Nine reasons for rising healthcare costs

By Elizabeth Walker on September 5, 2025 at 1:00 PM

The average American spends a considerable amount on healthcare each year. Premium increases, higher deductibles and copays, and soaring prescription drug prices can all impact medical costs.

According to the Centers for Medicare & Medicaid Services(CMS), U.S. healthcare costs in 2024 skyrocketed to $5.3 trillion¹. CMS expects national health expenditures to reach $6.8 trillion by 2030².

KFF Health Expenditures 1960-2023

Image: KFF Health Expenditures 1960-2023

With no end to rising healthcare costs, you must understand what causes these spikes. This article will examine nine reasons medical care in the U.S. is so costly. We’ll also show employers how they can help their staff control their medical expenses with a health reimbursement arrangement (HRA).

In this blog post, you’ll learn:

The top reasons for rising healthcare expenses in the U.S.

Ways employers can support their employees’ medical needs with HRAs and stipends.

How personalized health benefits offer potential savings for both employers and employees.

1. Insurance pays medical providers for quantity, not quality

Most health insurance companies — including Medicare — pay doctors, hospitals, and other providers using a fee-for-service system. This method works by reimbursing each test, procedure, or physician visit.

The more services doctors provide, the more money they receive. This can lead to excess testing, overtreatment, or overprescribing. This is particularly true for patients with poor health and a low chance of improvement.

Additionally, unlike many other wealthy countries, the U.S. healthcare system is non-integrated. The World Health Organization defines integrated health services as “the organization and management of health services so that people get the care they need, when they need it, in ways that are user-friendly, achieve the desired results, and provide value for money.”³

So, what does that have to do with cost? Integrated healthcare means providers, management, and support teams work together on a patient’s care. In an unintegrated system, a lack of coordination can lead to duplicate testing and higher costs.

2. The U.S. population is becoming more unhealthy

According to the CDC, six in ten U.S. adults have at least one chronic disease. Chronic diseases include heart disease, high blood pressure, and diabetes. While they may not be rare, illnesses like these can result in higher healthcare costs.

Patients with chronic conditions often need long-term care that’s complex and intensive. This includes more prescription drugs, emergency services, in-home care, and support programs. But these all come with a high price tag.

Roughly 90% of all healthcare costs are for treating chronic illnesses and mental health conditions⁴. Additionally, 40% of U.S. adults and almost 20% of children ages 2 to 19 are obese⁵. This can lead to chronic diseases and inflated health spending, especially if these patients delay medical care.

As these health issues soar, the risk of insuring the average American increases. The higher the risk, the higher the annual premiums. Over the past decade, the average annual premium for family health insurance coverage rose from $16,351 to $23,968, a rapid increase of 42%⁷.

3. Newer healthcare technology and prescription drugs are more expensive

Medical advances can improve our health and extend our lives. However, upgraded tools can also result in increased medical spending and overutilization of expensive technology.

Many individuals associate more advanced technology and newer procedures with better healthcare. While it can keep people healthier, one thing is for sure — it’s more expensive.

“One of the most influential factors causing costs to rise is technology,” said Raychel Ria, BSN/RN/MPM at MHA Programs. “Healthcare experts are constantly looking for new ways to improve healthcare services. So, medical professionals are researching the capabilities of technology (like AI tools) and implementing many new tech tools. While improving healthcare services is undoubtedly a benefit, the reality is that all of this technology is costly.”

When patients and doctors demand the newest treatments, healthcare costs rise for all Americans, even if some don’t support the latest technology.

Furthermore, health insurers also anticipate higher expenses as tariffs proposed by the Trump Administration may increase the cost of imported medical devices and prescription drugs.

Many carriers are adjusting their 2026 premiums upward beyond normal projections, citing the expected rise in drug costs. For instance, UnitedHealthcare of New York has attributed a 3.6% premium increase to the potential effects of these tariffs on prescription medications⁶.

The increasing usage of glucagon-like peptide-1 receptor agonists (GLP-1 RAs) to control weight loss and diabetes has also led to an increase in prescription drug spending by insurance carriers. According to a study from JAMA Network Open⁷, part of the American Medical Association (AMA), spending on GLP-1s increased by more than 500% from 2018 to 2023.

