In the US, a common argument I've seen against a universal healthcare system is that removing the ability of private health insurance companies to compete will give rise to a natural monopoly in the industry, leading to an overall increased cost to the taxpayer.

This argument seems to assume that competition between health insurance providers is currently benefiting consumers by lowering the price of premiums & deductibles, however this study by the KFF found that the average annual premiums for employer sponsored health insurance rose by 4-5% in 2019, more than both wages (3.4%) (based on the change in total average hourly earnings of production and nonsupervisory employees) and inflation (2%).

Why isn't competition between health insurance providers lowering the cost of premiums? Are there other factors at play? How do existing nationalized healthcare systems seek to mitigate this issue?


18 Answers 18


What the other answers fail to address is a fundamental flaw in capitalism for certain types of business:

Your average human places their continued survival above all other priorities.

This concept is called 'inelastic demand'. In order for supply and demand to work properly, both entities need to be free to disengage and seek other options. But when one's life and/or well-being are at immediate risk, fear of death and/or disability clouds our judgment towards rational analysis of our situation, and thus puts healthcare providers in a position of power over us. Likewise, the fear of future death and/or disability versus financial ruin or loss of coverage can put health insurance companies in a position of power over us.

So while I might shop around for a good car and allow my current car to become less-than-ideal while I wait for a good opportunity, I will not gamble with my life or the life of my family, and thus if I only have two options for healthcare, I will invariably pick one of those two rather than wait for something better to come along.

  • 114
    This is pretty much it. The technical term for it is inelastic demand. There's no such thing as a free market when the actors on the demand side effectively have a loaded gun pointed at their temple. Which means a "free market" in healthcare is a myth.
    – T.E.D.
    Commented Mar 5, 2020 at 17:29
  • 6
    Comments deleted. This is not a discussion forum. Please refrain from lengthy back and forth debates in comments. It is annoying for the author of the answer (because of message spam) and usually does not result in an improvement of the answer.
    – Philipp
    Commented Mar 5, 2020 at 21:52
  • 6
    The question is about the cost of insurance. The demand for insurance is surely not inelastic. Your answer does not address the question.
    – puppetsock
    Commented Mar 5, 2020 at 22:26
  • 4
    @puppetsock: Insurance is effectively something you cannot do without, which makes the demand for insurance inelastic.
    – user285
    Commented Mar 5, 2020 at 22:32
  • 7
    This does not address the question asked. The question regards the cost of health insurance while this answer is focused on emergency health care, a related but separate concern. I am not flagging this answer because I'm new here and not certain of the general standards for this stack.
    – user30575
    Commented Mar 6, 2020 at 20:43

How free is the US health care market really?

The reason that free competition has not made health care in the US cheaper is that free competition has in fact been severely restricted for decades. As described in this article, regulation of the health care industry has been continuously expanded (decreasing the supply of drugs, doctors, etc.), while subsidies have been raised (increasing demand). The article provides the following list of legislation historically passed by both parties that has interfered with the competitive landscape:

