Governments at the federal and state level have several proven tools to reduce healthcare costs, ranging from drug price negotiation to payment reform to cutting administrative waste. Some of these strategies are already in effect and producing measurable savings. Others are policy options with strong evidence behind them but limited adoption so far. Here’s how each approach works and what kind of impact it can realistically deliver.
Negotiating Prescription Drug Prices
The United States has historically been an outlier among wealthy nations in allowing drug manufacturers to set their own prices for government-purchased medications. That changed with the Inflation Reduction Act, which authorized Medicare to directly negotiate prices on high-cost drugs for the first time. The first round targeted ten drugs covered under Medicare Part D, with negotiated prices taking effect in 2026.
The projected savings are significant. Medicare enrollees are expected to save an estimated $1.5 billion in out-of-pocket costs once the negotiated prices kick in. If those same prices had been in effect during 2023, they would have cut net drug spending by roughly $6 billion, a 22% reduction in aggregate spending on those ten drugs alone. As the program expands to cover more medications in future years, cumulative savings will grow substantially.
Boosting Generic and Biosimilar Competition
One of the most reliable ways to lower drug prices is simply to allow more competitors into the market. Federal data from Medicare claims between 2007 and 2022 shows a clear pattern: prices drop as more generic manufacturers enter. With just two generic competitors, prices fall about 2.5% compared to a single generic option. By the time six competitors are selling the same drug, prices drop roughly 31%. After three years of generic competition with about three manufacturers, prices typically decline by 20%.
The government can accelerate this process by streamlining FDA approval timelines for generics and biosimilars (the generic equivalents of biologic drugs), cracking down on patent manipulation tactics that brand-name companies use to delay competition, and reducing regulatory backlogs that keep cheaper alternatives off the market longer than necessary.
Reforming How Medicare Pays for Services
Medicare currently pays drastically different rates for the same procedure depending on where it’s performed. A routine blood test or imaging scan billed through a hospital outpatient department can cost Medicare far more than the identical service performed in a doctor’s office. This gap exists because of how payment rules evolved, not because the hospital setting adds clinical value for most of these services.
Site-neutral payment reform would equalize these rates. A 2024 analysis in Health Affairs found that three prominent policy options for site-neutral payments would have reduced Medicare spending by anywhere from $212 million to $7.36 billion annually, depending on how broadly the policy was applied. The wide range reflects different proposals: some target only a narrow set of services, while others would apply across nearly all outpatient care. Even the modest end of that range represents real money, and the broader versions would be among the largest single-policy savings available.
Reducing Administrative Waste
Administrative spending accounts for 15 to 30 percent of all U.S. healthcare spending. That includes billing, insurance verification, prior authorization paperwork, provider credentialing, and quality reporting. Much of this is duplicative, outdated, or unnecessarily complex.
Several targeted fixes could chip away at this problem. Switching to a fully electronic prior authorization system could save an estimated $417 million annually. Creating a standardized national platform for maintaining provider directories, the lists insurers use to show which doctors are in-network, could save more than $1.1 billion per year. Improving quality measurement systems to reduce redundant reporting requirements could save up to $7 billion annually. None of these changes require revolutionary technology. They require standardization and political will to force different parts of the healthcare system onto common platforms.
Enforcing Competition in Hospital Markets
Hospital and physician consolidation is one of the quieter drivers of rising costs. At least 47 percent of physicians were employed by or affiliated with hospital systems in 2024, up from less than 30 percent in 2012. That trend matters because when independent physician practices get absorbed into hospital systems, the same services often get billed at higher hospital-based rates. Studies reviewed by the Government Accountability Office found that this consolidation leads to increased Medicare spending and higher prices for commercially insured patients.
Stronger antitrust enforcement, meaning blocking mergers that would reduce competition in a given market, is one lever. Another is requiring that when hospitals acquire physician practices, they can’t simply rebill existing services at hospital outpatient rates without providing additional clinical value. These policies work best in combination with site-neutral payment reform.
Investing in Prevention
Preventive care is often discussed in vague terms, but specific programs show concrete returns. Researchers from Harvard Medical School developed a prototype calculator to measure the return on investment of prevention services. Testing it on a Boston-based mobile health clinic called the Family Van, which provides screenings and education for diabetes, heart disease, nutrition, and other conditions in underserved neighborhoods, they found the program returned $36 for every dollar invested over the long run.
That ratio reflects the reality that catching chronic conditions early, or preventing them entirely, avoids years of expensive treatment downstream. The challenge is that prevention savings take years to materialize, while program costs are immediate. This makes prevention politically difficult to fund even when the math is overwhelmingly favorable. Government programs that target high-risk populations with screenings, vaccination campaigns, and chronic disease management tend to produce the strongest returns.
State-Level Payment Models
Some of the most compelling evidence comes from state experiments. Maryland operates an all-payer model in which the state sets hospital rates that apply to all insurers, not just Medicare or Medicaid. Rather than letting each hospital negotiate different prices with different insurance companies, the state essentially regulates what hospitals can charge.
Over five years, the model generated $1.4 billion in Medicare savings at Maryland hospitals, with $273 million in savings during 2018 alone compared to a 2013 baseline. Hospital readmission rates for Medicare patients dropped below the national average by the end of the fourth year. The model works because it removes the incentive for hospitals to increase the volume of services (since their total revenue is capped) and instead rewards efficiency and keeping patients healthy enough to stay out of the hospital.
Price Transparency
Since 2021, federal rules have required hospitals to publicly post their prices for services, including the rates they negotiate with different insurers. The theory is straightforward: if patients and employers can compare prices, market pressure will push costs down. In practice, compliance has been inconsistent. A review by the HHS Office of Inspector General found that not all hospitals have fully complied with the rule.
Transparency alone doesn’t reduce costs. It creates the conditions for competition to do so, but only if the data is accessible, usable, and enforced. Strengthening penalties for noncompliance and building consumer-friendly tools to compare prices across facilities are necessary steps to make this policy deliver on its promise.
Telehealth’s Complicated Role
Telehealth expanded dramatically during the pandemic, and many assume it saves money. The reality is more nuanced. The Congressional Budget Office has noted that whether telehealth reduces federal spending depends on a key question: do virtual visits replace more expensive in-person care, or do they simply add new visits that wouldn’t have happened otherwise?
If a patient uses a video visit instead of going to an emergency room, that saves money. If telehealth makes it easier for someone to see a specialist they wouldn’t have otherwise visited, it adds spending. Both things happen simultaneously, and the net effect depends entirely on how a given telehealth program is designed, what services it covers, and how payment rates are structured. The government can steer telehealth toward cost savings by targeting it at populations with high emergency department use and designing payment rules that encourage substitution rather than addition.