How the Healthcare Industry Makes Money: A Complete Guide

The US healthcare industry makes money by moving about $5.3 trillion a year (2024) from four payers, private insurers, Medicare, Medicaid and patients, to the hospitals, doctors, drugmakers and intermediaries that deliver and manage care. Almost none of that money moves directly from patient to provider. It flows through insurers, government programs, pharmacy benefit managers and clearinghouses, each of which takes a role and often a cut, and profit settles wherever a company controls a step that everyone else must pass through.

On 21 February 2024 attackers shut down Change Healthcare, the largest claims clearinghouse in the country. For weeks hospitals, physician practices and pharmacies could not check insurance or submit claims. Care went on; the money stopped. UnitedHealth, which owned Change, advanced about $9 billion to providers at the peak (reported). The outage showed in a few weeks what this guide explains at length: healthcare's revenue depends less on the care itself than on the rules and pipes that turn care into cash.

This guide walks through who pays, how each part of the industry gets paid, where the margin settles, and why so many well-funded companies have failed. It draws on The Care Equation, a book that explains how healthcare companies create, capture and destroy value.

How big is the healthcare industry, and who pays for it?

US national health spending was about $5.3 trillion in 2024, 18.0% of GDP (CMS). Hospital care was about 31% of that, and physician and clinical services about a fifth. Four pools fund most of it.

Shares from CMS National Health Expenditure data as summarized by MedPAC.

Three facts surprise most newcomers. First, the "insurer" often carries no insurance risk. Roughly 60–67% of covered workers are in self-funded plans (KFF), where the employer pays the claims and the insurer is paid a fee per employee per month to run the network and process claims. Second, government money increasingly flows through private companies: about 55% of eligible Medicare beneficiaries chose Medicare Advantage plans in 2026 (KFF), and most Medicaid enrollees are in managed-care plans. Third, the patient's share is small in total but large for the individual. The average employer family premium was $28,303 in 2026, of which workers paid $7,471 (KFF).

Chapter 3 of the book traces this chain in detail. The habit it teaches is simple: for any product or service, name the payer, the budget it comes from, the unit of payment and the date it is paid.

How do providers get paid?

What a provider is paid for decides what it does more of. Every healthcare business model sits on one or more of these units.

The same knee replacement can be paid by DRG in a hospital, at a lower rate in an ambulatory surgery center, as part of a bundled episode, or out of a capitation payment the surgeon never sees. Medicare usually sets the reference price, and commercial insurers express their rates as a multiple of it.

How do hospitals make money?

A hospital is a 24-hour, high-fixed-cost facility. Labor is typically 50–60% of operating expense, and staff and buildings cost about the same whether beds are full or empty. The American Hospital Association counts about 6,100 US hospitals, about 5,100 of them community hospitals, and roughly 70% of community hospitals belong to a system (FY2024 data).

The key to hospital economics is that the same service has many prices. Medicare sets its prices by regulation and, by the AHA's estimate, pays about 82–83 cents per dollar of hospital cost. Medicaid usually pays less. Commercial insurers negotiate, and RAND found that private payers paid about 254% of Medicare rates for hospital services in 2022 (reported). Uninsured patients are billed from the chargemaster, the hospital's list price, and pay little of it.

That makes payer mix, the share of patients from each payer, the main driver of whether a hospital makes money. In the book's stylized example, a hospital with $500 million of cost and 30% commercial patients earns a 1.5% operating margin. Shift five points of its mix from commercial to Medicare and the margin turns to −1.5%. Put the same cost base in a commercial-heavy suburb and it earns 8.3%.

The spread between winners and losers is wide. The median nonprofit hospital's operating margin was about 1.3% in 2025 on one Kaufman Hall measure (reported). HCA Healthcare, which ran about 190 hospitals in 2025, reported revenue of about $75.6 billion and adjusted EBITDA of about $15.6 billion (reported), an EBITDA margin in the high teens to about 20%. HCA's edge is choosing dense, growing urban markets with a commercial-heavy mix and enough local share that insurers cannot leave it out of their networks. Market power matters: prices at monopoly hospitals were about 12% higher than in markets with four or more competitors (Cooper and colleagues, 2019, reported).

