Before you can fix a machine, you need to understand how it runs. And the American healthcare system — the largest, most expensive, most complicated healthcare machine ever built — is one that almost nobody, including most of the people working inside it, truly understands end to end.
This series is an attempt to change that. Not with abstractions, but with the actual numbers, the actual flows of money, and the specific ways that Southern Oregon — a region with one dominant health system, a rapidly aging population, and chronic disease rates that outpace the state average — is sitting at a particularly sharp edge of a national problem.
Let’s start with the money. Because if you follow the money, everything else becomes clear.
$4 Trillion. Let That Land.
The United States spends approximately $4 trillion a year on healthcare. That is not a number most people have intuition for, so let’s build some.
Total US exports — everything we sell to every other country in the world, across every industry — add up to about $3 trillion. We spend more on healthcare than we export. Total US consumer spending — every American buying every product and service in the entire economy — runs just under $4 trillion. Healthcare is in the same ballpark. And our total GDP — the entire US economy — is about $28 trillion, roughly 25% of global economic output. Healthcare is nearly 20% of that.
Put another way: if American healthcare were a country, it would be the third largest economy on Earth.
Where does that $4 trillion come from? It breaks into four roughly equal buckets. About $1 trillion comes directly from consumers — out-of-pocket spending plus contributions toward insurance premiums. Another $1 trillion comes from employers, who purchase insurance on behalf of their workers, a practice entrenched after a 1954 tax law made employer-sponsored health benefits a pre-tax benefit. The remaining $2 trillion comes from government — federal and state — through Medicare, Medicaid, and the tax subsidies that make employer insurance financially dominant.
That government slice deserves attention. The federal government collects roughly $5 trillion in taxes each year. It spends closer to $7 trillion — a $2 trillion annual deficit, every year. Defense runs about $1 trillion. Social Security runs $1.2 trillion. Healthcare — direct spending plus tax subsidies — consumes nearly $2 trillion of federal resources. Roughly 40 cents of every federal tax dollar goes to healthcare. That is not a stable situation. It is the defining fiscal challenge of the next generation.
The Three Thirds: Where Money Goes Once It Enters the System
Once that $4 trillion enters the system, it flows in a pattern worth understanding. First, take out the 10 to 15% that goes purely to administration — billing systems, claim adjudication, prior authorization, compliance. In no other developed healthcare system does administration eat this proportion of the budget. The remainder divides roughly into thirds.
One third goes to hospitals and facility-based care. One third goes to physician offices and ambulatory clinics. One third goes to drugs and devices — including pharmaceuticals administered in hospitals and clinics, not just retail pharmacy.
What matters about this breakdown is what is growing fastest. The drug and device third is expanding rapidly, driven by a pharmaceutical pipeline that will bring dozens of expensive new biological treatments to market over the next decade. And that expansion has enormous cost implications in the United States — the only major developed country where drug pricing is effectively unconstrained.
How We Got Here: 70 Years in Five Minutes
In 1950, the United States spent less than 5% of GDP on healthcare. Most of it was paid out of pocket — you went to the doctor, you paid your bill. Insurance was for genuine catastrophes. Then three decisions, made between 1946 and 1965, permanently altered the architecture.
First, the Hill-Burton Act of 1946 funded a massive expansion of hospital construction — the goal was a hospital within 10 to 15 miles of every American. The federal government subsidized hospital infrastructure until the Act expired in 1997.
Second, a 1954 tax code change codified the exemption for employer-sponsored health benefits. If your employer pays for your insurance, that benefit is not taxed as income. That single provision made employer coverage worth considerably more, dollar for dollar, than taking the equivalent in wages. Employer coverage exploded.
Third, Medicare and Medicaid arrived in 1965. The federal government committed to covering seniors and the poor — a morally defensible decision at a time when the average senior was spending 25% of their Social Security income on healthcare.
Each decision was reasonable given what anyone could have known at the time. Healthcare in 1965 was 6% of GDP. Nobody predicted it would reach 17%, then 18%, then approach 20%. Nobody projected what pharmaceutical innovation would do to costs. Nobody projected that chronic disease driven by obesity and metabolic dysfunction would become the dominant driver of utilization — creating conditions that are permanent, not episodic, and that the system was not designed to handle.
What resulted was a self-reinforcing cycle for those selling healthcare: more coverage meant more consumption; more consumption funded more innovation; more innovation created more things to consume. And each expansion of coverage widened the funnel through which dollars flowed into the system. Healthcare has grown at roughly 2% faster than the overall economy, every year, for 60 years.
