Welcome to my overview on the US healthcare system. I developed this because so many founders have basic questions about how healthcare in the U.S. works or are choosing not to engage it because of how intimidatingly complicated it seems.
Well, the U.S. healthcare system is complicated, but it’s this complexity that creates opportunities for creative problem-solvers with innovative solutions. The system is the perfect playing ground for digital health founders, I believe, and hopefully this overview can help you understand the plethora of opportunities that exist over there.
Why should you care about the US Healthcare System as a Digital Health founder?
The U.S. Healthcare Market Is Huge
The U.S spends over $4.5 trillion a year on healthcare—more than any other country. In addition, Americans spend about 2x as much “out-of-pocket” than Germans do.
Investors Love Digital Solutions
Digital health and Digital Healthtech is uniquely positioned to take on some of the biggest challenges with the US Healthcare system. Innovation is how the US manages costs and ensures quality, and payers will consider any product or device that promises either.This means lots of B2B opportunities, which I flag throughout this post.
Plenty of Market Entry Points and Ways of Getting Reimbursed
There are so many different types of payers in the US Healthcare system – from hospitals, insurers, employers, and of course, consumers. Unlike Germany, you can sell an approved-for-marketing product to any payer
I start this overview, well, with an overview – a one sentence definition of the U.S. healthcare system that flags its most fundamental and long-standing features.
Ok, here it is:
“A heterogeneous system with no overarching regulatory body (think: Germany’s BfARM) characterized by an entitlement to consumer choice, cutting-edge treatments and therapies, high costs, and innovative, self-directed initiatives to ensure quality and control costs.”
I’ve defined the bold-faced terms further below. I have to say, it’s a pretty good definition!
The US healthcare system has it all – single provider health system (for veterans), public insurance (Medicare and Medicaid), private insurance, employer- or group-based plans, individual insurance plans, and self-paying public (yes, there are Americans who choose not to be insured). Care is provided through single-payer networks, hospital systems, and fee-for-service payment arrangements – you name it, we have it.
Healthcare has always been marketed like a consumer good and Americans believe they have the right to whatever treatment and therapies they want, which is why direct to consumer marketing was able to become a thing in the US. Along these lines, “socialized medicine”or mandatory anything are non-starters in US politics and health policy (the current take-down of quasi-mandatory vaccination policies in the U.S. is a good case in point).
This one goes without saying. Consumer-driven demand for new and innovative therapies and treatments (and their willingness to pay for it) keep the wheels of innovation turning.
Laughably high costs from a European perspective. In the U.S., insuring a whole family would cost you around $25,000 per year for pretty sub-standard insurance with high co-pays, premiums and deductibles (more on this later). Because there is no BfARM equivalent, drug manufacturers set whatever price they want (e.g., why Trump claims the US subsidizes drug costs for Europeans). Doctors, in particular specialists and surgeons, are among the best paid professionals in the US (average salary for a general surgeon: $430,000 per year, and for an orthopedic surgeon – one of the highest paid medical specialties – this jumps up to $800,000 per year.)
With the exception of the FDA, which approves all drugs and medical devices sold in the US, there is no overarching government body controlling quality and costs across the United States. Rather, professional associations, states, federal agencies, healthcare service networks, patient and advocacy groups, and insurers work to control quality and costs through increasingly innovative instruments and mechanisms (more on this later too).
Best to start with the lay of the land. With the exception of some military personnel and veterans who receive care from government-owned facilities, most Americans receive their healthcare from privately owned entities – everything spanning a single-physician private practice to private, nonprofit corporate conglomerates (note the private, nonprofit aspect of these conglomerates, which means they are not share-holder owned like a typical corporation). Another important feature is that the healthcare market is always in flux, with private practices getting absorbed into integrated health systems one year and switching to another health system the next, or simply opting to be private again. The practice may look exactly the same (same lobby, receptionist, and providers), but will suddenly be part of a new or a different corporate entity. This flux is constant, and dizzying, and often frustrating if you want to keep the same provider or use the same hospital as you’ve done in the past.
