Cuts to Medicaid. Slashing the federal health bureaucracy. The Trump administration and congressional Republicans have backed these efforts in the name of addressing a broken health care system where Americans have gotten sicker while paying more than any other country on Earth. Perhaps there are ways  to make the public health system more efficient through reorganization and trimming fat. However, any true effort to lower health care costs must focus on the central culprit: corporate power. Targeting the Medicaid program especially totally misses the mark and will cause more pain for American families.

In Fiscal Year 2024 (October 1, 2023, to September 30, 2024), the federal government spent over $6.75 trillion. The largest single contributors to these expenditures were Social Security ($1.45 trillion), Medicare ($870 billion), and Medicaid ($618 billion). Thus, the federal government spent the most money, $1.49 trillion, to provide health coverage to Americans through both Medicare and Medicare.

Key figures in the incoming Trump Administration have pushed for cuts to federal spending with the stated goal of making government more efficient. While President Trump has repeatedly suggested that he would protect Social Security and Medicare, he has not made the same effort when it comes to cutting Medicaid. In fact, the first Trump Administration’s failed legislative effort to repeal the Affordable Care Act in 2017 would have significantly cut back on spending by making millions of Americans ineligible and losing their Medicaid coverage.

The recent House budget resolution calls for $880 billion in relevant cuts over ten years, most of which would presumably come from Medicaid without cuts to Medicare or the privatized Medicare Advantage program. The latest Senate resolution does not contradict the House, allowing for Medicaid cuts. Proposing to cut Medicaid is not new, as fiscal conservatives and congressional Republicans have consistently targeted Medicaid for cuts.

In 2017, Republicans proposed gutting federal funding to states for Medicaid, transferring $370 billion in annual costs and likely causing them to kick millions of low-income adults off of their health coverage. In January, Politico obtained a Republican policy menu of potential spending cuts, including up to $2.3 trillion claimed in less spending over ten years on Medicaid. Around half of such cuts would come from capping federal payments to states and instituting work requirements.

Medicaid Cuts Miss the Point

Along with the fact that cutting Medicaid would likely force millions of Americans to lose health coverage, the focus on Medicaid spending misses the real problem: the United States’ exorbitant spending on health care overall. In 2023, the United States spent $4.9 trillion on health care, equating to roughly $14,570 per person and accounting for nearly one-fifth (17.6%) of overall economic activity or Gross Domestic Product (GDP). The U.S. spends nearly twice as much per person on health care compared to other developed nations.

Growth in health care spending has consistently outpaced inflation overall; from January 2000 to June 2024, prices for all goods and services rose 86.1% while medical care prices rose 121.3%. Consequently, federal spending on Medicare and Medicaid has similarly increased alongside the overall rise in health care costs. However, public coverage spending has risen more slowly compared to private health insurance. Medicaid spending in 2023 grew 7.9% compared to 8.1% for Medicare and 11.5% for private health insurance.

In fact, private health insurance spends more for the same medical products and services compared to Medicare and Medicaid. This gap between public and private health insurance spending has grown over the last two decades. One clear indicator of this reality (besides publicly available data) is that providers like hospitals complain about low Medicare/Medicaid reimbursement rates. The Supreme Court in 2015 even ruled against providers trying to sue the Idaho state government for its reimbursement rates.

Ultimately, cuts to Medicaid would not reduce bloated government expenditures; rather, they would simply lower federal spending by pushing low-income Americans off of their health coverage. Theoretically, if all these people got private insurance, overall health care spending would increase because private insurance spends far more than Medicaid. In reality, Medicaid cuts lower federal spending not by reining in health care costs but by simply forcing Americans to (a) not have access to health care or (b) pay exorbitant costs out-of-pocket and potentially go into medical debt.

What’s Really Driving Runaway Health Care Costs?

