorten timelines, and make the rules more predictable for challengers rather than only survivable for incumbents.

At the FDA, Congress should move beyond broad promises of faster approvals and impose concrete structural reforms. Manhattan Institute research has shown that review times vary dramatically across FDA divisions, with oncology and antiviral divisions moving far faster than neurology and cardiovascular review offices.¹⁶ That kind of internal variation is a sign that the agency already knows how to review products more quickly when it chooses to do so. Congress should require division-level transparency on review times, binding performance benchmarks, and regular public reporting on why some offices lag far behind others. It should also direct the FDA to expand the best features of accelerated review, including smaller and shorter trials where scientifically appropriate, to a wider range of serious conditions rather than confining that flexibility largely to a few favored categories.

Congress should also modernize the FDA's evidentiary model so competition is not strangled by outdated trial design. Manhattan Institute has argued that greater use of real-world data, real-world evidence, and pragmatic clinical trials could materially reduce the cost and delay of drug development, yet progress at FDA has remained slow even after Congress instructed the agency to move in that direction.²⁰ AEI testimony likewise argues that clinical-trial burdens should be reduced by promoting real-world evidence and moving more trial activity into community settings rather than relying so heavily on the most cumbersome traditional models.²¹ A serious reform package should therefore require FDA to set measurable targets for the use of real-world evidence in supplemental applications and rare-disease treatments, expand adaptive and pragmatic trial methods where appropriate, and rely more on post-market evidence collection when early approval is justified by strong but incomplete data. That would not mean weakening safety standards. It would mean matching the evidence burden more intelligently to the product, the condition, and the urgency of patient need.

NIH also needs reform, but in a different direction. Its role should be to support rigorous basic and translational science, not to function as a sprawling, opaque bureaucracy that steers research through ideological fashion or subsidizes administrative growth. Manhattan Institute has called for NIH to recommit itself to scientific rigor and merit, intellectual diversity, transparency, and evidence-based medicine.²² That same principle should be applied to grantmaking more broadly. Congress should require clearer disclosure of grant criteria and outcomes, tighter scrutiny of programs that drift from core biomedical priorities, and stronger limits on overhead spending that diverts research dollars away from laboratories and into administration. That issue is not trivial. NIH announced a 15 percent cap on indirect cost payments in 2025 after years in which negotiated overhead payments consumed billions of dollars.²³ The point of NIH reform should be simple: more of the taxpayer dollar should buy science, and less of it should disappear into process.

The next barrier is CMS, which too often operates as a second gate after FDA approval rather than a predictable bridge to patient access. AEI has described this problem as a Valley of Death between FDA clearance and Medicare coverage, and Brian Miller has argued that CMS needs binding timelines, greater transparency, regular public input, and clear guidance on when it will use national coverage determinations, local coverage determinations, coverage with evidence development, or outside technical review.²⁴ ²¹ Congress should codify those process requirements, require CMS to define reasonable and necessary more clearly, and revive a broader transitional coverage pathway for FDA-designated breakthrough devices. The Trump Administration's 2021 MCIT rule moved in that direction by offering four years of guaranteed coverage for breakthrough devices, while the later TCET alternative became a far narrower and more discretionary pathway.²⁵ Medicare beneficiaries should not have to wait through another multi-year bureaucratic gauntlet after a product has already cleared the federal government's first one.

Finally, CMS reform must address payment as well as coverage. Even when a therapy, service, or device reaches the market, Medicare's pricing systems can still suppress competition by rewarding the wrong settings, distorting adoption, and sending unstable reimbursement signals. Paragon has argued that Medicare's coverage and reimbursement rules increase uncertainty, mismeasure value, and raise barriers to entry for innovators, while its 2026 roadmap for CMS recommends expanding site-neutral payment, relying more on market-based pricing in fee-for-service, and reforming 340B-related distortions.²⁵ ²⁶ Heritage likewise argues that the physician fee schedule has become a patchwork of government price controls and short-term fixes rather than a stable payment framework aligned with efficient, high-quality care.²⁷ The solution is not another layer of bureaucratic micromanagement. It is to move CMS toward clearer, more market-oriented payment rules so innovators have a credible path not only to approval, but also to adoption and competition on value.

