Updated/posted: Feb 2015
Validated by: (in process)


Overview of Health Care in the US

The United States (US) has a population of over 315 million people, embodying one of the most complex health care systems in the world, with intertwining relationships between providers, payers, and patients receiving care. Historically and to this day, the US health care system is in a constant state of evolution. Trailing behind China and India, the US is the third most populous country in the world, spending $2.8 trillion on health care or 17.9% of the gross domestic product (GDP) in 2012 [1, 2] Switzerland and the United Kingdom spent 11.3% and 9.4% (GDP) respectively on health care in 2012 [2]. Growth in health care spending is mostly attributable to the growth in pharmaceutical drugs and devices since 2000 (84% attributable in 2010; 4% growth per year) [3].

The Department of Health and Human Services (HHS), at the federal level, is the primary agency responsible for regulating the health care system in the US. Each state, with a certain degree of self-governance, also has its own Department of Health (DoH) to implement state-level health policies. Health care provision and financing for those serving or formerly serving in the military are independently managed by either the Department of Defense (DoD) or the Department of Veterans’ Affairs (VA). These two departments finance 3% of the total health expenditure [4].

Figure 1. Financial flow of the US health care system

Financial flow of the US health care system figure

Source: Reinhardt U. E. The Money Flow from Household to Health Care Providers (2011) [5]

Health Care Financing

An overview of the financial flow of the US health care system is presented in Figure 1.

The health care sector is a multi-payer system composed of both public and private financing sources. Public health insurance schemes operated by the Centers for Medicare & Medicaid Services (CMS), e.g., Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP), are financed primarily by government taxes. Medicare is the largest single payer in the US, providing health care coverage for those age 65 years and older --regardless of income or medical history-- and those under the age of 65, with permanent disabilities or end-stage renal disease. Medicaid is jointly funded by both the federal government and individual state with each state setting its own guidelines regarding eligibility, services, and reimbursement. Medicaid provides care to individuals below the poverty level and to those who cannot afford to pay for health care given their eligibility. CHIP is a national health insurance program for children under 18 years of age who are not eligible for other insurance plans (including private insurance coverage).

Private financing sources consist of private health insurance plans and out-of-pocket payments by individuals who are not insured via a public or private plan.  There are several national health insurance plans, as well as regional and self-insured plans (organized by large companies). In the US, it is common that employers contribute to private insurance premiums either in whole or part for their employees. Some individuals also buy private health insurance for themselves; the private insurers then collect premiums from the individuals and employers. In turn, they pay their providers (hospital and physicians) for health services according to the contracts they have with the providers.

Individuals who are neither covered by public health insurance schemes nor private health plans pay out-of pocket at the point of service. Moreover, individuals with health insurance are responsible to pay co-payments when insurance does not provide complete coverage.  The total out-of-pocket spending in 2012 was $328.2 billion [1]; the out-of-pocket costs for insured patients for retail medicines alone were $49 billion in 2011 [6].

Both public and private hospitals, with the exception of specialized veteran’s facilities, receive payment from both public and private financing sources [4, 7]. Hospitals are typically paid based on “Diagnostic Related Group,” or DRG payment. DRGs are widely used by CMS and many private payers as a payment scheme for hospitals. The DRG-based payments cover accommodation costs in a hospital (i.e., room and board, facility costs, etc.), procedure costs, support staff (nurses, technicians, etc.), and drug/medical device costs; however, this system does not include physician fees. Most drugs are reimbursed by CMS by the inpatient DRG, though some (especially some expensive and innovative drugs) are paid separately in the outpatient DRG, called an Ambulatory Payment Classification (APC).

The DRG payment rates are updated once per year. Based on a standard payment for each DRG, regional wage difference, regional cost of living difference, and type of health care providers are all taken into account in the calculation of a final payment for a procedure using various indexes. Information on CMS DRG payments can be found on their website [8].

