The Business Model of Healthcare

• CMS actuaries (published in Health Affairs, reported by Medical Economics, 14 Jan 2026): 2024 spending rose 7.2% to $5.3 trillion, or $15,474 per person, 18.0% of GDP (17.7% in 2023).
• Hospital care was $1.6 trillion (31% of the total), physician and clinical services $1.1 trillion (21%), prescription drugs $467 billion (9%).
• Medicaid enrollment fell to 84.3 million from a 2023 peak of 92.2 million; 91.8% of people were insured, about 28 million uninsured.

On 4 February 2026 Express Scripts settled the FTC administrative case on its pharmacy benefit model (JD Supra and law-firm summaries, Feb 2026). The consent order sets 10 years of operating commitments covering formularies, pricing, transparency and compensation, moves patient cost-sharing toward net rather than list prices, and includes drug-level reporting. On 3 March 2026 the FTC extended the stay of its case against OptumRx and Caremark Rx to allow settlement talks.

Per Pharmacy Times and The Pharma Letter coverage, the TrumpRx cash-price site launched on 5 February 2026 with 43 brand-name drugs at discounts of 50-70%, and all 17 drugmakers first sent most-favored-nation letters have signed deals; a White House fact sheet puts the total at 26 companies covering about 89% of the branded market. Most announced discounts apply to Medicaid or cash buyers outside insurance.

The enhanced premium tax credits expired at the end of 2025. Reported CMS data show about 22.8 million 2026 marketplace sign-ups, roughly 1.4 million fewer; KFF found average deductibles rose from $2,759 to $3,786, and a KFF survey of enrollees (Feb-Mar 2026, 1,117 respondents) found 9% had become uninsured. CBO projects about 2 million more uninsured this year.

KFF's 2025 Employer Health Benefits Survey (22 Oct 2025) found average family premiums of $26,993, up 6%, with workers paying $6,850. KFF's 2026 analysis shows 55% of eligible Medicare beneficiaries in Medicare Advantage; UnitedHealth and Humana together hold 46% of enrollees.

• Q3 2026 (reported 13 Oct 2026, via Pulse 2.0 and Fierce Healthcare): revenue $112.7 billion, earnings from operations $6.6 billion (from $4.3 billion), medical care ratio 88.4% (from 89.9%, including $610 million of favorable prior-period reserve development).
• Optum Health earned $735 million (from $41 million) while exiting value-based care markets where it lacked scale; Optum Insight $1.28 billion; Optum Rx $1.72 billion on $39.9 billion revenue. Together about 57% of group operating earnings.
• Full-year adjusted EPS guidance was raised to at least $20.50; management said commercial cost trend is running above the 11% it first expected.

Not refreshed: the CVS Caremark and OptumRx settlement status (sources conflict), commercial/government coverage shares, PBM market shares, margin and ROIC by sector (2017 data), the spending-share chart (2021 mix), international per-person comparisons (2022), Medicare outlays after 2022, and the Humana value-based care figures. Medicaid changes in the 2025 budget law could not be verified.

• Follow the dollar. We trace one healthcare dollar from premium to profit, not the biology.
• Three actors, one system. Payers pay, providers deliver, patients receive, but rarely choose.
• Margins are the point. We always ask who actually keeps the money, and why.
• Every figure is sourced. Costs, shares and returns come from CMS, KFF, CBO and OECD, dated.

• Prices, not quantity. Americans don't use much more care, they are charged far more per unit.
• A fragmented market. Thousands of payers cannot bargain like one national buyer.
• Administrative overhead. Billing, coding and middlemen add cost at every hand-off.
• Fee-for-service. Paying per procedure rewards doing more, not keeping people well.

1. Money in: employers, workers and taxpayers fund premiums and payroll taxes.
2. Payers pool it: insurers and government programs hold the pooled risk.
3. Middlemen route it: PBMs and networks negotiate what is actually paid.
4. Providers earn it: hospitals, physicians, pharma and device makers deliver the care.
5. Margin settles: where the dollar sticks is not where the care happens.

Insurance is not saving for a rainy day: it is pooling everyone's rain so that no single family drowns in a bill.

A $150k cancer diagnosis is unaffordable alone; split across a pool of the healthy and the sick, it becomes a manageable monthly premium.

• Underwriting profit: premiums earned minus the claims paid out, the core spread.
• Investment income: premiums are invested in bonds before claims come due, the float.
• ASO admin fees: fee-based management for self-insured employers, with no claims risk.
• Medicare Advantage: ~$1,200 per member per month from government, keep what you don't spend.

1. HMO (rigid and cheap): strict network, PCP gatekeeper, 13% of enrollment.
2. POS: HMO plus out-of-network option, 10%.
3. PPO: broad network, no gatekeeper, 47%.
4. CDHP: HSA plus high deductible, 29%.
5. Conventional (flexible and costly): any provider, any bill, 1%.

• High fixed cost. Land, building, equipment and staff must be paid whether beds are full or empty.
• Location is destiny. It sets competition, labour cost and, crucially, payer mix.
• Volume pays it back. Empty beds still cost money; throughput is everything.
• Payer mix decides profit. Commercial pays ~2x Medicare; Medicaid pays less than cost.