The Moral Hazard Problem — Or, Why Your Friend Left the Air Conditioning On
There is a concept in economics called moral hazard. It describes what happens when people are insulated from the costs of their decisions. When someone else pays for your consumption, you consume more than you would if you were paying yourself — not because you are irresponsible, but because the price signal that normally guides decision-making has been removed.
Saum Sutaria, CEO of Tenet Health, makes the point with a story. A friend living in Riyadh left his apartment in May and returned in September. His colleague asked: doesn’t your place turn into a sauna while you are gone? He shrugged. He had left the air conditioning running all summer. The government paid the electricity bill. It cost him almost nothing.
That is exactly what 70 years of American healthcare policy has done. In 1950, more than half of healthcare dollars were paid directly by consumers. Today, direct consumer exposure to healthcare costs is down to about 15% of total expenditure. 85% is paid by a third party — employer, insurer, Medicare, or Medicaid.
“Insurance today is a discount card. It’s not insurance in healthcare. Insurance traditionally would be where you procure coverage for random, infrequent and unpredictable events.” — Saum Sutaria, CEO, Tenet Health
Insurance makes sense for catastrophes you did not see coming — a heart attack, an emergency appendectomy. That is what it was designed for. But insulin for type 2 diabetes is not an unpredictable catastrophe. It is a permanent, ongoing treatment requirement for tens of millions of Americans. You do not use car insurance for oil changes. In American healthcare, we use a third-party payer system for oil changes — and that has made consumers systematically insensitive to the cost of every interaction with the system.
What This Means for Southern Oregon Specifically
Southern Oregon sits at the center of this national story with features that make the national dynamics particularly acute.
Market concentration. Asante Health System — Rogue Regional Medical Center in Medford, Three Rivers Medical Center in Grants Pass, and Ashland Community Hospital — holds roughly 78% market share across the nine-county region it serves. It is a $1.3 billion revenue organization that, in fiscal year 2022, led all Oregon regional health systems in community benefit spending at more than 200% of its state-mandated minimum. Asante is doing genuine good. And it is also, by virtue of its market position, the system against which the normal market forces of competition — price transparency, consumer choice of provider — function poorly or not at all.
When a single health system dominates a regional market this decisively, prices are set by negotiation rather than competition. The rates Asante negotiates with commercial insurers reflect that market position. The costs that flow downstream to employers and employees reflect those rates. There is no alternative system down the road offering the same services at half the price.
Health status. Southern Oregon’s health outcomes are demonstrably worse than the state average. County health rankings consistently place Jackson and Josephine counties below state averages on both health outcomes and health factors. We have higher tobacco use, fewer physicians per capita, and chronic disease rates — obesity, diabetes, hypertension — that run above state averages. Oregon itself, despite its outdoorsy brand, has an obesity rate around 30%, compared to 26% in Washington and 24% in California.
Worse health status means higher healthcare utilization. Higher utilization in a low-competition market means higher costs. Higher costs mean more residents priced out of coverage. More uninsured and underinsured residents mean more uncompensated care, which gets absorbed through cost-shifting to commercial payers — driving costs higher still for the insured population. It is a system with feedback loops pulling in the wrong direction.
The Sustainability Question
If healthcare currently runs at nearly 20% of GDP and has historically grown 2% per year faster than the overall economy, the long-term trajectory leads somewhere no serious economist can look at comfortably. The US economy has been robust enough to absorb the growth so far. But sustainability over the next 50 years is genuinely in question.
One reason for cautious optimism: the aging wave driving much of the current Medicare demand has a demographic peak. The baby boomers are projected to max out their impact on the system around 2032. After that, the aging pressure begins to ease.
But a countervailing force does not ease: chronic disease driven by obesity and metabolic dysfunction is getting worse, not better. Type 2 diabetes has gone from roughly 1% of the population in the early 1970s to 12 to 15% today. The drug pipeline to treat these conditions is expanding rapidly and expensively. Southern Oregon, with its above-average chronic disease burden and older-than-average population, is not positioned to wait for favorable national trends.
The machine is running. The question is whether we understand it well enough to do anything about it. In the next article, we examine the most broken and most exploited part of the machine: how American drug pricing works, why we pay two to three times what every other developed country pays for identical medications, and who is capturing the value in the gap.
Next: Article Two — The Toothpaste Tube: Drug Pricing, PBMs, and the Most Expensive Pharmacy on Earth
This series was produced by Reimagine Healthcare for educational purposes. It is based on analysis of publicly available research. It is not intended as medical or financial advice.