Private insurers pay hospitals on the basis of DRG, case rates, per-diems, fee-for-service or discounted fee-for-service schemes. On average, these payments exceed the hospital’s costs of providing the underlying services. In theory, the margins built into these payments cover the losses hospitals may have on serving uninsured and Medicare / Medicaid patients.

Health Care Provision

Health care services are provided by community, hospital-based health care professionals, or solo-practicing self-employed general practitioners. Physicians may be employed by hospitals or medical groups that are either private or affiliated with a hospital, and are typically located within large teaching hospitals. Increasing numbers of primary care practices are being purchased by hospitals where the physicians are becoming hospital employees. Ambulatory, secondary, and tertiary care is provided by hospital-based doctors who are either self- or hospital-employed. Nationally, hospitals are a mix of public and private, though private hospitals (mostly not-for profit) dominate in number [7]. Public hospitals are typically large-size tertiary teaching hospitals.

Individuals may choose health care providers based on coverage through their particular health insurance plan. For example, a health maintenance organization (HMO) plan will provide both health insurance and health care services to their enrollees; however, individuals are restricted to health care services and providers available only within the HMO network. Similarly, a preferred provider organization (PPO) plan contracts with specific health care providers, restricting access to only those contracted physicians. Enrollees with PPO insurance have the option to be treated by non-contracted providers, but would need to pay significantly more out-of-pocket since the provider is considered out-of-network.

Physicians who are self-employed are paid through fee-for-service. If the patients are covered by any of the public health insurance schemes (Medicare & Medicaid, CHIP), the price of the health care service is defined by CMS and based on either the Physician Fee Schedule (PFS) or by the Medicaid PFS. The prices of the procedures conducted by physicians are then calculated based on their national uniform relative value units (RVUs, points given to a procedure), and the regional costs per unit. Private insurers also pay self-employed physician(s) based on the physician fee schedule, however, with a different rate that is negotiated between physician(s) and private insurers.

Health Care Reform

The US health care system has relied heavily on the private sector and is characterized by a lack of universal health care insurance, a case different than other developed countries. The Patient Protection and Affordable Care Act (HR 3590), signed into law on March 23, 2010, allowed for greater access to health care, particularly among those uninsured. The bill, being phased in over several years, aims to change the US health care system into a system with almost universal access to health insurance [9]. Starting October 2013, open enrollment began in the ‘Health Insurance Market place’. A full summary of the Affordable Care Act (ACA) can be found at the Henry J. Kaiser Family Foundation website [10]

The new law makes it mandatory for most employers (employing more than 50 fulltime employees) to provide health insurance coverage for full-time employees, otherwise they face financial penalties. Likewise, all citizens (except for those with very low income) are expected to enroll in some form of health insurance or else face a penalty. The law expands eligibility for Medicaid and allows people who do not have any insurance, or who could not afford insurance previously, to be able to buy tax-payer subsidized coverage. A diagram, Health Coverage under the Affordable Care Act, by the Kaiser Family Foundation identifies the options/availability for health care coverage [11].  Additionally, the new law makes it illegal for insurance companies to refuse coverage to people with pre-existing medical conditions or to stop coverage when they become ill.



Decision Makers Interrelation Diagram
Model Symbols:

Boxes: Decision-making bodies.
Circles:  Data requirements, tools, etc. that impact the process.
Broken Arrows:  May or may not impact the decision.



Key organizations

The Department of Health and Human Services (HHS) is responsible for protecting the health and providing essential human services for all Americans. Several agencies function under HHS including the Center for Disease Control and Prevention (CDC), the Food and Drug Administration (FDA), the National Institutes of Health (NIH) and the Agency for Healthcare Research and Quality (AHRQ). HHS and state-level Departments of Health are responsible for developing and supervising the implementation of health policies, as well as managing a large part of health care expenditure via The Center for Medicare & Medicaid Services (CMS). However, there is no strict target of federal- or state-wide health care expenditure.

