The Messed-Up Value of Healthcare

Healthcare is one of the largest industries in the world, yet how we assign value within it is fundamentally broken. The numbers tell a story that should give every healthcare stakeholder pause.

The Value Paradox

Consider this: the global healthcare services market — hospitals, clinics, health systems, insurance administration — is roughly three times the size of all tangible healthcare manufacturing sectors combined. That includes pharmaceuticals, medical devices, in vitro diagnostics, and nutraceuticals.

In other words, we spend three times more on delivering healthcare than we do on creating the tools of healthcare. This isn’t inherently wrong — delivery requires infrastructure, personnel, and systems. But it raises uncomfortable questions about where value is being created versus where it is being captured.

Where the Money Goes

Let’s break it down. In a typical healthcare dollar:

The largest share goes to hospitals and health system administration. This includes everything from building maintenance to billing departments to executive compensation. Much of this spending is necessary, but a significant portion represents administrative overhead that adds no direct patient value.

The next largest share goes to physician and clinical services. These are the humans who actually interact with patients — and increasingly, they are caught between rising patient loads and stagnating reimbursement rates.

Pharmaceuticals — the products that cure diseases, manage chronic conditions, and prevent infections — account for a relatively small share. And within that share, the innovative products that represent genuine therapeutic advances are a small fraction of total pharmaceutical spending, with generics making up the bulk.

Diagnostics — the products that tell us what’s wrong so we can fix it — account for the smallest share of all. Despite being the gateway to virtually every healthcare intervention, the IVD industry’s total global revenue is a rounding error compared to healthcare services spending.

The Innovation Penalty

This value distribution creates a perverse dynamic: the sectors that drive the most innovation capture the least value, while the sectors that primarily manage and distribute healthcare capture the most.

This matters because investment follows returns. When the greatest financial returns come from building hospital chains and insurance networks rather than developing new drugs or diagnostic tools, that’s where capital flows. The result is a healthcare system that is increasingly efficient at processing patients but decreasingly effective at giving clinicians better tools.

The Services Bloat Problem

Healthcare services have grown not because patients need more services, but because the system has become increasingly complex. Regulatory compliance, insurance administration, legal liability management, and quality reporting all add layers of cost that are invisible to patients but consume enormous resources.

In the United States, administrative costs account for roughly 30% of total healthcare spending — far higher than in any other developed country. This is not because American administrators are less efficient; it’s because the system itself generates more administrative requirements.

What This Means for Strategy

For healthcare companies — whether pharmaceutical, diagnostic, or device makers — the implication is clear: value creation and value capture are decoupled. Building a better product does not automatically translate into capturing more value. The intermediaries — GPOs, PBMs, hospital systems, insurers — capture a disproportionate share of the value chain.

This has several strategic implications:

1. Direct-to-patient models will become increasingly important. Cutting out intermediaries doesn’t just reduce cost; it allows product companies to capture more of the value they create.

2. Diagnostics companies are chronically undervalued. If a diagnostic test enables a $100,000 treatment decision, the test itself should be valued far higher than its typical $10-50 price point. The market is beginning to recognize this with companion diagnostics, but the adjustment is slow.

3. The real competition is not between products but between systems. A pharmaceutical company doesn’t just compete with other pharma companies — it competes with every other claimant on the healthcare dollar. Building a case for value requires understanding the entire system, not just the product segment.

4. LMIC markets present an opportunity precisely because the services layer is thinner. In countries where healthcare infrastructure is still being built, there is an opportunity to build more efficient systems from the ground up — systems that allocate value more rationally between services and products.

The Path Forward

Fixing the messed-up value of healthcare requires:

• Transparency: Making visible where healthcare dollars actually go, so that patients and payers can make informed decisions
• Outcome-based valuation: Shifting from volume-based to outcome-based models that reward actual health improvement rather than service throughput
• Infrastructure investment in products: Increasing public and private investment in the tools of healthcare — drugs, diagnostics, devices — relative to the systems that deliver them
• Rethinking the intermediary layer: Challenging whether every intermediary in the healthcare value chain is adding genuine value or simply adding cost

The healthcare industry is remarkable in that it simultaneously under-invests in the products that save lives and over-invests in the systems that process claims. Until we fix this fundamental misallocation, we will continue to have a healthcare system that is expensive without being effective, and complex without being better.

The value of healthcare is messed up. Acknowledging that is the first step toward fixing it.