Two other revenue sources shape hospital strategy. The 340B program lets qualifying nonprofit and public hospitals buy outpatient drugs at steep discounts while being reimbursed at normal rates; covered entities bought $81.4 billion of drugs at 340B prices in 2024 (HRSA). And facility fees let hospitals bill more for the same clinic visit in a hospital-owned outpatient department than in a physician's office, which is one reason hospitals buy practices. Our guide to how to analyze hospital financial statements shows how to read these numbers.

How do doctors and outpatient businesses make money?

Physician and clinical services absorb about $1 trillion a year. Since 1992 Medicare has paid physicians through the Resource-Based Relative Value Scale: each billing code carries relative value units multiplied by a conversion factor, about $33.40 in 2026. Commercial insurers typically pay physicians about 120–145% of Medicare, far less of a premium than they pay hospitals. The AMA calculates that Medicare physician pay, adjusted for practice-cost inflation, fell about 33% from 2001 to 2025.

That squeeze explains why practices sell. About 82% of US physicians were employed by hospitals or corporate entities on 1 January 2026 (PAI/Avalere, reported). Buyers pay more than a practice can earn alone because they value what the physician controls. A primary-care physician who bills a few hundred thousand dollars a year directs several million dollars of downstream spending through referrals, admissions, imaging and drugs. A hospital buys that for referrals, an insurer for control of total cost, and private equity for a platform to roll up.

Primary care absorbs only about 5% of US health spending (Milbank Memorial Fund, definition-dependent) and rarely pays for itself on fee-for-service rates. It works financially when someone funds it from elsewhere: capitation in Medicare Advantage, downstream hospital revenue, employers, or membership fees. Retailers learned this expensively. Walgreens' VillageMD bet produced about $12.4 billion of pre-tax impairments in fiscal 2024 alone.

Procedures, meanwhile, migrate to the cheapest safe setting. Medicare pays ambulatory surgery centers roughly 55–60% of the hospital outpatient rate for many procedures, and they still make money because they are smaller and run predictable schedules.

How do health insurers make money?

A US health insurer does five jobs: it bears risk, builds networks and negotiates prices, administers claims, manages care through tools such as prior authorization, and distributes plans through brokers and government bids. The critical distinction is between fully insured business, where the insurer bears the risk, and self-funded business, where it is paid a fee to administer an employer's plan.

Since 2011 the Affordable Care Act has required insurers to spend at least 80% (individual and small group) or 85% (large group) of premium on care and quality, the medical loss ratio. Medicare Advantage and Part D plans face an 85% floor. The rule caps the upside but not the downside, rewards growing premium dollars, and encouraged vertical integration: payments from an insurer to a clinic or pharmacy it owns count as medical cost, while the affiliate's margin sits outside the cap.

The underwriting business is a small slice of a large flow. A 3% margin on a $600 monthly premium is $18 per member, and a one-point miss on medical cost trend erases a third of it. That is why UnitedHealth Group built Optum, CVS Health bought Aetna, and Cigna bought Express Scripts. UnitedHealth's 2025 revenue was $447.6 billion. Its medical care ratio rose from a historical ~82–83% to about 85% in 2024 and about 89% in 2025, and each point on roughly $340 billion of premium is worth more than $3 billion of pre-tax profit. It suspended guidance in May 2025 and replaced its chief executive.

Our guide on how to analyze a health insurance company covers the metrics that show trouble before earnings do.

How does Medicare Advantage work as a business?

Medicare Advantage lets beneficiaries choose a private plan instead of traditional Medicare. It grew from about 19% of eligible beneficiaries in 2007 to 55% in 2026 (KFF). CMS pays each plan a monthly amount per member based on a county benchmark, the plan's bid, its star rating and each member's risk score, which rises with documented diagnoses. Plans rated four stars or more get a 5-percentage-point benchmark bonus.