The Food and Drug Administration (FDA) is a regulatory body responsible for approving and registering pharmaceutical drugs and medical products in the US, as well as monitoring their safety and efficacy while on the market.

Center for Drug Evaluation and Research (CDER) is the division within the FDA that regulates over-the-counter and prescription drugs, including biological therapeutics and generic drugs.

The Centers for Medicare & Medicaid Services (CMS) is the largest public health insurer, which operates Medicare, Medicaid, and CHIP. CMS sets the reimbursement rates for drugs and medical devices, as well as prospective payment rates (e.g., Diagnostic Related Group (DRG), ambulatory payment classification (APC), physician fee schedule (PFS) or by the Medicaid PFS) for the programs they operate. Reimbursement payment rates from private insurance companies are often based on CMS rates and typically are not lower than CMS reimbursement.

Agency for Healthcare Research and Quality (AHRQ) is responsible for supporting research designed to improve the quality of healthcare, reduce its costs, address patient safety and medical errors, and broaden access to essential services.

The Pharmacy and Therapeutics (P & T) Committee develops and manages the  formulary systems used in many different settings, i.e., hospitals, long-term-care facilities, Medicare, Medicaid, insurance companies, and managed care organizations. They acts as the liaison between pharmacy and medical staff in terms of choosing therapies that are effective, safe, and cost-effective for their particular facility or insurance plans.

Private Insurers (Private health insurance plans) are the key operators that make purchasing, coverage, and payment decisions regarding health care services.

Managed Care Organizations (MCO) or payers, operationalize health insurance for their enrollees by providing a complete health care delivery system consisting of affiliated and/or owed hospitals, physicians and other providers who provide a wide range of coordinated health services (e.g., Blue Cross and Blue Shield, United Healthcare, Kasier Permanente). These include health maintenance organization (HMO) and preferred provider organization (PPO).

Pharmacy Benefit Managers (PBMs) design, implement, and manage pharmacy benefits and coverage. Payers (MCOs) often partner up with PBMs and let the latter manage pharmacy-related insurance responsibilities (e.g., Express Scripts, CVS Caremark).

Academy of Managed Care Pharmacists (AMCP) is a national association of pharmacists, clinicians, and others responsible for providing health care, education, and policies affecting Americans covered by a managed pharmacy benefit.


Decision-Making Process

Once the manufacturer develops a product, the medicine must be reviewed for safety and efficacy to be available in the US market. Once on the market, the product is reviewed by different health care bodies that will determine the market access for individuals based on coverage and reimbursement decisions before reaching the patient.

Decision-Making Process diagram

Regulatory Approval of Pharmaceutical Products

Before pharmaceutical products (both brand-name and generics) can be marketed in the US, they are subject to market approval by the US Food and Drug Administration (FDA). A product must demonstrate sound efficacy and safety through various phases of clinical trials, which are undertaken by the pharmaceutical sponsor and assessed by the FDA’s Center for Drug Evaluation and Research (CDER) prior to regulatory approval. Trial data are evaluated by CDER to determine whether the drug is ready for sale and if the pharmaceutical company can apply for a new drug application (NDA) to introduce the medicine into the US Market.

Once approved, a medicine is available for use, but for the product to be reimbursed by a health insurance plan, it must be considered for formulary inclusion by their Pharmacy and Therapeutics (P&T) committee.



Figure 4. US Decision Makers and Influencers for Pharmaceuticals

Pricing & Reimbursement Process

Generally speaking, payers in the US (both CMS and private insurance companies) do not regulate the price of a pharmaceutical product, allowing the manufacturers to set prices freely. However, payers are allowed to set the reimbursement price/rate. The reimbursement process differs between the public sector (CMS) and the private sector.