This, in part, has led to an increase in insurance premiums. KFF Health News reports that some insurers are now eliminating or restricting GLP-1 coverage to better control rising costs⁸.

4. Many Americans don’t choose their own healthcare plan

About 154 million American workers have an employer-sponsored health insurance policy. However, employers typically don’t consult their employees when choosing their group plan.

Employers often decide their policy based on budget, available health insurers, location, and administrative burden. That means half of Americans don’t make any consumer decisions about their cost of care or insurance plan.

In 2024, the average premium for individuals with employer-sponsored health insurance was:

$746/month for self-only coverage
$2,131/month for family coverage⁹

Each plan will likely have an annual deductible, coinsurance, and copayments that can increase out-of-pocket costs.

When private insurers encourage employers to buy expensive group plans for tax reasons, they leave employees in a financial bind. Even low- or no-deductible health plans with small copay amounts can encourage overuse of care. This drives up demand and cost.

Other individuals who don’t necessarily have a choice in their health plan are those enrolled in Medicaid. Many states don’t have an expanded Medicaid program, limiting access to affordable care. Rural residents who depend on Medicaid face even greater barriers, such as long travel distances, limited transportation options, and shortages in local healthcare providers.

Additionally, the One Big Beautiful Bill Act (OBBBA) would significantly change Medicaid, with proposed cuts of roughly $900 billion over the next decade¹⁰. These financial reductions could push states to tighten eligibility rules, reduce benefits, and shift more costs onto enrollees.

Reduced funding would force many rural hospitals to eliminate certain medical services or shut down entirely. To offset any closures, nearby hospitals may see costs rise by as much as 3.6% to service displaced patients, straining lower-income individuals and already stretched facilities¹¹.

5. There’s a lack of information about medical care and its costs

Despite the wealth of information online, there’s no uniform way to understand treatment options and the cost of healthcare. We’d never buy a car without comparing models, features, gas mileage, out-of-pocket cost, and payment options. But this is how we buy healthcare.

Almost nine out of ten U.S. adults have trouble with health literacy, which is how well people understand basic health information¹². This lack of knowledge can lead people to make the wrong choices when choosing medical care, which can be costly.

But even when hospitals make their prices available, they’re often challenging to navigate and understand. Congress passed the No Surprises Act in 2022 to mitigate this lack of transparency.

The No Surprises Act aims to do the following:

Reduce surprise medical bills under private health insurance plans.
Improve the patient experience.
Control costs of health conditions.
Reduce balance billing.
Provide individuals with Good Faith Estimates.

6. Hospitals and providers are well-positioned to demand higher prices

Mergers and partnerships between medical providers and insurers are common.

These partnerships allow hospitals to:

Expand service offerings
Broaden networks
Increase access to specialists
Better serve patients

However, they also reduce individual market competitiveness. The lack of competition allows providers and health insurance companies to drive up their prices unopposed. This can lead to higher hospital charges and lower quality of care.

Consolidated private insurance companies can secure lower prices from healthcare providers because they have more bargaining power. But even so, studies have found that lower provider prices don’t necessarily translate to lower premium prices for consumers.

7. Fear of malpractice lawsuits

Frequently called “defensive medicine,” some doctors will prescribe unnecessary tests or treatment out of fear of facing a lawsuit.

The annual price for these treatments varies and increases over time. A study found that defensive medicine costs around $46 billion to $300 billion yearly. This makes up almost 3% of national healthcare spending¹³. This isn’t surprising, given that our current system supports the fee-for-service model.

Just over 31% of U.S. doctors have been sued by a patient during their career¹⁴. To avoid this, some medical providers perform unnecessary tests to cover all their bases, leading to wasteful health spending.

8. Medical inflation’s impact on the economy

Medical inflation has increased due to patients receiving more medical care. Like other industries, inflation affects medical operations, pharmaceuticals, administration, and facilities costs. Healthcare providers have also taken a hit due to staff shortages, lower wages, and increased prices for medical supplies, which they then pass on to consumers at higher costs.

As of June 2024, the annual inflation rate was 3%¹⁵. However, the medical inflation rate was even higher, at 3.3%. Additionally, some services and items saw higher prices for care than others.