1. 1965Medicare & Medicaid: federal insurance for the elderly and poor is created.
2. 1983Prospective Payment System: Medicare pays fixed rates per stay, not costs incurred.
3. 1990s-2000sThe outpatient shift: care flees expensive inpatient beds for cheaper settings.
4. 2010Affordable Care Act: coverage expands; the MLR reshapes payer incentives.
5. 2020sVertical integration: payers buy providers to escape the margin cap.

A dot plot compares the cost of the same visit at an emergency room versus an urgent care clinic for five conditions: urinary tract infection, sinusitis, strep throat, sore throat and earache. For each, the urgent-care dot sits far to the left of the emergency-room dot. Exact dollar values are not labelled on the chart.

1. Buy with leverage: debt funds the deal and magnifies the equity return.
2. Roll up: combine facilities for pricing power over insurers.
3. Cut costs: consolidate admin, IT and headcount.
4. Raise utilization: push more billable services through the same assets.
5. Raise prices: NBER finds PE-acquired practices charge measurably more.
6. Exit: sell the enlarged platform at a higher multiple.

1. Manufacturer: makes the drug, sets the sticker 'list' price.
2. Wholesaler: distributes to pharmacies at national scale.
3. Pharmacy: dispenses the drug to the patient.
4. PBM & insurer: decide coverage, rebates and copays behind the counter.

A patent buys ~7-12 years of monopoly after approval; the day it expires, generics enter and cut the price ~80% (biosimilars cut biologics ~50%). Pharma's whole model is to earn back its ~$1.5B average development cost before that cliff arrives.

The company that never touches a pill often sets its price: the pharmacy benefit manager sits between drugmaker and insurer, and is paid by both.

PBMs build the formulary (the list of covered drugs) and collect rebates from manufacturers for good placement on it.

A scatter plot maps profit margin (horizontal axis) against return on capital (vertical axis), in four quadrants: thin margin with fat returns (top-left), the best of both (top-right), squeezed (bottom-left), and fat margin with thin returns (bottom-right). Pharmacies, PBMs and health insurers sit in the top-left, thin margin and fat returns. Pharma sits at the far right, near the middle vertically, labelled the best of both. Medical devices sit near the centre. Hospitals sit low and slightly left of centre, with weak returns.

In healthcare, the businesses that touch the least care often earn the highest returns on the least capital.

The pharmacy counter and the PBM's spreadsheet out-earn the hospital's operating theatre, which is why capital keeps flowing to the middle of the chain.

1. Fee-for-servicePaid per procedure; rewards doing more. Paid for volume.
2. Pay-for-performanceFees plus quality bonuses.
3. Bundled paymentOne price for an episode of care.
4. Shared savingsKeep part of what you don't spend.
5. Full risk / capitationA fixed sum per patient; provider owns the risk. Paid for value.

1. Collect premiums under the MLR cap.
2. Own the PBM, clinics and data.
3. Keep the spend in-house.
4. Capture margin the cap forbids.
5. Reinvest in more providers.

The diagram is titled 'The Optum playbook' and shows the five steps above in a loop.

• Value-based care: paying for outcomes instead of volume.
• Vertical integration: payers owning providers, PBMs and data.
• Telehealth: virtual visits run ~72% cheaper than in-person.
• Retail clinics: CVS MinuteClinic and grocery-store primary care.
• Generative AI: ambient scribes reclaim the ~62% of time lost to paperwork.
• Cost-plus pharmacies: Mark Cuban's model bypasses the PBM entirely.

• Payer: whoever pays the bill, a private insurer or a government program.
• Provider: whoever delivers care, a hospital, physician or pharmacy.
• PBM: pharmacy benefit manager, the middleman that sets drug coverage and prices.
• Formulary: the list of drugs an insurer covers, organised into cost tiers.
• MLR: medical-loss ratio, the ACA rule that insurers spend ~80-85% of premiums on care.
• ASO: administrative-services-only, a self-funded plan where the employer bears the risk.
• Medicare Advantage: privately-run Medicare, paid a fixed sum per member per month.
• Value-based care: paying providers for outcomes and prevention, not volume of services.

America built a healthcare system that spends the most, insures fewer, and lives shorter, not because anyone designed it that way, but because everyone in the chain is behaving exactly as their incentives demand.

1. Follow the dollar, not the headlines: the money and the outrage point different ways.
2. Prices, not usage, drive the bill: fragmentation and fee-for-service are the causes.
3. Margin hides where value is captured: capital-light middlemen earn the best returns.
4. Incentives explain the outcomes: volume-based pay produces volume, not health.
5. Integration is the system's answer: payers are becoming providers to keep the margin.

• CMS: National Health Expenditure Accounts (2021-23).
• Peterson-KFF Health System Tracker: spending, prices and outcomes.
• Kaiser Family Foundation: insurance coverage, Medicare Advantage and Medicaid analyses.
• CBO: drug development cost and R&D intensity analyses.
• OECD: comparative health and pharmaceutical spending (2019-22).
• Deloitte: Return on Capital Performance in Life Sciences & Health Care (SEC filings, 2017).
• NBER; American Antitrust Institute: private equity in healthcare.
• Company disclosures (UnitedHealth, Eli Lilly) and industry data; figures marked 'est.' are compilations.