  • In 1910, the physician oligopoly was started during the Republican administration of William Taft after the American Medical Association lobbied the states to strengthen the regulation of medical licensure and allow their state AMA offices to oversee the closure or merger of nearly half of medical schools and also the reduction of class sizes. The states have been subsidizing the education of the number of doctors recommended by the AMA.
  • In 1925, prescription drug monopolies begun after the federal government led by Republican President Calvin Coolidge started allowing the patenting of drugs. (Drug monopolies have also been promoted by government research and development subsidies targeted to favored pharmaceutical companies.)
  • In 1945, buyer monopolization begun after the McCarran-Ferguson Act led by the Roosevelt Administration exempted the business of medical insurance from most federal regulation, including antitrust laws. (States have also more recently contributed to the monopolization by requiring health care plans to meet standards for coverage.)
  • In 1946, institutional provider monopolization begun after favored hospitals received federal subsidies (matching grants and loans) provided under the Hospital Survey and Construction Act passed during the Truman Administration. (States have also been exempting non-profit hospitals from antitrust laws.)
  • In 1951, employers started to become the dominant third-party insurance buyer during the Truman Administration after the Internal Revenue Service declared group premiums tax-deductible.
  • In 1965, nationalization was started with a government buyer monopoly after the Johnson Administration led passage of Medicare and Medicaid which provided health insurance for the elderly and poor, respectively.
  • In 1972, institutional provider monopolization was strengthened after the Nixon Administration started restricting the supply of hospitals by requiring federal certificate-of-need for the construction of medical facilities.
  • In 1974, buyer monopolization was strengthened during the Nixon Administration after the Employee Retirement Income Security Act exempted employee health benefit plans offered by large employers (e.g., HMOs) from state regulations and lawsuits (e.g., brought by people denied coverage).
  • In 1984, prescription drug monopolies were strengthened during the Reagan Administration after the Drug Price Competition and Patent Term Restoration Act permitted the extension of patents beyond 20 years. (The government has also allowed pharmaceuticals companies to bribe physicians to prescribe more expensive drugs.)
  • In 2003, prescription drug monopolies were strengthened during the Bush Administration after the Medicare Prescription Drug, Improvement, and Modernization Act provided subsidies to the elderly for drugs.
  • In 2014, nationalization will be strengthened after the Patient Protection and Affordable Care Act of 2010 (“Obamacare”) provided mandates, subsidies and insurance exchanges, and the expansion of Medicaid.

In dollars and cents, the US public sector has for decades spent several 100 billions of tax dollar every year on providing health care. Any claim made about competition and the US health care system must be seen in light of this fact (image source on Wikipedia).

enter image description here

Moreover, unlike medical procedures supplied by the politically controlled and subsidized system, the cost of laser eye-surgery and cosmetic surgeries (both of which are not subject to the same regulatory burdens) has steadily been declining while the quality has increased (source).

A real world example of a health care system run under something closer to free market conditions is Switzerland's. Insurance is practically completely privatized (though purchasing one is mandated by law), and recipients of tax-funded public health support are expected to pay back the funds later. As a result, costs are relatively low, while quality and accessibility is high (source).

On a related note, it is common for people (particularly in the case of Europeans) to overestimate how laissez-faire the US really is. Anyone who compares their level of public spending to GDP (+30% the past 50 years) or anyone who has tried to read the byzantine federal tax code can confirm that its economy is less free than public discourse might lead one to believe.

  • 15
    Examples of confounding factors: the increasing use of technology in health care has led to far better results over time, but also incurs some essentially irreducible costs (for example, the widespread prevalence of MRI machines, which rely on superconducting magnets that people don't really have a good way to make cheaper). Some technology is easier to make cheaper (lasers are a great example, which is why you cherry-picked out laser eye surgery), while a lot of it simply isn't. Commented Mar 5, 2020 at 20:04
  • 17
    In other words, you haven't demonstrated that increasing healthcare costs are caused by increased regulation. You haven't really demonstrated that they're particularly well correlated, either - for that, you'd need to connect specific changes in regulation with specific points on your plot where spending increases faster than the baseline rate. It's not obvious how to do this, since the timeframe in which a policy change has an effect can be significantly after the policy actually is enacted. The overall point: it's much more complicated than you're portraying it here. Commented Mar 5, 2020 at 20:51
  • 11
    What a fantastic answer. Yes, demand for healthcare is effectively inelastic. But no, that doesn't mean that free market competition is impossible under such conditions. Commented Mar 5, 2020 at 21:31
  • 14
    This should definitely be marked as the correct answer, as it is the only one that addresses the fact that the (hidden) premise of the OP's answer - that there's in fact a free market and competition on the healthcare industry in the US -, is incorrect Commented Mar 6, 2020 at 10:23
  • 21
    This is rather misleading. If the claim is that the increased cost of healthcare in the US is due to a lack of free-market forces in the healthcare industry, this is entirely undermined by the fact that most industrialized countries have far more socialized healthcare than the US and generally spend far less per capita on healthcare. For one, it doesn't at all explain why drug prices are so much higher in the US.
    – Kai
    Commented Mar 6, 2020 at 18:46

I place the blame on the fees charged by drug makers, doctors, nurses, and hospitals. The market for healthcare does not have the "supply and demand" dynamic. Patients just have to "pay-up".