Hospitals in the US aren’t just hospitals. Many are part of large regional or national chains or integrated health systems that own hospitals and outpatient clinics. Some of the big hospital systems in the US include Mayo Clinic, Cleveland Clinic, UPMC, and Mass General Brigham, and Johns Hopkins.
There’s a long-standing trend also toward larger integrated health systems, examples include HCA Healthcare, Kaiser Permanente, and Ascension. These systems have massive negotiating leverage with insurers. Importantly, because they control entire regions, they are also invested in ensuring long-term care and outcomes for the patients in their area, and are therefore some of the most innovative players in the US healthcare scene. Some names to watch out for include Kaiser Permanente, Intermountain Healthcare, and Geisinger Health. These organizations are recognized for advancements in coordinating care, personalizing medicine, adopting new technology, and developing novel care delivery models. All good stuff!
Around 40-50% of providers work in a privately owned practice with 10 or fewer providers. These types of practices span the fields of medicine and are particularly common for ophthalmology, orthopedic surgery, other surgical specialties, and psychiatry. However, trends show private practice is a dying model, and probably for the best, given the perverse incentives of the model to provide as much reimbursable services as possible.
Well, the short answer is: nobody and everybody. Unlike Germany (where costs are centrally negotiated), U.S. healthcare prices are the outcome of negotiations between a messy cast of players, each with its own agenda, incentives, and leverage. The end result is the famously high, often unpredictable, and wildly inconsistent prices Americans face for the same service depending on where they live, who they work for, and which insurance they carry. The result is the highest healthcare spending in the world with highly variable pricing that is, sadly, rarely connected from quality or outcomes.
Below is a further breakdown of the main actors that shape costs:
Hospitals and physician groups have enormous pricing power, especially in markets where they dominate. Consolidated health systems can essentially dictate their rates to insurers (“you want our flagship hospital in-network, you’ll pay our rates”), which is why hospital prices vary so dramatically across the U.S. Specialist physicians also drive costs, especially in high-demand fields like orthopedics, cardiology, and surgery.
Insurers negotiate rates with providers and then pass costs along to employers and consumers in the form of premiums, deductibles, and co-pays. They keep costs in check by building networks (discounts for “in-network” providers) and imposing utilization management (things like prior authorization, step therapy, and referrals). But their negotiating power only works in fragmented provider markets. In highly consolidated markets, they often have to accept the providers’ terms.
Employers cover healthcare for about half of Americans and increasingly act like payers themselves through self-insurance. Large employers (think Walmart, Boeing, Amazon) can use their leverage to negotiate direct contracts with health systems or carve out “centers of excellence” for expensive surgeries. They also put pressure on insurers to design cheaper plans — or take on more risk themselves — which shapes cost trends for everyone.
Medicare and Medicaid set administered prices — essentially government fee schedules for hospital and physician services. Medicare rates are generally much lower than what commercial insurers pay, but they act as a market “anchor.” Medicaid rates are even lower (and vary by state), which is why many providers refuse Medicaid patients. Medicare in particular plays an outsized role, since private insurers typically pay 2–3x Medicare rates for the same service.
Drug and device companies set their own list prices, unlike in Europe where governments negotiate centrally. These prices are only loosely constrained by market forces. The U.S. government cannot (yet) negotiate most drug prices, though Medicare has recently gained some authority in this area. As a result, pharma pricing is a major driver of overall spending.
PBMs (like CVS Caremark, Express Scripts, and OptumRx) act as middlemen between insurers, employers, and drug manufacturers. They negotiate rebates and discounts in exchange for putting certain drugs on formularies (the list of covered medicines). But because PBMs keep part of these rebates, the system actually rewards higher list prices. PBMs also control how much pharmacies are reimbursed and often steer patients toward mail-order or preferred pharmacies they own. In practice, they’re one of the least understood but most powerful actors in U.S. cost-setting.
