There is a comfortable story most employers tell themselves about why health benefits cost so much: the price of everything is going up, and doctors are expensive. It is intuitive. It is also wrong. Adjusted for inflation in practice costs, Medicare's payment to physicians has fallen 33% since 2001 — even as the cost of running a practice rose 59% over the same period (AMA, 2025). The clinician at the center of the system is not the line item driving the curve.
So where is your healthcare dollar going?
The United States spent roughly $5.3 trillion on health care in 2024 — about 18% of the entire economy, or some $15,500 for every person in the country (CMS, National Health Expenditure Accounts, 2024). The interesting question is not how big that number is. It is where the money goes — and which part of it is buying actual health care.
Where the dollar officially goes
The federal government tracks this precisely. By the Centers for Medicare & Medicaid Services' official accounting, every dollar of U.S. health spending in 2024 broke down roughly like this:
Hospital care takes the largest share at 31 cents. Physician and clinical services account for 21 cents. Retail prescription drugs are 9 cents. Notably, "government administration and the net cost of health insurance" — the line most people would point to as the bureaucracy — is just 7 cents (CMS, "The Nation's Health Dollar — Where It Went," 2024).
Seven cents. If administration were really that small, it would barely be worth discussing. But that 7 cents is one of the most misleading figures in American health care.
The 7 cents is the tip of the iceberg
The official "administration" line captures only the overhead that lives inside insurers and government programs. It does not capture the enormous administrative cost baked into every other slice — the billing departments, coding staff, claims-appeal teams, and prior-authorization labor that hospitals and physician practices must maintain simply to get paid in a fragmented, multi-payer system. (That is what the orange in the chart above represents: the share of each category that is administrative rather than care.)
When researchers added all of that up, the picture changed completely. A peer-reviewed analysis in the Annals of Internal Medicine found that insurers and providers together spent $812 billion on administration in 2017 — 34.2% of national health expenditures (Himmelstein, Campbell & Woolhandler, Ann Intern Med. 2020;172:134-142). Not 7 cents on the dollar. Closer to 34 cents — nearly five times what the headline number suggests. Hospitals alone run roughly 25% administrative cost (Himmelstein et al., Health Affairs 2014), and at physician practices, billing and insurance-related work consumes anywhere from 8% to 25% of revenue depending on the type of visit (Tseng et al., JAMA 2018).
One caveat, stated plainly: that 34-cent figure is a synthesis, not a single clean measurement. It stitches the government's official accounting together with separate peer-reviewed studies of hospital and physician administrative cost, and the remaining portion is extrapolated to reconcile with the full-system estimate — so the build is, by its nature, partly an estimate. The precise number is debated; reasonable analysts land anywhere from the high 20s to the mid 30s. What is not in dispute is the direction and the scale: administration consumes a far larger share of the dollar than the official 7 cents lets on.
The friction is real and it is measurable. In the American Medical Association's 2024 national survey, physicians reported completing an average of 39 prior-authorization requests per week, consuming roughly 13 hours of physician and staff time, and 40% of practices now employ staff who do nothing but prior authorizations (AMA, 2024 Prior Authorization Physician Survey). None of that labor shows up as "administration" in the official dollar. It shows up inside the 31-cent hospital slice and the 21-cent physician slice — disguised as the cost of care.
A quarter of the dollar is waste — and the biggest piece has no known cure
If administration is hidden, waste is hiding in plain sight. A landmark JAMA analysis estimated the cost of waste in the U.S. health system at $760 billion to $935 billion a year — roughly 25% of all spending (Shrank, Rogstad & Parekh, JAMA. 2019;322(15):1501-1509).
The single largest source of that waste was not overtreatment, not fraud, not pricing. It was administrative complexity, at an estimated $265.6 billion. And here is the part that should stop any benefits decision-maker cold: when the researchers searched the literature for interventions proven to reduce administrative waste, they found none. Every other category of waste had at least some evidence-based remedy. The biggest bucket had no studied solution at all.
That is not a problem a plan sponsor buys its way out of with another point solution. It is a problem that has to be designed around.
The intermediaries pricing your plan — that you never see
The same pattern of hidden cost repeats in the pharmacy supply chain. Three pharmacy benefit managers — CVS Caremark, Express Scripts, and OptumRx — now process about 79% of all U.S. prescription drug claims, and the six largest control roughly 94% (FTC, Pharmacy Benefit Managers staff report, 2024; KFF, 2025).
These firms are not passive pass-throughs. Each of the three is vertically integrated with one of the country's largest insurers, each retains a portion of the rebates it negotiates, and the pricing logic is opaque enough that the Federal Trade Commission spent two years investigating it — securing a structural settlement with Express Scripts in February 2026 aimed squarely at the rebate practices that inflate what plans and patients pay (FTC, 2026). A meaningful slice of the 9-cent drug line is not paying for the medicines themselves. It is paying for position in a market a handful of firms control.
What this means if you are the one paying
And all of this cost — the hidden administration, the waste, the intermediary margins — falls to one place: the owner of the health plan, the employer. Whether it arrives directly, as claims under a self-funded plan, or indirectly, as next year's premium increase under a fully-insured one, it always lands on the same desk. The employer owns the cost whether or not it owns the decisions.
Put the evidence together and a single conclusion emerges:
The leverage in health-care cost is not in the clinical layer. It is in the administrative and intermediary layer that sits between the employer, the employee, and the care.
This reframes the entire problem. The instinct — squeeze provider rates, shift more cost onto employees, shop for a cheaper plan — aims at the clinical slices, which are not where the runaway cost lives. Meanwhile the administrative and intermediary layers, the part actually driving the curve, go untouched, because in a conventional arrangement no one on the employer's side owns them. The insurer has little incentive to dismantle overhead it profits from. The broker is often paid on the very complexity that creates the cost. The PBM's economics depend on the opacity. The complexity is not an accident. It is the product — and as long as it pays the people who manage it, it will not simplify itself.
Every employer pays for this, whether it funds its own plan or buys a fully-insured one. The difference is only how much leverage you have to do something about it. Self-funded and captive employers have the most direct path — they can step out from under insurer overhead and own the operating layer rather than rent it. But even a fully-insured employer can refuse to treat its health spend as a fixed cost of doing business: insisting on claims and fee transparency, auditing the PBM arrangement and its rebate flow, challenging low-value utilization, and bringing independent clinical judgment to renewal negotiations instead of accepting whatever the carrier presents. What every one of those moves requires is the same thing the system is built to discourage — someone on the employer's side who actually understands medicine and is paid to reduce cost rather than to perpetuate complexity.
That role — an independent, physician-led medical function seated on the employer's side of the table, rather than embedded in the insurer's — is the structural answer the data keeps pointing toward. Not a cheaper vendor. A different relationship between an employer and medicine itself.
The hidden 34 cents is the whole argument for why that role has to exist.
Sources
- NHE Fact Sheet - Centers for Medicare & Medicaid Services
- Medicare physician pay has plummeted since 2001 - American Medical Association
- Health Care Administrative Costs in the United States and Canada - Ann Intern Med
- A Comparison of Hospital Administrative Costs in Eight Nations - Commonwealth Fund summary
- Administrative Costs Associated With Physician Billing and Insurance-Related Activities at an Academic Health Care System - JAMA
- Waste in the US Health Care System: Estimated Costs and Potential for Savings - JAMA
- 2024 Prior Authorization Physician Survey - American Medical Association
- Pharmacy Benefit Managers staff report, 2024; KFF, 2025 - Federal Trade Commission
- What to Know About Pharmacy Benefit Managers - Kaiser Family Foundation
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