After a cycling accident fractured my clavicle, I didn't call 3 or 4 EMT services for price quotes. Someone else had to dial 911, the EMTs took me away to the ER without any discussion of cost. Just 4 blocks to the ER, yet my EMT bill alone was $1,800. The ER bill was an additional $2,000. I refused a CT scan, but they would not discharge me unless I had a CT. Exhausted I relented, and the CT was a waste and radically raised the price of my health care. One moment, I was riding my bike trying to be a healthy person, then US healthcare charged me $3,800 for a 4 block ride to the hospital. There's no treatment for broken clavicles. And, I didn't bother purchasing pain medication (luckily the break didn't hurt too bad and pain meds don't really work on me for some reason).

A family member, to stay alive a little longer, must purchase a prescription drug. The drug company can charges what they think maximizes profits, not what saves the most lives.

Summary: the excessive cost of US healthcare is caused by a lack of "supply and demand" dynamic for non-optional medical treatments. And, probably 98% of all medical treatment is non-optional. A patient just has to "pay-up" and hospital / doctors / drug companies can charge anything they want.

  • 3
    This answer is correct, but it is not the whole picture. The big pharma companies, insurance companies, investors and legislators operate in tandem, in the US. The end result is a sort of parasitic conglomerate, locked into a system destined to continue increasing prices of healthcare.
    – Frank
    Commented Mar 5, 2020 at 21:41
  • 2
    @psaxton The cost of insurance is a function of the cost of healthcare itself. My point is that in many cases, the price charged to patients has not relationship to the actual cost of providing it. With a broken clavicle in the middle of street, my only option was an immediate localized shot of painkiller. EMTs are in a "for profit" business, and they leveraged my responsibility to society to get out of the way of traffic to maximize their profit. That unfairness gets pushed-up to the insurance companies. They could have charged $10,000. I had to get off the street.
    – user312440
    Commented Mar 10, 2020 at 15:30
  • 1
    @psaxton As far as who's in the driver's seat? Are insurance companies driving prices down (putting hospitals / EMTS / doctors in the poor house), or healthcare providers driving prices up (increasing premiums + deductibles thus lowering standard of living in addition to forcing people, similar to me, into medical bankruptcy)? I'm gonna say it is the healthcare providers (and pharmaceuticals) that drive prices up because they are not subject to supply / demand market forces. Lying in the street, severely injured and a public nuisance, I'm at the mercy of a "for profit" company. not fair.
    – user312440
    Commented Mar 10, 2020 at 16:54
  • 2
    @psaxton Don't worry. I've escaped to a country with socialized care. I feel no adversarial relationship with the healthcare providers here. In USA, first and foremost, II am just a source of $ for EMTS and doctors. That's capitalism.
    – user312440
    Commented Mar 10, 2020 at 17:11
  • 1
    @VolkerSiegel Because.... I known my problem. This accident meant I had to see my neurologist regardless of the stupid ER CT scan results. To compare CT scans, they must be taken on the same machine. When I saw my neurologist later that week, I knew I would have to have another CT scan on the same machine used for the CT scans already on file to be able to COMPARE them. I was in a situation of superior knowledge, but the azhole ER doctor wouldn't listen. I was in too much trauma to fight, so I was said "fk it. You got me. I'll pay-up. Just please discharge me ASAP."
    – user312440
    Commented Mar 17, 2020 at 2:25

I think you're looking at this the wrong way.

