Healthcare Debates: Does Expensive American Healthcare Actually Fund Medical Research?

American healthcare is the most expensive in the world, and its cost is rising. In 2024, the US spent $5.3 trillion on healthcare, or $15,474 per person,  a figure that has nearly doubled since 2010. That level of spending prompts the reasonable question: what are we getting for it? 

One answer offered frequently by the healthcare industry is that high prices fund medical innovation. The logic goes that without premium pricing, the research and development pipeline that produces new drugs, devices, and treatments would dry up. But physicians, health economists, and policy researchers have spent decades scrutinizing that claim, and many find it wanting.

Dr. David Himmelstein has been among them. A primary care physician who practiced for roughly 40 years and now researches health policy at Harvard Medical School and the City University of New York, he has published more than 200 scientific articles on how the American healthcare system works, and who it works for. “At the root of it,” he says, “we treat healthcare as a business, not a service, and it’s a business that is highly profitable for many firms and some individuals.”

This article examines where healthcare spending actually goes, what it does and doesn’t fund, and whether the R&D argument holds up to scrutiny.

On the funding side, the numbers are substantial. According to Research!America, total US investment in medical and health R&D reached $245.1 billion in 2020, with industry accounting for 66 percent of that spending and the federal government contributing just over 25 percent. The research segments within American healthcare that contributed to that total included: 

• Biopharmaceuticals
• Medical technology
• Independent hospital research centers
• Healthcare services

But R&D represents a small slice of overall healthcare spending, less than six cents of every healthcare dollar, even in a year that included substantial one-time federal funding for Covid-19. Understanding where the rest goes requires looking at the full structure of healthcare costs.

David Himmelstein, MD, is a distinguished professor of public health at Hunter College, City University of New York, and a lecturer in medicine at Harvard Medical School. He earned his medical degree from Columbia University’s College of Physicians and Surgeons and practiced primary care internal medicine for roughly four decades, including serving as chief of social and community medicine at Cambridge Hospital.

Dr. Himmelstein has authored or co-authored more than 150 peer-reviewed studies, including widely cited work on medical bankruptcy, administrative costs in healthcare, and the consequences of being uninsured in America. He co-founded Physicians for a National Health Program, an organization advocating for single-payer healthcare reform.

The gap between US healthcare spending and that of comparable nations keeps widening. The OECD’s Health at a Glance 2023 report found that per-person health spending averaged just under $5,000 across member nations, with the US at $12,555, the highest of any country in the analysis.

Higher spending might be defensible if it produced better outcomes. It does not. A landmark 2018 study published in JAMA compared US healthcare spending with ten other high-income nations and found that the differences were driven mainly by prices for labor and goods, including physician and hospital services, pharmaceuticals, diagnostic tests, devices, and administrative costs, not by greater utilization of care. 

More recent data has reinforced that structural finding. The Commonwealth Fund’s 2024 Mirror, Mirror report found that despite spending the most of any nation studied, the United States has the worst-performing healthcare system overall. The US ranked last in access to care, ninth in equity, and last in health outcomes, with the highest rates of preventable deaths and lower-than-average life expectancy. 

Dr. Himmelstein, who has spent decades studying these disparities, points to a structural cause. “We treat healthcare as a business, not a service,” he says, “and that both causes enormous extraction of profit from healthcare, but also the disorganization and distortion of healthcare that results from the push for profits.”

Americans often hear that the high cost of healthcare reflects what they receive in return: more care, more technology, better outcomes. The data does not support that. Dr. Himmelstein pushes back directly: “We don’t get more doctor visits; we don’t get more hospital stays,” he says. “People in Japan get many more MRIs and CT scans, and several European nations get comparable amounts of most high-tech procedures. Even for very expensive cancer treatments, people in other countries get equivalent or better care, and outcomes of cancer are at least as good, probably better, in many other nations than in the US.”

So where does the money go? Dr. Himmelstein points to two forces that account for most of the excess. The first is profit. According to McKinsey, total US healthcare industry profit pools reached $583 billion in 2022 and are projected to grow to $819 billion by 2027. 

“There are hundreds of billions extracted from healthcare each year for profit,” Dr. Himmelstein says. The second force is the bureaucratic infrastructure built to sustain a profit-driven system. A 2020 study he co-authored in the Annals of Internal Medicine, using 2017 data, estimated that US healthcare administrative spending consumed 34.2 percent of national health expenditures, more than double the share spent in Canada. More recent comprehensive peer-reviewed data on administrative costs has not yet been published at that level of rigor, but the structural conditions driving those costs have only intensified since. 

“There’s probably close to a trillion dollars in needless bureaucracy that extracts that profit and enforces the crazy structures we’ve built to finance healthcare,” Dr. Himmelstein says. “And a lot of waste because we do stuff that’s profitable but not useful.” As an example, he points to knee arthroscopy for older patients with torn cartilage. “We now know from a randomized trial that you’re worse off having that surgery than not having it,” he says. “And we’re still doing it hundreds of thousands of times a year.”

Prescription drugs accounted for $467 billion of US healthcare spending in 2024, representing 9 percent of total national health expenditures, according to CMS. That figure has grown steadily for decades, and pharmaceutical pricing sits at the center of the broader debate over what Americans are actually paying for.

The industry’s standard defense of high drug prices is the cost of research and development. Drug development is genuinely expensive. A 2025 study published in JAMA Network Open estimated a median R&D cost of $708 million per newly approved drug, rising to a mean of $1.31 billion when accounting for the cost of capital and failed development programs. A separate Deloitte analysis put the average cost for large pharmaceutical companies even higher, at $2.23 billion per drug in 2024, citing increasingly complex trial designs and high attrition rates.