When patients receive care but bills go unpaid, providers still must cover the cost of delivering that care. Those unpaid costs reduce the resources hospitals and practices have to reinvest in better care, modernize facilities, and purchase the newest life-saving technology. Over time, widespread nonpayment can make it harder for providers (especially smaller hospitals, rural facilities, and independent practices) to grow, innovate, or keep pace with larger systems. Some of those losses are also shifted onto paying patients through higher prices and onto taxpayers through higher public spending and bailouts.

Unfortunately, recent evidence suggests repayment by patients continuing to weakened. A large cross sectional study of patient accounts at 217 US hospitals found average repayment rates around 54 percent before the pandemic, with repayment declining in more recent years.¹⁷ When policymakers make it harder to collect legitimate debts, they should expect more nonpayment, tighter credit, higher up front deposits, and more cost shifting.

That risk became clear when the CFPB finalized a rule intended to remove medical bills from credit reports and restrict creditor use of medical information, claiming it would eliminate about $49 billion in medical debt from the credit reports of roughly 15 million Americans.¹⁸ In July 2025, a federal judge in Texas vacated the rule, concluding the CFPB exceeded its authority under federal credit reporting law.¹⁹

The broader lesson for lawmakers is not just about one rule. It is about predictable incentives. Policies that treat medical debt as something that should be hidden rather than collected encourage nonpayment and make provider losses more likely. At the state level, lawmakers should avoid consumer protection measures that effectively make collection impractical, and should instead focus on transparency, accurate billing, workable payment plans, and targeted charity care that is explicit and accountable rather than quietly socialized across everyone else.¹⁷ ¹⁹

Sources

¹FDA: 2024 New Drug Therapy Approvals Annual Report

²National Science Board / NSF: Global R&D and International Comparisons

³Heritage Foundation: Health Care — Solutions 2024

⁴Paragon Health Institute: Roadblock to Progress — How Medicare Impedes Health Care Innovation

⁵CMS: CMS and FDA Announce RAPID Coverage Pathway to Accelerate Patient Access

⁶Heritage Foundation: How Can We Spur Organizational Innovation to Fix US Health Care

⁷AEI: Making Health Care Affordable — Solutions to Lower Costs and Empower Patients

⁸FDA: Drug Development Process

⁹GAO: Drug Development Time and Costs

¹⁰Manhattan Institute: Stifling New Cures — The True Cost of Lengthy Clinical Drug Trials

¹¹AEI: The Innovation Imperative — Crossing the Valley of Death

¹²Paragon Health Institute: Roadblock to Progress — How Medicare Impedes Health Care Innovation

¹³Heritage Foundation: Time to Roll Back Excessive Regulation of Medical Practices

¹⁴Mercatus: Resolving Roadblocks — Activating Additional Physicians

¹⁵CBO: Research and Development in the Pharmaceutical Industry

¹⁶Manhattan Institute: FDA — Measure and Improve Thyself

¹⁷JAMA Health Forum: Hospital Patient Repayment Study

¹⁸CFPB: Finalizes Rule to Remove Medical Bills from Credit Reports

¹⁹Reuters: Judge Grants Request to Scrap Medical Debt Rule

²⁰Manhattan Institute: Expanding the Use of Real-World Evidence

²¹AEI: Brian Miller Witness Testimony on Health Care Innovation

²²Manhattan Institute: Reform Proposals for the National Institutes of Health

²³NIH: Supplemental Guidance to the 2024 NIH Grants Policy Statement: Indirect Cost Rates

²⁴AEI: The Innovation Imperative — Crossing the Valley of Death

²⁵Paragon Health Institute: Roadblock to Progress — How Medicare Impedes Health Care Innovation

²⁶Paragon Health Institute: Advancing Choice, Competition, and Fiscal Sustainability in Medicare

²⁷Heritage Foundation: Medicare Physician Payment — The Case for Market-Based Reforms

Medicaid was built as a targeted safety net for low-income children, pregnant women, seniors, and people with disabilities. The Affordable Care Act fundamentally changed the program's role by adding millions of able-bodied, working age adults to a welfare system that was never designed to cover them long term. Heritage estimates that between 2013 and 2022, the ACA added 19.8 million work capable adults to Medicaid.¹

The spending trajectory followed. Medicaid has become one of the fastest growing federal commitments, with total expenditures growing from roughly $200 billion in FY 2008, to about $894 billion in FY 2023.² As costs rise, lawmakers increasingly rely on larger subsidies and broader eligibility to keep the ACA from collapsing under its own weight. The result is a cycle of more dependency, more spending, and less urgency to fix the underlying affordability failures.