Americans pay far more out-of-pocket than Europeans, especially in high-deductible health plans. In theory, this gives consumers “skin in the game” to shop around. In practice, the opacity of pricing and complexity of insurance rules makes real comparison shopping nearly impossible. Still, in niche markets like LASIK or cosmetic surgery (not covered by insurance), patients’ willingness to pay directly has helped stabilize or even reduce prices.
Well, mostly through health insurance. The majority of Americans get their health insurance through their employers. A sizeable portion of Americans are on publicly-funded forms of health insurance. About 25 million Americans, or about 8%, are uninsured (a number that is sure to grow in the coming years). Also, a considerable amount of Americans pay for healthcare ‘out-of-pocket’ – i.e., directly and not through insurers. Americans spend about $50-$100 billion (depending on what you include in this number) on services and products NOT traditionally covered by health insurance.
Strangely, Americans also feel entitled to the right NOT to have to have health insurance – a reason why the Affordable Care Act – or “Obamacare” – was not able to institute mandatory insurance coverage, like you have here in Germany. These Americans opt to pay for healthcare directly, out-of-pocket, and tend to take advantage of some programs that enable them to put some of their income in tax-free accounts used only for healthcare expenses.
Below is a further breakdown, ordered by the percentage of use:
Employers cover much of the healthcare costs for about 50% of Americans through providing fully-insured and self-insured healthcare plans.
In these plans, an employer pays a large insurance provider to take on the job of paying the healthcare costs of its employees. The cost for paying an insurance provider (called a premium) is high, but in exchange the insurance company pays your employees bills and takes on all risk. This is the easiest path for employers but rather quite expensive. Insurance companies that commonly contract with employers include UnitedHealthcare, Elevance Health (formerly Anthem), Kaiser Permanente, Centene, Humana, Cigna, Aetna (part of CVS Health), and Blue Cross Blue Shield.
This is where an employer sets aside a fund to cover the healthcare costs of their employees directly. They take on all the risk in terms of paying the medical bills of their employees. This is becoming a more popular approach among employers because it’s cheaper. Two downsides: very challenging to manage (employers will often outsource the administration of these plans to, wait for it, insurance companies), and high risk, as the employers must fork out the cash to pay for agreed upon coverage. This is why employers themselves are an important marketing target for innovative products and services, especially if they support managing these plans and reduce risks.
Given the costs of fully insuring employees, or risks and administrative overhead of self-insuring employees, many employers are turning to ICHRAs instead, where they reimbursement employees (tax free!) for the cost of buying health insurance as an individual over the Affordable Care Act’s Individual Marketplace (this is the thing that Obama set up to help pool risk of uninsured Americans and set some humane guidelines on insurance companies to participate – more on this later). This model is growing fast, and some expect it will grow to become a major model for employer-sponsored health insurance moving forward.
About 36% of Americans are enrolled in publicly-funded health insurance programs like Medicaid and Medicare that pay for healthcare.
Medicaid programs are state- and federally-funded insurance programs for the poor and disabled that are managed by all states and territories in the US. These 54 state- and territory-run Medicaid programs collectively cover about 21% of Americans. These programs are, sadly, notoriously underfunded. A growing number of providers will not accept Medicaid patients because reimbursement rates are just awful – a huge problem for ensuring healthcare access to poor and disabled Americans.
Provides health insurance to 15% of Americans (essentially every American 65 years old and over plus a few younger Americans with certain disabilities and conditions). Hugely popular publicly funded health insurance program for Americans aged 68 and over. Medicare is an entitlement program, which means every retired American is entitled to this benefit as a result of paying into the system throughout their working lives. Medicaid, on the other hand, is not an entitlement system.
About 4% of the US population, but only those in the military or who served in the military.
TRICARE is effectively an insurance company for active duty military personnel (and their families) that is fully paid for and administered by the federal government. The VA focuses on veterans, and operates more like a single-provider health system (i.e., all providers are federal employees) you need to go to a VA facility or hospital to get care.
