Background

Basic Information

The United States (US) has a population of more than 330 million people¹ and is supported by one of the most complex healthcare systems in the world, formed by intertwining relationships between providers, payers, and patients receiving  care. The US healthcare system is in a constant state of evolution.

Description of the Healthcare System

Coverage Overview

The US healthcare system does not provide universal coverage and can be defined as a mixed system, where publicly financed government Medicare and Medicaid (discussed here) health coverage coexists with privately financed (private health insurance plans) market coverage. Out-of-pocket payments and market provision of coverage predominate as

a means of financing and providing healthcare.2 As of 2022, KFF, the leading health policy organization in the United States, reports that 48.7% of citizens received private insurance coverage through their employer (group insurance), 6.3% received private insurance through health insurance marketplaces (nongroup insurance) (discussed here), 21.2% of citizens relied on Medicaid, 14.6% on Medicare, and 1.3% on other public forms of insurance (eg, Veterans Health Administration [VHA] and Military Health Service [MHS]), leaving 8% of Americans uninsured.³

An overview of the financial flow of the US healthcare system is presented in Figure 1.

Hospital and Physician Financing

Public and private hospitals receive payment from both public and private financing sources. Hospitals are typically paid through a diagnostic-related group (DRG), which assigns a set payment amount for a particular condition or treatment sequence. Inpatient DRGs are widely used by the Centers for Medicare & Medicaid Services (CMS) and by many private payers as a payment scheme for hospitals. Rather than paying the hospital for a line-item list of procedures and medications, Medicare pays the hospital a fixed amount based on the DRG, regardless of the actual cost of treatment. The DRG-based payments cover accommodation costs in a hospital (ie, room and board, facility costs, etc), procedure costs, support staff (nurses, technicians, etc), and drug/medical device costs; however, this system does not include physician fees. In the outpatient setting, Ambulatory Payment Classification (APC) codes are used by the hospital system for billing and reimbursement. These APC codes represent a fee-for-service style of billing, rather than the capitated, cost-based style of DRGs.5

Physician fees are not included within DRG (inpatient) or APC (outpatient) codes. When billing for physicians and other clinician fees, Current Procedural Terminology (CPT) codes are used and are billed under the name of the provider rather than the hospital. CPT codes may be used in both inpatient and outpatient settings and indicate a fee-for-service healthcare reimbursement structure.

Private insurers pay hospitals based on DRGs, case rates, per diems, fee-for-service, and/or discounted fee-for-service schemes. On average, these payments exceed the hospital’s costs of providing the underlying services. Conversely, hospitals, on average, are reimbursed less than the costs of services for Medicare, Medicaid, and uninsured patients.

Regulation and Policy Making

Federal healthcare laws are enacted and amended through Congress, the legislative branch of government. Policy can also be changed through the regulatory process, whereby the federal branch of the government interprets how policies are to be implemented and enforced. In the United States, the Department of Health and Human Services (HHS) is responsible for the provision of medicine, public health services, and social services at the national level. The HHS is part of the federal branch of government and is the oversight agency for healthcare organizations in the country such as the US Food and Drug Administration (FDA), Centers for Medicare and Medicaid Services (CMS), National Institutes of Health (NIH), Agency for Healthcare Research and Quality (AHRQ), and Centers for Disease Control and Prevention (CDC).10 For more information on these healthcare decision makers, see here. In addition to federal healthcare laws, states may pass additional laws if they are not contradicted.

Recent National Legislation

The 21st Century Cures Act was signed into law on December 13, 2016, and laid out changes to the FDA’s drug and device approval processes, with the goal of incorporating patient perspective into drug and device development and expediting the development and review of novel medical products. This legislation calls for the incorporation of “data summaries” and real-world evidence into the drug approval process and laid the groundwork for preapproval communication of appropriate healthcare economic information (HCEI) to expedite the formulary decision-making process after FDA approval. Also, the Regenerative Medicine Advanced Therapy and Breakthrough Devices Program was established as a new expedited product development program.^11,12 On March 23, 2010, the ACA, often referred to as “Obamacare,” was passed by Congress. This sweeping overhaul of the healthcare system represents the largest change and expansion of coverage since the passing of Medicare and Medicaid in 1965.¹³

The Inflation Reduction Act (IRA) represents a landmark legislative stride toward addressing the multifaceted challenges of inflation, climate change, and healthcare costs. At its core, the IRA aims to fortify the economy by making strategic investments in energy and healthcare, while also laying the groundwork for long-term deficit reduction. The Act encompasses provisions for clean energy incentives, a much-anticipated extension of ACA subsidies, and measures to reduce prescription drug prices, thereby promising to reshape key sectors with broad economic implications. For an in-depth exploration of the IRA’s components and anticipated impacts, please refer to the detailed analysis provided later in the Drug Pricing Rules and Regulations section.

Health Statistics Information

The United States is the third most populous country in the world, behind China and India, but has a population that is only about one-quarter of either of those 2 countries. Nevertheless, it spent $4.3 trillion on healthcare, or 18.3% of the gross domestic product (GDP), (more than any other country) in 2021.20,21 Comparable healthcare spending estimates include Germany (12.65%), the second-highest country, as well as France (12.1%) and the United Kingdom (UK) (11.3%).²¹ The figure below illustrates the per capita spend of the United States on healthcare relative to other developed nations.

In the United States, hospital care is the main driver of overall healthcare spending, accounting for 31.1% of 2021 healthcare dollars; physician and clinical services are second at 20.3%; and prescription drugs are third at 8.9%. See the figure below for a more complete breakdown of total healthcare spending in the United States.