Diagnoses

Before the Affordable Care Act, Medicaid eligibility largely depended on both income and category. The program focused on children, pregnant women, the disabled, and certain low income seniors, while childless, non disabled adults were generally excluded in most states.¹

The ACA expanded Medicaid eligibility to nearly all adults under 65 with incomes up to 138 percent of the federal poverty level in states that opted in, and it did so by offering an unusually generous federal match that settles at 90 percent of expansion costs.² This financing structure rewards states for moving people onto Medicaid and shifting the bill to federal taxpayers.

Instead of correcting the ACA's cost drivers, Congress has repeatedly layered on more subsidies and broader eligibility to keep enrollment high. Cato notes that the "temporarily" expanded exchange subsidies removed the 400 percent of poverty cutoff, allowing subsidies for some households with incomes of almost $600,000.³ This is not a stable affordability solution. It is a fiscal patch that becomes politically difficult to unwind once people and insurers reorganize around it.

“The temporarily expanded subsidies eliminated the 400-percent-of-poverty cap, allowing some Americans with incomes of almost $600,000 to qualify for government benefits.”
— Cato Institute

The Affordable Care Act's Medicaid expansion and the financing games that surround Medicaid payment policy have created another distortion: politically influential providers can profit by optimizing for Medicaid revenue rather than competing for consumers. States commonly use provider taxes, intergovernmental transfers, and related mechanisms to fund the state share on paper while drawing down additional federal matching dollars.³⁰ ³¹

In Medicaid managed care, states have increasingly used "state directed payments" to push large additional payments through managed care plans to favored provider classes. GAO reports rapid growth in these directed payments and documents how states often rely on funds from providers and local governments, including provider taxes, to finance the nonfederal share, which can effectively increase the federal government's share of the net payments.³² This structure can reward higher Medicaid billing and larger supplemental payment flows, especially for systems with the political influence and administrative capacity to navigate the process.

Paragon Health Institute argues that these arrangements create a perverse incentive: when Medicaid payments are pushed upward through state directed payment mechanisms, providers can face stronger financial reasons to prioritize Medicaid volume, which can crowd out attention to Medicare patients, including seniors who paid into the system over a lifetime.³³ Policymakers focused on protecting seniors and taxpayers should treat these financing loops as a form of hidden subsidy that reduces transparency and weakens accountability.

“This payment disparity incentivizes providers to prioritize Medicaid patients over Medicare recipients, which not only undermines seniors' access to care but also drives up federal taxpayer costs.”
— Paragon Health Institute

The Affordable Care Act's subsidy design pays insurers first. Most premium tax credits flow in advance to insurance companies, which means premium increases are increasingly absorbed by taxpayers rather than consumers.³ ⁴ That weakens price discipline and gives insurers more room to raise premiums in a market where government approved plan design and limited competition already distort normal consumer behavior.

The numbers illustrate the imbalance. Cato reports that by 2025, taxpayers covered 88 percent of the premium for subsidized enrollees and nearly one third of enrollees paid nothing toward their ACA premiums.⁴ As subsidies grow, insurers face less pressure to offer plans people would willingly purchase without a large government backstop.

Paragon's analysis of insurer valuations adds context to why this structure matters. It reports that a weighted average of health insurer stock prices rose 1,032 percent from 2010, the year the ACA was enacted.⁵ The point is not that every dollar of that gain is "because of the ACA," but that the ACA created a subsidy driven market where insurers can benefit from taxpayer financed premium growth.