About 6% of Americans buy health insurance as individuals through the health insurance exchanges established by the Affordable Care Act. The ACA was a game changer for self-employed or under-employed Americans as it made it illegal to deny coverage for a pre-existing condition and enabled larger numbers of healthy individuals to get affordable coverage (and hence, lower the cost for everyone). As of 2020, any employer can now use tax-free money to cover the costs of their employees’ health insurance premiums bought over the ACA Marketplace. These arrangements are called Individual Coverage Healthcare Reimbursement Arrangements, or ICHRAs.
If you’ve ever wondered why US healthcare feels like a patchwork of incentives and strange behaviors, the answer often lies in how providers and hospitals get paid. Payment models in the US are not just a “back office detail,” they directly shape how doctors practice medicine, how hospitals deliver care, and where digital health startups can create value. Here are the main approaches you’ll hear about:
This is the OG of US payment models. Providers get paid for each service they perform, which means every test, visit, scan, or surgery comes with a separate bill. The incentive here? Volume. The more a physician does, the more they earn. It’s easy to see why this led to overtreatment, ballooning costs, and frustration for payers. Still, FFS is alive and well, especially in specialist care.
Managed care emerged as an antidote to runaway FFS costs. In this model, insurers contract with a network of providers and negotiate lower rates in exchange for patient volume. Providers are incentivized to keep costs under control, but critics argue managed care sometimes achieves this by limiting access. This is where utilization controls like prior authorization or step therapy come into play.
Think of PPOs as a looser version of managed care. Patients have more flexibility to see doctors and specialists without a strict referral process. Out-of-pocket costs are lower if patients stay “in-network,” but patients can still choose to go “out-of-network” (remember, consumer choice is a big feature of the American healthcare system); they’ll just pay significantly more for it. This flexibility is popular with patients but drives up premiums.
Providers get paid mostly through insurance companies, and they can generally decide which insurance “network” to belong to. “In-network” providers have signed contracts with the insurance company to deliver services at pre-negotiated (read: low) rates. Patients save money when they stay in-network, which means when a provider is in-network, they get more patient traffic, which is why they are willing to negotiate lower rates with payers. “Out-of-network” providers, on the other hand, can bill whatever they want, but insurance companies will only reimburse a fixed price for their services, shifting the cost to the patient.
In this payment model, providers get a fixed monthly payment for every patient they have enrolled in their practice. While this puts providers at risk, it also allows them to innovate in the ways they deliver health and free them from only getting paid for the billable services provided. Providers using these models are often technically savvy, with strong care coordination and digital tools, and are open to trying out new products that can actually profit by keeping patients healthier and avoiding expensive hospitalizations.
Here, the payer gives a single lump sum to cover all the care related to a specific condition or procedure (say, a hip replacement). Providers and hospitals have to divvy it up among themselves. If they manage to deliver the episode of care for less, they keep the savings; if they overspend, they absorb the loss. Bundled payments create strong incentives for coordination and efficiency across providers.
Popular in value-based care programs, these models let providers share in the savings if they deliver care for less than a benchmark cost. More advanced arrangements include “two-sided risk,” where providers also take on losses if costs exceed the target. These models are becoming increasingly important for large provider groups and ACOs.
Payers (health insurance companies, programs like Medicare/Medicaid, and employers) control costs through defining the terms of payment to doctors, hospitals, and other providers. They use a variety of strategies, some of the more popular approaches are listed below:
Capping costs
Payers will cap their payouts to providers either on a per-patient basis or per diagnosis (i.e., diagnosis related groups). Lowering reimbursement rates for providers and hospitals that are in-network.
Referrals, step therapy, prior authorization, concurrent review
Payers only cover services provided to patients when the service has been “preapproved” or referred by a primary care physician. This form of cost control keeps consumer behavior in check. Also called prior authorization (a process where someone within the insurance company determines if the services is necessary), referrals (when a primary care physician deems the service necessary), or step therapy (which forces you to try cheaper therapy prior to using the service – i.e., anti-depressants prior to using transcranial magnetic stimulation for treating depression).
Payers require the consumer to pay for some of the service to keep prices in check. Includes things like co-pays, deductibles, and tiered drug coverage. The idea here is that making patients have to pay a little out of pocket (even as little as $5) will discourage them from pursuing unnecessary services. And it works. This is why Obamacare made charging copays for preventative services illegal, which dramatically enabled the use of preventative services.