But research costs tell only part of the story. “They’re spending much, much more on profits and marketing than they’re spending on research,” Dr. Himmelstein says. “If you look at how much they’re paying off shareholders and how much they’re spending on marketing, that dwarfs what they’re spending on research.”

The marketing numbers support that argument. The ten largest pharmaceutical companies spent a combined $13.8 billion on advertising and promotion in the US in 2023 alone. Direct-to-consumer advertising hit a record $7.6 billion in 2022, with television accounting for more than three-quarters of that spend. A 2021 analysis by America’s Health Insurance Plans found that seven of the ten largest pharmaceutical companies by revenue spent more on sales and marketing than on R&D that year. According to an analysis of publicly available SEC filings conducted by the Campaign for Sustainable Rx Pricing, pharmaceutical manufacturers averaged a 23.2 percent net income margin from 2017 through 2024, roughly ten times greater than other sectors of the drug supply chain, including distributors, retail pharmacies, and health insurers.

Dr. Himmelstein points to a structural remedy: “If advertising were not a tax deduction,” he says, “they’d stop spending so much on it.”

The human cost of current pricing is not abstract. Dr. Himmelstein points to research examining what happens when patients face high out-of-pocket drug costs. “There’s a very good study looking at what making people pay for drugs means in terms of mortality,” he says. “It looked at people who started Medicare in the course of the year, so they turned 65 at various points in the calendar year, and therefore incurred different out-of-pocket costs for their medications. People who turned 65 earlier in the year, and therefore had higher drug co-payments out-of-pocket, often stopped the drugs, and their death rates went up. We know that we’re killing people with what we’re charging for drugs.”

The claim that high US healthcare prices are the price of medical innovation is repeated so often it has become conventional wisdom. The logic is straightforward: drug development is expensive, American prices are high, and therefore American patients are effectively subsidizing the research pipeline that produces new treatments for the world. Dr. Himmelstein, who has spent decades examining how healthcare dollars actually move through the system, says that framing does not hold up.

“At Harvard Medical School, that’s pretty much not true,” he says. “The hospitals and clinics are not subsidizing the research done by the doctors. Most of the important research is funded by grants from public agencies or foundations.”

The data supports that. A 2023 study published in JAMA Health Forum by Bentley University’s Center for Integration of Science and Industry found that the NIH spent $187 billion on basic or applied research related to 354 of the 356 drugs approved by the FDA from 2010 to 2019, with 83 percent of that total involving basic research on drug targets rather than the drugs themselves. 

The study found that NIH investment per approved drug was comparable to reported industry spending, suggesting that the public sector bears a far larger share of the innovation burden than the pharmaceutical industry’s pricing arguments imply. That investment came from taxpayers, not from hospital bills or insurance premiums.

Pharmaceutical companies primarily fund the later stages of development, once the science has already established that a profitable product is achievable. “Drug companies have often taken the first stages of research that show there’s going to be a profitable product there, and that research was funded by the government,” Dr. Himmelstein says. While basic discovery research is funded primarily by government and philanthropic organizations, late-stage development is funded mainly by pharmaceutical companies or venture capitalists, who enter once the scientific groundwork has been laid and the prospect of a marketable product is clearer. Private companies then hold the patents, set the prices, and capture the returns on an investment the public largely underwrote.

Dr. Himmelstein argues that this arrangement is neither inevitable nor efficient. “Government could fund the final stages of research that the drug companies currently fund,” he says. “Government pays for two-thirds of all drugs, so they’re funding the profits at this point. If you said we’ll fund the research but not the profits, it’d be much cheaper to have that innovation.”

He is also skeptical that the profit motive is what drives the researchers themselves. “The researchers aren’t motivated by the drive for profit,” he says. “Their bosses are. The people actually doing the science are doing it because they’re interested, and they’re trying to help the world. It’s fascinating work. The profit is really the bosses running the firms, not the people doing the work.”

Medical R&D remains one of the smaller line items in overall healthcare spending, even as pharmaceutical profit margins outpace nearly every other sector. With most healthcare overspending concentrated elsewhere, in administrative bureaucracy, marketing, and profit extraction, the argument that cutting drug prices would starve medical innovation deserves scrutiny.

Since the Inflation Reduction Act passed, allowing Medicare to negotiate prices on certain drugs starting in 2026, pharmaceutical companies have repeatedly pointed to the law when announcing cuts to research programs. PhRMA, the industry’s leading trade group, said the law would lead to fewer new treatments, and individual companies, including Bristol Myers Squibb and Alnylam, have cited the law when canceling or scaling back specific research programs. 

But health policy researchers who track the industry are skeptical that the law is the real cause. Stacie Dusetzina, a health policy professor at Vanderbilt University School of Medicine who studies drug pricing, has noted that many of the R&D projects pharma companies claim to have sidelined because of the law likely would not have advanced regardless. The pattern mirrors what Dr. Himmelstein describes more broadly: companies attribute cuts to policy changes that threaten their margins, while the underlying research decisions were likely already in question. 

Dr. Himmelstein’s framing of the broader system applies directly here. The industry’s R&D argument depends on the assumption that current prices, and current profit margins, are the only way to sustain innovation. But if the government already funds the foundational science, and companies spend more on marketing and shareholder returns than on research itself, the claim that lower prices would starve medical progress becomes harder to sustain. As Dr. Himmelstein puts it, the people doing the actual science are not driven by the prospect of higher profits. The people setting the prices are.