Formulary evidence dossiers

Evidence dossiers summarize the key clinical and economic evidence for a product, and are often used as a reference document by P&T committee’s for their formulary decision making, along with other key considerations such as drug acquisition costs and potential budget impact. Pharmaceutical sponsors typically develop an Academy of Managed Care (AMCP) dossier detailing key clinical and economic evidence for their product and submit it to AMCP [12]. The dossier gets uploaded on the AMCP portal and is made available to health care decision makers (health plans, Pharmacy Benefit Managers (PBM), government agencies, etc.) upon their unsolicited request. This information is used to support reimbursement and/or formulary placement, consideration of a new product, new indication, or new formulation of an existing product. More detail regarding the structure and elements of the AMCP dossier can be found in the ‘Data Requirements’ section.

Public sector

For prescription drug coverage, Medicare offers a prescription drug plan (Part D), which is offered through health plans and PBMs approved by Medicare. Similarly, Medicare Advantage Plans typically offer the same prescription coverage. These plans have their P&T committees make decisions on what drugs to include in the formulary, using the information from evidence dossiers and accounting for drug acquisition costs and potential budget impact. Typically, CMS is required to approve the formulary of these health plans. (Key points in each CMS program can be found in Table 1)

Table 1. Federally Funded Health Insurance Programs


Coverage is sub-divided into four parts (Part A to D).

People who are eligible for Medicare are all entitled to Part A. Those covered by Part A can enroll in Part B voluntarily. Around 95% of Part A participants also enroll in Part B benefits. Those covered by Part B can enroll in Part C voluntarily, so on and so forth.

Part A

Covers inpatient hospital services including inpatient and hospital prescriptions.

Part B

Covers payment for physician, outpatient, home health, and preventive services.

Part C

Medicare Advantage Prescription Drug Plans (MA-PD) are offered by private plans, HMOs, and PPOs with lower copayment than the “standard” plans that are approved by Medicare.

Part D

Covers outpatient prescriptions.


Eligibility requirements are based on income status, age, pregnancy status, disability, and citizenship status.

Covers hospital stays, doctor visits, emergency room visits, prenatal care, prescription drugs, and other treatments.

Children’s Health Insurance Program (CHIP).

Benefits are very similar to that of Medicare Part A.

Coverage of drugs used during inpatient or outpatient procedures or hospitalization for Medicare, Medicaid, and CHIP patients is included within the reimbursement provided for the procedure or specific DRG. Thus, it is the responsibility of the hospitals to decide which drugs will be on their formulary to be used for a covered procedure. Hence, it is important for hospitals to maintain their own formularies; their decision making process is explained later in this section.

There is no federal HTA requirement; however, from time to time Medicare requests that the Agency for Health Care Quality (AHRQ) review new treatments or procedures for efficacy, safety, and comparative effectiveness.

Private sector

Coverage decisions for private health insurance plans are customized per individual health plan. Many health plans use evidence dossiers and/or conduct their own clinical and economic review (e.g., budget impact) to determine coverage for a particular drug and/or procedure. PBMs also conduct their own internal review to make decisions regarding coverage. Reimbursement varies across health plans.

Hospitals form their own P&T committee to develop and manage the hospital formulary as well as act as the liaison between pharmacy and medical staff in terms of choosing therapies that are effective, safe, and cost-effective for their particular facility. Similar to the AMCP dossier, hospitals often create their own evidence dossier/monographs by gathering information including clinical trial data, package inserts, and published literature to conduct their own analyses to make formulary decisions. Moreover, they take into account acquisition cost of the drug as well as budget impact [13]. Once implemented, physicians use the formulary as a tool for prescribing treatment to patients.

Drug cost and the tier-system

Health plans maintain a formulary of drugs they plan to cover for their enrollees under a particular insurance policy. The formulary is structured in a tier co-payment or co-insurance system, where the beneficiary pays for a percentage of drug cost versus a fixed-fee co-payment.