“The weighted average of health insurer stock prices are up 1,032 percent from 2010, when the ACA was enacted.”
— Paragon Health Institute

When millions of consumers are insulated from premiums, the exchange becomes a target rich environment for waste and abuse. Paragon reports that improper enrollment rose to 6.4 million in 2025, with the taxpayer cost projected to exceed $27 billion.⁷

A related warning sign is the rise of "zero claim" enrollees. Paragon found that nearly 12 million exchange enrollees in 2024 did not file a single medical claim, and it reports zero claim enrollment reached 11.7 million that year.⁶ In a normal insurance market, some people will have no claims. What is not normal is the scale, the rapid growth following subsidy expansions, and the evidence that many of these enrollees are "phantoms," meaning people who may be unaware they were enrolled or were enrolled without meaningful consent.⁶ Americans for Prosperity similarly points to weakened verification and broker incentives as drivers of improper and phantom enrollment.⁸

In plain terms, this is what happens when government turns enrollment itself into the product and sends the money straight to intermediaries and insurers.

“The subsidies … along with weakened income verification, have led to skyrocketing improper enrollments … and zero-claim enrollees have also skyrocketed, signaling widespread fraud.”
— Americans for Prosperity

When the Affordable Care Act was enacted, it was presented as a framework that would restrain federal health spending through "innovation" in payment and delivery. The Center for Medicare and Medicaid Innovation (CMMI) was created to test new Medicare and Medicaid payment models that would reduce program expenditures while maintaining or improving quality.¹¹

The fiscal record, however, indicates the Innovation Center has moved in the opposite direction of its intended purpose. Competitive Enterprise Institute noted that CBO originally projected CMMI would generate net savings of $2.8 billion from 2011 to 2020, but later analysis found the program instead increased net spending by $5.4 billion over that period and is projected to increase spending by another $1.3 billion from 2021 to 2030.¹² Paragon also documents that CBO at one point projected far larger savings in later windows, including a 2016 estimate of $34 billion in savings for 2017 to 2026, underscoring how routinely projected savings have exceeded realized results.¹¹

Model performance has been similarly discouraging. CEI pointed out that, from 2011 to 2020, only four of the 49 evaluated models showed enough potential to save money and improve care to warrant expansion.¹² Paragon likewise finds that only a small subset of models generated significant savings and only a handful were certified for expansion, a modest yield for an agency with a permanent, mandatory funding stream and unusually broad authority to reshape federal payment policy.¹¹

Conservative analysts argue these outcomes reflect structural incentives. Paragon highlights recurring design weaknesses, including heavy reliance on voluntary participation, benchmark problems, and quality measurement issues that can encourage favorable selection and dilute true savings.¹¹ House Budget Committee Republicans have also criticized CMMI's "autopilot" financing and limited congressional accountability, noting the program received additional mandatory funding even before exhausting its initial tranche.¹³

Meanwhile, many prominent so-called "innovation" concepts resemble merely basic price controls and regulatory schemes. For example, Citizens Against Government Waste has noted CMMI seeks to impose "most favored nation" drug price controls, criticizing the plan as an expansion of centralized planning through an agency with a poor record of cost containment.¹⁴ This criticism connects to a broader point about policy history: Cato notes that such regulations and price controls have repeatedly reappeared over centuries despite well-documented distortions, and that the underlying logic of such controls has not been transformed by modern data or bureaucracy.¹⁵

“Common sense dictates that any federal program (CMMI) with such an abysmal rate of success should not be given any further opportunity to waste the taxpayers' money.”
— Competitive Enterprise Institute

The Affordable Care Act expanded welfare coverage while pricing private options out of reach for many households, and it did so through two channels. It expanded Medicaid for adults below 138 percent of the poverty level in participating states, and it expanded subsidized exchange coverage for those above that threshold.¹ Over time, this has increased the share of Americans who rely on government financed health coverage, even when they are work capable and would otherwise be in the private market.

