Why Healthcare Costs Keep Rising: What Public Programs Must Do Differently

Healthcare costs continue to rise even as public programs raise deductibles, narrow networks, and tighten utilization controls. This is the paradox: programs are applying familiar cost-containment strategies, yet spending growth persists. The reason is simple: most efforts target symptoms rather than the system.

Over the past five years, public-sector health programs have relied heavily on cost-sharing and utilization controls. These actions can slow spending in the short term, but rarely change underlying cost drivers. Healthcare cost growth is multi-dimensional. It reflects the combined effects of price variation, utilization patterns, site-of-care decisions, pharmacy trends, and fragmented vendor accountability. Isolated interventions cannot solve a system-level problem.

High-performing programs take a fundamentally different approach. They move from fragmented cost-cutting to a coordinated, data-driven population health purchasing model: one that manages price, utilization, site of care, pharmacy, and vendor performance together. This is not a new theory; it is the disciplined application of core population health principles at scale. In this model, public-sector employers and plan sponsors act as active stewards, setting expectations, enforcing accountability, and aligning financial incentives across the system.

A defining feature of this approach is the use of structured frameworks that connect strategy to execution. The Population Health Value and Accountability Model (PH-VAM) provides a framework that integrates governance, operational levers, data infrastructure, and implementation discipline into a single system. Its value is straightforward: it closes the gap between policy intent and operational performance where most cost-containment efforts fail.

The evidence increasingly supports this integrated approach. In the United States, studies consistently show that price variation, not utilization, is the primary driver of healthcare spending growth. Commercial prices for hospital services can exceed Medicare rates by greater than 200–300%, with wide variation across markets and no consistent link to quality. At the same time, specialty drugs now account for over 50% of total pharmacy spending, despite representing a small share of prescriptions, and emerging therapies, such as GLP-1s, are accelerating this trend.

High-performing programs respond by deploying a coordinated portfolio of strategies. These include cost-growth benchmarks to set clear affordability targets, Total Cost of Care accountability, and global budgets that hold providers responsible for spending across the full continuum of care. They also implement reference-based pricing and targeted contracting to address excessive unit prices, while investing in advanced primary care models to reduce avoidable utilization. Pharmacy is managed through structured governance, including clinical criteria, utilization controls, and outcomes tracking.

The contrast with traditional approaches is clear. Most programs remain reactive, focusing on cost shifting, fragmented vendor oversight, and short-term savings. High-performing programs are proactive, managing total cost drivers, aligning incentives, and holding all actors accountable for outcomes.

At the center of this transformation is a critical insight: price is the dominant driver of cost growth. Hospital consolidation and provider market power continue to push prices upward, often without measurable improvements in quality. Programs that succeed do not ignore this reality; they confront it directly through contracting strategies, affordability benchmarks, and governance structures that enforce compliance. However, policy alone is not enough. Execution determines outcomes.

Provider incentives play a central role. Payment structures shape clinical decisions, affecting referrals, admissions, prescribing, and site-of-care selection. Without aligning incentives to value, even well-designed policies will underperform. This is why programs are increasingly adopting Total Cost of Care models, global budgets, and risk-based contracts. In practical terms, Total Cost of Care accountability means providers are responsible for all healthcare spending for a population. Global budgets provide a fixed amount to manage care over time, encouraging efficient resource use. Risk-based contracts tie payment to performance, rewarding high-quality, cost-effective care while penalizing inefficiency. Together, these models shift healthcare away from volume and toward value.

Operational execution is equally important. Programs are increasingly optimizing the site of care, shifting services to lower-cost, high-quality settings, such as ambulatory surgery centers, home-based care, and Centers of Excellence. However, access alone does not change behavior. Without guidance, members often default to higher-cost providers. For this reason, care navigation and member engagement have become essential tools. Digital front doors, advocacy models, and structured navigation systems help steer members toward high-value care, reducing unnecessary spending while improving experience.

Pharmacy remains one of the fastest-growing cost drivers. Specialty drugs and biologics dominate spending growth, and the expansion of GLP-1 therapies introduces new financial pressure. Effective programs respond with disciplined pharmacy governance, balancing access, affordability, and clinical value through clear criteria and ongoing monitoring.

Another often-overlooked opportunity lies in administrative simplification. Fragmented billing systems, prior authorization burdens, and inconsistent vendor reporting create high hidden costs. Treating administrative inefficiency as a core cost driver, not a background issue, can unlock meaningful savings without reducing benefits.

None of these strategies succeeds without integrated data. High-performing programs connect eligibility, claims, pharmacy, and clinical data to generate real-time insights. Increasingly, they use predictive analytics and artificial intelligence to identify high-risk populations, anticipate utilization, and detect fraud, waste, and abuse. A small percentage of members often drives a disproportionate share of costs; targeted interventions in these populations can significantly improve outcomes and reduce spending.

In this environment, actuarial expertise has evolved into a strategic function. Actuaries now model risk, evaluate interventions, and ensure that cost-containment strategies produce sustainable savings rather than short-term reductions that create downstream financial exposure. Complementary strategies, such as reinsurance and high-cost claimant pooling, further stabilize financial risk.

Procurement and contract design remain decisive. Public programs must move beyond transactional purchasing to value-based sourcing, embedding performance guarantees, financial risk, and accountability into every contract. This is where many programs fall short. A key distinction between leading programs and the rest is the ability to differentiate between true savings and false savings. Cost shifting may reduce immediate spending, but it often leads to higher downstream utilization and worse outcomes. Sustainable cost control focuses on efficiency, early intervention, and value.

This is why primary care and behavioral health are not cost centers: they are cost-control strategies. Integrated care models that address medical, behavioral, and social needs reduce avoidable utilization and improve long-term outcomes. Addressing social determinants of health, such as housing, food access, and transportation, is not only a population health goal but also a financial strategy.

Digital health has become a permanent feature of care delivery. Virtual care, remote monitoring, and hybrid models can improve access and reduce cost, but only when integrated into care pathways. Without alignment, they can increase utilization rather than reduce it.

What should leaders do next? Focus on execution. Establish cost-growth benchmarks, align provider incentives to Total Cost of Care, strengthen vendor accountability through contract design, and invest in integrated data infrastructure. Most importantly, treat cost management as a system, not a set of isolated interventions. Managing healthcare costs is not about doing more. It is about doing the right things consistently and with accountability. Programs that succeed will not be those that spend less in the short term, but those that manage complexity better, aligning policy, procurement, data, incentives, and execution into a system that delivers measurable value. In the end, cost control is not a policy problem: it is a system design and execution problem. Programs that recognize this will define the future of public-sector healthcare.

About the Author Olu Albert is the President and CEO of Mello Health Strategy Group, a consulting firm specializing in health care strategy and population health solutions.

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