Generally, plans may have a three-tier system including generic drugs under tier 1 with a $10 co-payment, preferred brands under tier 2 with a $30 co-payment, and non-preferred brands under tier 3 with a $50 co-payment. Each plan may have a different tier system to include varying co-payment costs and more than 3 tiers. The costs per tier serve as financial incentives for patients to use lower-cost drugs for treatment. For drugs not included in the formulary, a patient will have to pay 100% of the drug cost.

Medicare, for Part B prescription drugs, pays the average sales price (ASP) plus 6% for drugs administered in the physician office or clinic, whereas for Part D and Medicare Advantage Prescription Drug (MA-PD) plans, Medicare negotiates rebates and discounts with drug manufacturers [14]. Under the Medicaid program, the state (since Medicaid is managed by individual states) will pay pharmacies or managed care plan for drugs dispensed using rates based on wholesale acquisition cost (WAC) for brand drugs, and maximum allowable cost (MAC) for other brands and generics. WAC’s are set by manufacturers and is an estimate of the manufacturer’s list price for wholesalers or other direct purchasers, not including discounts or rebates.



Market approval of a new pharmaceutical product is predicated on the submission of a new drug application (NDA) to the FDA. A full review of NDA requirements may be found on the FDA website or at CRF-Code of Federal Regulations Title 21.

Once approved by the FDA, pharmaceutical sponsors will typically submit clinical and economic evidence of their product for formulary consideration, market access, and reimbursement. In the US, the Academy of Managed Care (AMCP) has developed the AMCP Dossier for the evaluation of a product’s attributes by key health care decision makers and payers (hospitals, health plans, government plans, PBMs, etc.). The following key components are necessary for AMCP Dossier submission [12].

1.0  Executive Summary – Clinical and Economic Value of the Product

  • Clinical Benefits
  • Economic Benefits
  • Conclusions

2.0  Product Information and Disease Description

  • Product Description
  • Place of Product in Therapy
    • Disease Description
      • Epidemiology and relevant risk factors, with a focus on identifiable subpopulations that would be appropriate for the use of the product
      • Pathophysiology
      • Clinical presentation
      • Societal, humanistic, and/or economic model
    • Approaches to Treatment
      • Approaches to treatment
      • Alternative treatment options (drug and non-drug)
      • Place and anticipated uses of proposed therapy
      • Ancillary disease or care management intervention strategies
      • Expected outcomes
      • Other drug development or post-marketing obligations
      • Key assumptions and rationale
    • Relevant Treatment Guidelines and Consensus Statements from National and/or International Bodies
  • Evidence for Pharmacogenomic Tests and Drugs

3.0  Supporting Clinical Evidence

  • Summarizing Key Clinical Studies
    • Published and Unpublished Data and Clinical Studies Supporting Labeled Indications
    • Published and Unpublished Data and Clinical Studies Supporting Off-Label Indications
    • Clinical Evidence Table Spreadsheets of all Published and Unpublished Studies
    • Summary of Evidence from Secondary Sources

4.0  Economic Value and Modeling Report

  • Modeling Overview
    • Utility of Modeling for Decision Making
    • Types of Models
    • Other Considerations
  • Modeling Approaches and Methods
    • Approach and Framework
    • Data Sources
    • Analysis
  • Modeling Report and Interactive Model
    • Transparency
    • Modeling Report Format
    • Interactive Model

5.0  Other Supporting Evidence

  • Summarizing Other Relevant Evidence
  • Published and Unpublished Studies Supporting Labeled and Off-Label Indications
  • Evidence Table Spreadsheets of all Published and Unpublished Studies