Medicaid expansion also crowds out private coverage and deepens dependency. Testimony to the U.S. Senate Homeland Security and Governmental Affairs Committee summarized the dynamic bluntly: if the remaining non-expansion states adopted Medicaid expansion, it would push 5.8 million Americans off private insurance and onto Medicaid.⁹ This crowd out effect is not simply a reshuffling of coverage categories. It transfers families from private financing into a welfare program, increases dependency on government funded care, and adds billions in new taxpayer costs.⁹ ¹⁰

In practice, expansion steers able-bodied adults into welfare style coverage while shifting resources away from the children, disabled, and low-income seniors Medicaid was meant to protect. It also advances a political strategy that treats bigger rolls and bigger spending as a feature, because a permanently enlarged entitlement is harder to reform or unwind.

“Promises made by expansion advocates continue to be proven false … millions of able-bodied adults are forced onto welfare, shifting resources away from the truly needy. … The Left's goal is to get more taxpayer money into the program and more government dependency.”
— Foundation for Government Accountability

Prescriptions

In a functioning safety net, Medicaid is focused on the most vulnerable: children in low-income families, pregnant mothers, seniors, and the disabled. The ACA changed that mission by encouraging states to add able bodied, working age adults up to 138 percent of the federal poverty level, financed with an enhanced federal match that remains far more generous than traditional Medicaid.¹⁶ ¹⁷ The result is predictable: states are rewarded for expanding the welfare rolls, while resources and provider capacity get stretched thinner for the people Medicaid was originally meant to serve.¹⁸

Because entitlements are politically difficult to roll back once expanded, lawmakers should use the leverage point Washington controls: federal financing. Congress should phase down the enhanced expansion match rate so it no longer functions as a permanent incentive to expand welfare. A straightforward approach is to move expansion Federal Medical Assistance Percentage (FMAP) toward parity with traditional Medicaid over time, or reduce the enhanced match below 90 percent so states face real budget tradeoffs when choosing to cover work capable adults.¹⁷ ¹⁹ ²⁰ Furthermore, other programs connected to Medicaid should be either shrunk or terminated, with the elimination of the Center for Medicare and Medicaid Innovation (CMMI) one such example.

The Affordable Care Act's Medicaid expansion has already pushed 41 jurisdictions, including Washington, DC, into an open ended entitlement expansion that the federal government funds at a permanently elevated match rate.³⁴ For the expansion population, the federal government pays 90 percent of benefit costs, creating a powerful incentive for states to expand even when the policy increases dependency and long run spending.³⁵

That incentive is compounded by state financing tactics that are functionally designed to maximize federal matching dollars with as little real state fiscal effort as possible. Many states levy provider taxes, then recycle the proceeds back to the same provider classes through higher Medicaid payments, including large lump sum supplemental payments and state directed payments in managed care.³⁶ Conservative budget analysts have documented how these "tax and repay" arrangements can inflate federal costs and reward politically powerful hospital systems.³⁷ GAO has also documented how supplemental payments can exceed hospital Medicaid costs in aggregate, which is a major red flag for program integrity.³⁸

Lawmakers should treat these arrangements as a federal taxpayer protection issue and not as a harmless state budgeting tool. Congress can tighten the rules that allow provider tax games, require clearer demonstrations that the state share is truly financed by the state, and place stricter guardrails on supplemental and state directed payments that function as backdoor bailouts.³⁶ ³⁸

Instead of routing more taxpayer dollars through opaque managed care contracts that reward enrollment growth and administrative complexity, states should be pushed toward consumer directed models that fund patients directly. Health savings account style funding treats low-income individuals like consumers with agency, not passive recipients, and reinforces cost awareness and personal responsibility.²¹ ²²

Under this approach, public support follows the patient into an account the patient controls, paired with catastrophic coverage for truly high cost events. When people spend from accounts they control, they have stronger incentives to compare prices, avoid unnecessary care, and seek better value. In contrast, the managed care model often rewards plans for growing enrollment and billing taxpayers, even when care is wasteful and outcomes do not improve.²¹ ²³ This structure also helps reduce benefits cliff distortions by supporting a transition toward independence rather than permanent dependency.²⁴

Medicaid should not operate as a no questions asked entitlement for able bodied adults. Work and community engagement requirements, paired with meaningful exemptions for disability, pregnancy, and primary caregiving, can reduce dependency while encouraging training, job search, and workforce attachment.²⁵ ²⁶