That formula creates two levers: better care that keeps members out of hospital, and more complete coding that raises risk scores. MedPAC estimated in March 2025 that Medicare Advantage payments were about 120% of what traditional Medicare would have spent on similar people, roughly $84 billion more. CMS answered with a new risk model, V28, phased in over 2024–2026. Humana, which gets roughly 80–85% of its revenue from the federal government, showed how much the rules matter: the share of its members in four-star-plus plans fell from about 94% to about 25% in the 2025 ratings, an estimated $1–3 billion hit to 2026 revenue (reported). Our explainer on how Medicare Advantage plans make money walks through the formula step by step.

How does the drug industry make money?

A new medicine can take more than a decade and a reported ~$1–2.6 billion, counting failures, to reach market. Only about 8–10% of drugs entering Phase I trials are approved. The reward comes during a short window of patent and regulatory exclusivity, after which small-molecule drugs face generics that cut prices by more than 95% once six or more competitors enter (FDA analysis). Generics are about 90% of US prescriptions but only about 13–18% of spending.

Humira shows how long that window can be stretched. Its main US compound patent expired in December 2016, but AbbVie's estate of more than 100 additional patents kept US biosimilars out until 31 January 2023. In between, Humira earned roughly $93 billion of US revenue (approximate). Sales peaked at about $21 billion in 2022.

A branded drug has several prices at once: list, average wholesale price, average sales price, Medicaid best price and the net price after rebates. IQVIA estimated US medicine spending at about $1.363 trillion at list prices in 2025, against about $606 billion net. That gap is the rebate system.

Where do PBMs, wholesalers and pharmacies fit?

The product flows from manufacturer to wholesaler to pharmacy to patient. The money does not. Three wholesalers, McKesson, Cencora and Cardinal Health, handle the great majority of US distribution on operating margins of about 1–2% of revenue. Pharmacies are paid by pharmacy benefit managers, usually with a dispensing fee often under $2, and have almost no bargaining power: Rite Aid closed its last stores in 2025.

The PBM sits on the money flow. It adjudicates claims, builds pharmacy networks, writes the formulary and negotiates rebates from manufacturers. The three largest, Express Scripts (Cigna), CVS Caremark (CVS Health) and Optum Rx (UnitedHealth), handled about 80% of US prescription claims in 2025 (Drug Channels Institute). They earn from retained rebates and fees, spread pricing, owned specialty pharmacies and administrative fees. Our explainer on how PBMs make money follows one prescription through every party.

Why do GLP-1 drugs matter to the business of healthcare?

GLP-1 drugs for diabetes and obesity are the largest new drug market in a generation. Novo Nordisk's Wegovy was approved for weight management in June 2021, and Eli Lilly's Zepbound followed in 2023. At list prices of about $1,000–1,350 a month, covering them for even a fraction of members strains employer and state budgets, and they were among the drivers of rising insurer cost trend in 2023–26. They also became the first large US drug market where a cash channel, rather than PBM rebates, set the visible price: Novo launched NovoCare Pharmacy at $499 a month in March 2025, and in November 2025 Lilly and Novo agreed with the administration to supply Medicare and Medicaid at about $245 a month. Lilly's market value passed about $1 trillion that month (reported).

How do device, diagnostics and health IT companies make money?

Device makers earn in several ways: per-unit implant sales, capital equipment plus consumables, sensor subscriptions and fees per test. The most valuable model is the razor and blade. Intuitive Surgical reported about $10.06 billion of revenue in 2025 from about 3.15 million da Vinci procedures, and roughly three-quarters came from instruments, accessories and service consumed with every case rather than from robot sales.

Getting cleared by the FDA answers whether a device may be sold, not whether anyone will pay. A device maker still needs coverage, a billing code and a payment rate, and inside a hospital stay an implant is paid within the DRG, so the hospital wants the cheapest acceptable option.

Health IT sells mostly to hospitals and physician groups. Epic Systems held 43.7% of US acute-care hospitals and 56.9% of beds in 2025 (KLAS, reported), a position that makes switching costs, not features, the main moat. Digital health is several businesses wearing one label. US digital-health venture funding reached $29.1 billion in 2021 (Rock Health) and then fell to about $10–11 billion a year in 2023–24, as companies learned that virtual care was a channel for existing care rather than a new industry.