6.0  Supporting Information

  • References Contained in Dossiers
  • Dossiers and Economic Models



ACA: Affordable Care Act
AHA: American Hospital Association
AHRQ: Agency for Health Care Quality
AMCP: Academy of Managed Care Pharmacy
APC: Ambulatory Payment Classification
ASP: Average Sales Price
CDC: Center for Disease Control and Prevention
CDER: Center for Drug Evaluation and Review
CHIP: Children’s Health Insurance Program
CMS: Centers for Medicare & Medicaid Services
DoD: Department of Defense
DoH: Department of Health
DRG: Diagnostic Related Group
FDA: Food and Drug Administration
GDP: Gross Domestic Product
HHS: Department of Health and Human Services
HIPPS: Hospital Inpatient Prospective Payment Scheme
HMO: Health Maintenance Organization
MAC: Maximum Allowable Cost
MA-PD: Medicare Advantage Prescription Drug Plans
MCO: Managed Care Organizations
NDA: New Drug Application
NIH: National Institutes of Health
OPPS: Outpatient Prospective Payment System
PBM: Pharmacy Benefit Managers
P&T: Pharmacy and Therapeutics
PFS: Physician Fee Schedule
PPO: Preferred Provider Organization
PPS: Prospective Payment System
RVU: Relative Value Unit
THE: Total Health Care Expenditure
US: United States
VA: Veteran’s Affairs
WAC: Wholesale Acquisition Cost





  1. CMS, National Health Expenditures 2012 Highlights. Available from: http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/downloads/highlights.pdf. [Accessed August 27, 2014].
  2. World Health Organization Available from: http://www.who.int/countries/en/. [Accessed August 27, 2014].
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  4. Martin AB, et al., Growth in US health spending remained slow in 2010; Health share of gross domestic product was unchanged from 2009. Health Affairs, 2012. 31(1): 208-219.
  5. Reinhardt UE. The Money Flow from Household to Health Care Providers. 2011 Available from: http://economix.blogs.nytimes.com/2011/09/30/the-money-flow-from-households-to-health-care-providers/. [Accessed December 20, 2013].
  6. IMS Institute for Healthcare Informatics, The Use of Medicines in the United States: Review of 2011, 2012. Available from: http://www.environmentalhealthnews.org/ehs/news/2013/pdf-links/IHII_Medicines_in_U.S_Report_2011-1.pdf. [Accessed January 3]. 2014.
  7. Association A.H. Fast Facts on US Hospitals. AHA Hospital Statistics 2013. Available from: http://www.aha.org/research/rc/stat-studies/101207fastfacts.pdf. [Accessed December 13, 2013] http://www.aha.org/research/rc/stat-studies/fast-facts.shtml. [Accessed December 22, 2014]
  8. FY 2013 IPPS Final Rule Home Page. Available from: http://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/FY-2013-IPPS-Final-Rule-Home-Page.html. [Accessed August 27, 2014].
  9. HHS. Key Features of the Affordable Care Act by Year. Available from: http://www.hhs.gov/healthcare/facts/timeline/timeline-text.html. [Accessed July 31, 2014].
  10. Summary of the Affordable Care Act. Available from: http://kff.org/health-reform/fact-sheet/summary-of-the-affordable-care-act/. [Accessed August 27, 2014].
  11. Kaiser Family, F., Health coverage under the Affordable Care Act. JAMA, 2012. 308(24): p. 2556.
  12. The AMCP Format for Formulary Submissions Version 3.1. Available from: http://amcp.org/practice-resources/amcp-format-formulary-submisions.pdf. [Accessed August 27, 2014].
  13. Pillay, T., D. Newby, and E. Walkom, The role of pharmacoeconomics in formulary decision-making. Formulary; 2006; 41:374-386. http://formularyjournal.modernmedicine.com/formulary-journal/news/clinical/clinical-pharmacology/role-pharmacoeconomics-formulary-decision-maki?page=full
  14. AMCP Guide to Pharmaceutical Payment Methods, Update. 2013. Available from: http://www.amcp.org/pharmaceutical-payment-guide/2013. [Accessed August 27, 2014].


Alexandra Khachatryan, MPH, Pharmerit International, Bethesda, MD, USA

Dipen Patel, PhD, Pharmerit International, Bethesda, MD, USA


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