Not well, unfortunately. It’s a well known fact that the US healthcare system is the most expensive with the least ROI in terms of health and improved outcomes. The core issue has historically been misaligned incentives: physicians got paid for doing more, not necessarily for doing better. Care has been fragmented, uncoordinated, and often not based on best practices. So what’s being done about it? Payers and providers are experimenting with new mechanisms to link payments to outcomes and create some accountability for quality. Back in the day, I supported Centers for Medicare and Medicaid Services (CMS) in paving the way for many of these models through their Medicare Advantage (essentially MCOs for Medicare) programs.
This is the umbrella term for models that reward providers for keeping patients healthy, not just for providing more services. It can take many forms: bonuses for hitting quality benchmarks, penalties for hospital readmissions, or shared savings when a provider manages to keep costs under a target. VBC is still a work in progress but represents a fundamental cultural shift.
Under P4P schemes, providers get financial incentives for hitting specific clinical or operational targets, like reducing hospital-acquired infections or ensuring diabetic patients get regular HbA1c tests. On paper it makes sense; in practice, it has been shown to create a “checklist medicine” mentality where hitting the metric matters more than treating the patient holistically. This may be better than paying for volume, but still not ideal.
ACOs are groups of providers (doctors, hospitals, clinics) that band together to coordinate care for a defined patient population. They share in any savings if they keep costs down while meeting quality benchmarks. ACOs are one of the more promising experiments in solving the coordination problem, though success varies widely. Medicare is a big innovator in this area.
Some payers are turning to the consumer side, providing apps and portals that show cost estimates, provider ratings, or even “report cards” for hospitals. The idea is that if patients act more like savvy shoppers, providers will have to compete on both price and quality. Whether this actually works is up for debate.
Professional associations are huge players ensuring quality, regularly publishing guidelines and best practices in the areas of medicine they cover. Payers increasingly tie reimbursement to evidence-based guidelines, nudging providers to follow established protocols rather than improvise. These guidelines often influence insurance practices like step therapy and other requirements for reimbursement.
The US healthcare system is fragmented, complex, and notoriously inefficient — but that’s exactly what creates so much room for innovation. Every pain point you’ve just read about, from high costs to poor coordination to perverse incentives, represents an opening for digital health startups that can deliver better outcomes, reduce costs, or make the system easier to navigate. The opportunity is not just about having a “good product”; it’s about aligning your solution with the right payer, provider, or employer incentive.
Here are the major opportunity buckets to keep in mind:
Self-insured employers are hungry for solutions that improve employee health while reducing costs. Digital health products that tackle chronic conditions, mental health, or productivity (e.g., reducing absenteeism) are especially attractive here. Employers, especially the mid-sized companies, offer easy points of market entry compared to the European market. Also, as a company, you can offer employers contracts where they don’t pay for your service until your service has delivered results. Again, an opportunity to launch a product in the real world.
As providers shift toward capitation, bundled payments, and shared savings, they need tools that help manage risk. Startups that track outcomes, prevent hospitalizations, improve self-care and self-management, or support care coordination are desperately needed to make these new models work..
The US system is drowning in paperwork. Automating prior authorizations, streamlining claims, and improving data interoperability are all rich areas for innovation. To be sure, many insiders think this area of the market is pretty saturated, but there are always new challenges with every new policy shift (good case in point: Trump Administration’s crack down on Medicaid has created demand for services that aid in reporting work hours, etc., to retain eligibility).
Americans expect choice and convenience in healthcare. Startups offering telehealth, digital-first care, cash-pay models, or retail-friendly solutions can tap into this consumer-driven demand. B2C opportunities are abundant.
With PBMs controlling drug access and pricing, startups that support medication adherence, specialty drug delivery, or digital therapeutics have strong partnership opportunities.
Medicare Advantage, Medicaid managed care, and CMS pilots are major sources of innovation funding and reimbursement. Products that address underserved populations or improve equity resonate here.
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