Medical service	Annual inflation rate
Hospital services	6.9%
Nursing care facilities	6%
Prescription drugs	2.4%
Medical equipment	0.8%
Physician services	0.8%

Many people worry that healthcare inflation will exceed their annual income. So, they cancel or postpone their care until their finances are in order. However, chronic illnesses and severe medical conditions can contribute to increased costs and insurers taking on more risk, leading to higher plan premiums and deductibles. Therefore, patients should get healthcare sooner rather than later.

9. The U.S. population is growing older

Baby Boomers comprise almost 20% of the U.S. population and are retiring quickly¹⁶. According to the U.S. Census Bureau, Americans aged 65 and older will be nearly 23% of the population by 2050¹⁷. This means the U.S. healthcare system will have more Medicare enrollees.

Because Medicare is a federal government program, more participants impact healthcare costs for everyone. The U.S. spent $1,029.8 billion on Medicare in 2023¹⁸. CMS projects that Medicare costs will rise to 7.6% annually until 2028 to support future enrollees¹⁹.

Older individuals also tend to spend more on healthcare than younger people. They often need frequent primary care services, prescription drugs, or treatment for a chronic condition. Yet, these services and items can lead to wasteful spending and higher medical bills.

How an HRA or stipend can help fight rising healthcare costs

Because healthcare spending continues to increase, it’s a great time to offer your employees a personalized health benefit. One of the best options for small employers is an HRA.

With a stand-alone HRA, you can reimburse your employees, tax-free, for their individual health insurance premiums and out-of-pocket medical costs. HRAs help you manage your health benefits budget and avoid unexpected rate increases. You can also create customized plan designs and give your employees more control over their healthcare spending.

Below are two types of HRAs that are alternatives to a group health insurance policy:

The individual coverage HRA (ICHRA) is for organizations of all sizes. To use the benefit, employees must have a qualified individual health plan. Those with health insurance through their spouse’s group plan or who participate in healthcare sharing ministries are ineligible unless they enroll in a qualifying individual health plan.
The qualified small employer HRA (QSEHRA) is for companies with fewer than 50 full-time equivalent employees (FTEs). Organizations can’t offer a group plan with a QSEHRA. With a QSEHRA, employees must have a qualified health plan that provides minimum essential coverage (MEC) to participate.

If your company already offers a group plan, there’s an HRA for you. Integrated HRAs, or group coverage HRAs (GCHRAs), are for employers of all sizes. With a GCHRA, you can supplement your group plan by reimbursing employees for out-of-pocket medical expenses. Examples of eligible costs include deductibles, coinsurance, and copays.

Integrated HRAs work with any group health policy. However, you can save even more by using a high deductible health plan (HDHP) with an integrated HRA. You and your employees save money on your monthly plan premiums, and the HRA will cover out-of-pocket costs that the HDHP may not cover. However, only employees enrolled in your group plan can participate in an integrated HRA.

Employee stipends

You can also offer your employees a health or wellness stipend. With a health stipend, employees receive a fixed, taxable amount of money to spend on out-of-pocket medical bills, including insurance premiums. Employers typically add the extra funds to employees’ paychecks.

You can also offer a wellness stipend to encourage healthy habits, reduce chronic health conditions, and improve morale. These stipends allow you to give your employees money for gym memberships, fitness apps, mental health counseling, and more.

Unlike HRAs, the IRS doesn’t consider stipends as formal health benefits. Your employees can spend their money on whatever they choose, even if it isn’t health-related. You also can’t ask them to prove they purchased medical care or require them to provide you with medical receipts. A stipend also doesn’t satisfy the ACA’s employer mandate for applicable large employers (ALEs). For most employers, a stand-alone HRA is a better option.

Conclusion

There’s no one reason to blame for rising health costs. Knowing the key factors can help you understand your options when offering health benefits to your employees. If you’re interested in providing a personalized HRA to offset spikes in healthcare costs, PeopleKeep by Remodel Health can help. With an HRA, you can keep your health benefits budget low while providing your employees with greater coverage. Schedule a call with an HRA specialist to learn more.

This article was originally published on May 9, 2014. It was last updated on September 5, 2025.