Many factors impact prices. Competition doesn't necessarily mean that prices will be lower year-over-year. Competition means that prices will be lower than they would be if there was no competition. If prices went up by 5% but they would have gone up by 8% in a non-competitive environment, then competition did in fact reduce prices. The overall price increase just means that there are other factors that happened to have a larger influence.

For health insurance in particular, competition definitely does lower prices this way (although not always as much as we'd like it to). The insurance company that my company uses was trying to raise rates far more than we anticipated. Competition meant we could shop around and found several other companies that bid similar plans at lower rates. We ended up staying with the same company, but only after they agreed to match their competitor's rates. Our premiums still went up, but by a much lesser degree. In a non-competitive environment, we would have had to suck it up and pay the higher price.

  • 7
    "For health insurance in particular, competition definitely does lower prices" citation needed. Or are you strictly comparing for profit privately owned competition to for profit privately owned monopoly? If that's the case your anecdote should be sufficient.
    – Peter
    Commented Mar 6, 2020 at 19:34
  • @Peter - The latter (the only variable I'm intentionally changing is the presence of competition). One of the competitors we shopped happened to be a not-for-profit group, but I don't think that changes the general idea.
    – bta
    Commented Mar 12, 2020 at 17:50

In my experience, when the affordable care act came out the first year there were quite a few choices in my city so you could shop and compare. By the second year there were fewer choices and then I moved from northern VA to central VA, just 80 miles away and my insurance didn't work anymore and now there were less choices and completely different.

What I can gather from this is that:

  1. Health insurance companies target specific regions, even down to the city/county (just like cable companies do) to maintain a monopoly. There may be some deals going on there.

  2. Health insurance companies buy each other/merge so I have received letters like Aetna is now part of Cigna or Vice versa or Anthem so they give you an illusion of choice when really a big corporation manages different brands to control prices (just like glasses or mattress conglomerates do)

Some references:

Obamacare shoppers find fewer insurer choices on exchanges

Top 5 Healthcare Mergers of 2018

The Conspiracy Behind Your Glasses (YouTube)


Because that's not how insurance works

Insurance is about risk management. When private companies enter this arena, their number one goal is to make a profit. They have to figure out how much a person should pay over time, estimate how much they'll have to pay out, and still come out with a profit margin.

It's all probabilities. If you're paying $200 a month, but only have $700 in expenses, the company makes $1700 off of you that year.

Here's the important bit: Your risk factors don't change when you switch companies. Sure their estimation formulae might differ, but ultimately, you will always represent the same amount of risk. This, in conjunction with the number of other people the company is insuring, is the biggest factor in determining the policy premium (all other things being held equal, i.e, for identical policies).

But if the government does it, they're not out to make a profit. They're out to break even over the entire population of their nation. In the US, you may have tens of thousands of people who rack up huge bills. It's outweighed by the tens of millions of healthy people who will be paying more than they spend. That's how it's (supposed to be) cheaper.

  • 8
    Health "insurance" in general is not how insurance works, though. If your car insurance worked the same way as your health "insurance" works, going to the car wash or filling up at the gas station would involve filing a claim with your insurance provider. Commented Mar 5, 2020 at 21:42
  • 3
    I'd add that the medical loss ratio for health insurance companies is regulated in the US (does not apply to all plans, there are exceptions): if a health insurer charges customers way too much in premiums compared to payments for claims (averaging across everyone, not for you specifically of course), they have to pay rebates. So the potential insurer profit is capped. Premiums are high in large part because risk—medical costs— is high. Commented Mar 7, 2020 at 1:22

removing the ability of private health insurance companies to compete will give rise to a natural monopoly in the industry, leading to an overall increased cost to the taxpayer.

Emphasis mine - and this is where the free-market assumption is utterly wrong.