What is value-based care, and does it make money?

Value-based care covers contracts that move some or all of the financial risk for a population from the payer to the provider. At one end sit quality bonuses on top of fee-for-service; at the other, global capitation, where a provider receives a share of premium, typically 80–90%, and pays for nearly all of its members' care.

A full-risk provider earns the gap between the premium share it receives and the care it pays for. That gap comes from fewer avoidable admissions, from more complete coding that raises risk scores, and from patient tenure. The model attracted enormous capital in 2020–21 and then broke when utilization rose, V28 cut risk scores and interest rates climbed. Oak Street Health sold to CVS for about $10.6 billion including debt in 2023; agilon health's shares fell more than 95%. The steadier performer was the Medicare Shared Savings Program: in 2024, 476 ACOs generated about $2.4 billion of net savings for Medicare (CMS). Our comparison of fee-for-service vs value-based care explains both models side by side.

Where does the profit settle in healthcare?

The pattern is consistent. Profit settles at scarce chokepoints: a must-have hospital in a local market, a formulary, a patent, a clearinghouse, a referral. Revenue that depends on a step someone else controls is, in the book's phrase, "revenue on loan."

Why do so many healthcare companies fail?

Healthcare has four problems most markets do not. The patient rarely judges what they need. The patient is rarely the buyer. It is unusually hard to prove that anything worked. And prices, products and relationships are set by law. The Care Equation argues that a healthcare business creates durable value only when four factors are true at once, and that they multiply, so if any is zero the result is zero:

1. Care: does it improve health or lower its cost?
2. Payer: is someone willing and able to pay, from a budget that renews?
3. Reach: can the company reach that payer for less than the payer is worth?
4. Proof: is the evidence strong enough to survive contracting and regulation?

Each famous failure zeroed out one factor. Haven, the Amazon, Berkshire Hathaway and JPMorgan venture announced in January 2018 and closed in February 2021, never had a route to the people who set prices. Theranos failed the proof factor: it ran most tests on conventional machines and voided two years of results. Babylon Health marketed AI but became a risk-bearing medical group it could not finance. Envision Healthcare's payer was willing only because emergency patients could not choose their doctor, and the No Surprises Act closed that gap. Our list of the biggest healthcare bankruptcies traces seven more.

Two forces sit around the equation like weather. Reimbursement policy can create a market, as cost-based Medicare did for investor-owned hospitals after 1965, or destroy one, as fixed DRG payments did in 1983. Capital cycles flood the sector and then withdraw. Neither changes whether care works, but both change how long a company has to prove that it does.

What is changing in healthcare economics in 2026?

Policy has moved fast. Medicare's first negotiated drug prices took effect in 2026 for ten Part D drugs, with CMS estimating savings of about 22%, and fifteen more, including semaglutide, follow in 2027. The Consolidated Appropriations Act signed on 3 February 2026 "delinked" PBM pay from list prices in Part D, generally from 2028 (reported), and the next day Express Scripts settled with the FTC, agreeing to end spread pricing under a ten-year order (reported). The July 2025 budget law cut projected federal Medicaid spending by roughly $0.9–1 trillion over ten years and added work requirements (CBO, reported). CMS finalized a Medicare Advantage payment increase of 2.48% for 2027 after proposing a near-flat change in January 2026. And ACA exchange enrollment fell from a record ~24.3 million plan selections for 2025 to ~22.8 million for 2026 as enhanced subsidies expired (CMS, reported).

The direction is the same across these changes: less room for margins built on gaps in payment formulas, and more pressure on intermediaries to show what they add.

The takeaway

The healthcare industry makes money by turning care into claims and claims into cash through a chain of payers and intermediaries, and the profit settles wherever a company controls a scarce step in that chain. Hospitals live on payer mix, insurers on a thin spread and the services they own, drugmakers on exclusivity, and PBMs on the gap between list and net prices. Companies that last have care that works, a payer with a renewing budget, an affordable route to that payer and proof that survives scrutiny. To see how each part of the system fits together, start with Chapter 3, Following the Money, and the rest of The Care Equation.