If policymakers want to lower health care spending, there are real solutions that involve tackling the corporate power and price gouging that cause Americans to spend more on health care in the first place. Research shows that higher utilization of health care services is not behind spending more on care. Therefore, programs to reduce Americans’ use of health care such as managed/value-based care will not (and historically have not) fix high prices. The principal reason for high health care costs is that prices for the same goods and services in the U.S. are significantly higher than they are in different countries.

There are numerous factors contributing to health care providers charging high costs. Increasingly, providers such as hospitals have become consolidated so that there is little competition. More consolidation and less competition is directly associated with higher prices. Overall, higher spending on inpatient and outpatient care is the largest contributor to America’s disproportionately high health care spending.

The US also spends twice as much as a percentage of total health care expenditures on administrative costs compared to other developed nations (7.6% compared to 3.8%). Much of this burden comes from billing and insurance costs which are disproportionately high with the country’s for-profit system of private insurance. Medicare has significantly lower administrative costs than private insurance; in 2023, 1.1% of spending went towards administration while private insurers in the last decade have spent anywhere between 12-18%.

Additionally, there is little to no transparency when it comes to much of health care pricing. While the Centers for Medicare and Medicaid (CMS) services issued a rule in 2021 “to provide clear, accessible pricing information online,” the Department of Health and Human Services Office of Inspector General in November 2024 estimated that around half of hospitals did not comply with the rule. Patients often do not know what prices hospitals charge for the goods and services they provide along with the discounts they negotiate with insurance companies. At the same time, there is often significant variation in pricing between different hospitals. Thus, patients do not know which provider will charge them less for the exact same procedure.

Insurance companies further add to price inflation, as they too are increasingly consolidated both in terms of a few companies controlling the insurance market and insurers merging with providers and pharmacies. The latter issue – formally known as vertical integration – has resulted in the largest pharmacy CVS owning the third-largest insurer Aetna along with the largest pharmacy benefit manager CVS Caremark. Without competition or transparency, the largely private American health care system does not remotely resemble a functional, free market.

Similar to overall health care spending, Americans pay more than two-and-a-half times the cost for the same prescription drugs as other nations and more than three times as much for brand-name drugs even when accounting for rebates. A key reason for this disparity is that other countries’ governments directly negotiate prices unlike the United States. Congress explicitly forbade Medicare from directly negotiating drug prices when it created Medicare Part D – the prescription drug benefit program – in 2003.

Several analyses from the Congressional Budget Office (CBO) have estimated significant savings if the government were able to negotiate drug prices for  Medicare beneficiaries. The Inflation Reduction Act only allowed Medicare to negotiate prices for just 10 drugs in 2026, up to 15 drugs in 2027 and 2028 each, and up to 20 drugs in each subsequent year. Yet, the CBO estimated that this limited program would save $98.5 billion on drug spending between 2022-2031. Both the Veterans Health Administration and Department of Defense can already negotiate drug prices, and they pay around half the price for prescription drugs compared to most Americans.

However, as CEPR co-founder Dean Baker has pointed out, the biggest reason for high prescription drug costs is the underlying patent system. By rewarding drugmakers with monopoly pricing power – the ability to charge any price without facing competition for many years – pharmaceutical companies price gouge Americans into paying (a) higher insurance premiums and (b) exorbitant out-of-pocket costs.

When the government allows generic drugs to enter the market and compete, drug costs can decrease by upwards of 80-85% less. Assuming that generics cost 80% less than brand name products, patent monopolies cost Americans $429 billion in 2022 alone. Alternative models to reward drug innovation, such as direct government contracts or prize funds, would eliminate the high cost of patents.

Ultimately, addressing high health care costs has to involve tackling the various industries that enormously profit off of Americans paying more for health care than any other country on Earth. In 2022, the average American spent $12,742 on health care, compared to almost half ($6,850) for the average citizen of other wealthy nations. Cutting Medicaid does absolutely nothing to address the real reasons for high health care costs. True reform means restructuring American health care to protect public health rather than corporate greed.