Just as important, Congress should mandate stronger eligibility controls to prevent "ghost enrollee" failures that bleed taxpayer dollars and enrich contractors and insurers. Federal auditors have repeatedly identified unallowable managed care payments made on behalf of ineligible or deceased enrollees, and other enrollment integrity breakdowns that still trigger payments to managed care organizations.²⁷ ²⁸ Work requirements should be paired with regular eligibility checks, cleaner data matching, and prompt termination of ineligible enrollment so Medicaid dollars actually reach those who qualify and genuinely need help.²⁹

Sources

¹Heritage Foundation: Key Health Care Trends Nationally and Each of the States

²CRS: Medicaid Financing and Expenditures

³Cato Institute: Six Reasons Not to Extend Enhanced Obamacare Subsidies

⁴Cato Institute: Universal Permanent Health Insurance Relief

⁵Paragon Health Institute: Insurer Stock Prices Soaring After Giant ACA Subsidies

⁶Paragon Health Institute: Ghostbusting ACA Fraud - Zero Claim Enrollees

⁷Paragon Health Institute: Obamacare Enrollment Fraud Surged in 2025

⁸Americans for Prosperity: Findings Show ACA Expansions Enable Massive Fraud

⁹Senate HSGAC: Bragdon Testimony on Medicaid Expansion

¹⁰Foundation for Government Accountability: Medicaid Expansion Crowd-Out

¹¹Paragon Health Institute: How to Reform the CMS Innovation Center

¹²CEI: CMMI Coalition Letter

¹³House Budget Committee: Health Care Task Force Examines Obamacare Program Driving Deficits

¹⁴CCAGW: Denounces CMMI Price Control Scheme

¹⁵Cato Institute: Why Forty Centuries of Price Controls

¹⁶CBO: Reduce Federal Matching Rate for Medicaid Expansion

¹⁷CRS: Medicaid Financing and Expenditures Report

¹⁸Paragon Health Institute: Medicaid Reform Issue Library

¹⁹Paragon Health Institute: Medicaid Financing Reform

²⁰Fierce Healthcare: Paragon Health Reform Priorities

²¹Heritage Foundation: Solutions 2024 Health Care

²²AEI: Republicans Should Refine Crapo-Cassidy HSA Proposal

²³Cato Institute: Making Health Savings Accounts Work for Everyone

²⁴AEI: Stranded by the Safety Net - Benefit Cliff Problem

²⁵CMS: Policy Guidance for Community Engagement for Able-Bodied Adults

²⁶MACPAC: Work and Community Engagement Requirements in Medicaid

²⁷HHS OIG: Unallowable Capitation Payments for Deceased Enrollees

²⁸HHS OIG: Pennsylvania Unallowable Capitation Payments for Multiple IDs

²⁹Paragon Institute: Reversing the Curse - Rooting Out Waste and Fraud

³⁰GAO: Medicaid Financing Report

³¹MACPAC: Improving Transparency of Medicaid and CHIP Financing

³²GAO: Medicaid State Directed Payments

³³Paragon Health Institute: Medicaid Money Laundering Apparatus

³⁴KFF: Status of State Medicaid Expansion Decisions

³⁵KFF: Eliminating the Medicaid Expansion Federal Match Rate

³⁶Medicaid.gov: State Directed Payments Guidance

³⁷Heritage Foundation: Budget Recommendations on Medicaid

³⁸GAO: Medicaid Supplemental Payments Report

Download the Executive Summary

Get a printable one-page summary of all five healthcare affordability challenges and their prescriptions — suitable for distribution to policymakers and stakeholders.

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The Five Healthcare Affordability Challenges

The Full Diagnoses and Prescriptions for Reform

1st Challenge:Skyrocketing Insurance Premiums

Diagnoses

Prescriptions

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2nd Challenge:Rising Medical Treatment Costs

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3rd Challenge:Shrinking Competition Among Providers

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Prescriptions

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4th Challenge:Stagnating Advancements in Healthcare

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5th Challenge:Exploding Government Spending

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Download the Executive Summary