Private health insurance, private hospitals, and private everything has one focus in mind. Return on investment. Not whether you get better. Not whether your treatment is effective. Not whether your treatment is cost-effective. Solely whether the organisation can turn a profit. This is the focus of every individual in that organisation, from the CEO to the cleaners. In a private system, your doctor does not care about you - they care about the money they can make from you. I'm not saying that everyone working in private medicine are inherently bad people. But I am saying their job does not allow them to be a good person at work.

So the most important thing in treating a patient is how to make the biggest profit from that patient. If we assume the cost of treatment is identical (and that in itself is a bad assumption; the UK's NHS pays an order of magnitude less for the same drugs compared to US hospitals), then the only way to increase your profit is to charge more for treatment.

If there was a way to shop around for treatment, then costs would certainly come down through competition. This is actually true for many elective procedures such as plastic surgery, hip replacements, and other non-emergency procedures.

But when it comes to an emergency, there is no competition. The ambulance picks you up from your car crash, unconscious, and takes you to the nearest hospital. You can't shop around. And you don't even know how much you owe until you recover from surgery.

So there is already a "natural monopoly" for emergency medical care, and the monopolists are maximising their return on their monopoly to the profound detriment of their customers/victims. And as with any other de-facto monopoly, the only way to control this exploitation is either with regulation or with nationalisation in the public interest. In every other monopoly situation in the past, this has resulted in lower costs to the consumer.

Which leads on to your actual question...

Why isn't competition between health insurance providers lowering the cost of premiums?

When the private healthcare providers can essentially charge what they like as monopolists, those costs are borne by the patient. If the patient has health insurance, then those costs are passed on to the insurer (less any co-pay amount, of course).

The insurer is therefore just as much a victim of the monopoly as the patient. They have no ability to limit how much a healthcare provider can charge. In order to pay these inflated costs, the only thing an insurer can do is raise premiums for all their customers.

A healthcare provider will charge the same amount per procedure to everyone - and since insurers will all have a similar customer base, they will all have to deal with similar costs from providers. So it follows that insurers will all have to charge very similar premiums, because they are all paying the same inflated costs to monopoly healthcare providers. If the healthcare provider puts up their costs, every insurer has to raise their prices correspondingly. This eliminates the possibility of competition between insurers, because the insurers themselves have no ability to affect costs.

The only possible source of competition amongst insurers would be to screen patients on application. Patients assessed as lower risk could be given lower premiums, because on average they will not have such high healthcare costs; and vice versa, higher risk patients would have higher premiums; and if an event occurs (such as a cancer diagnosis) which would increase risk then the next premium would be increased. This is widely seen as an unfair system, because it penalises people for factors (such as cancer) beyond their control. It is therefore illegal in some places.

  • Insurers do have influence on cost: They can approve or disapprove specific therapies, they can have a more or less efficient administration, they can negotiate discounts with healthcare providers. How much of that is actually happening depends a lot on the details of health insurance regulations, and healthcare provider monopolies, so there's no simple answer in general, but the assumption that insurance companies have no way to influence the cost isn't 100% correct.
    – toolforger
    Commented Mar 8, 2020 at 10:39
  • 1
    @toolforger They can approve or disapprove specific therapies Certainly they can. But for the same quality of service, all insurers will (by default) be charged the same for the same service. This does not reduce costs, only quality of service.
    – Graham
    Commented Mar 8, 2020 at 12:24
  • @toolforger ... they can have a more or less efficient administration That doesn't fly. By its very existence, an insurer adds a layer of administration costs between the healthcare provider and the customer. Unless the insurer's employees pay to work there, it will always cost their customers more than the provider getting paid directly. And that doesn't reduce costs on healthcare.
    – Graham
    Commented Mar 8, 2020 at 12:27
  • 1
    @toolforger ... they can negotiate discounts with healthcare providers Except the evidence shows they can't. Or to be more specific, they can't negotiate discounts past the level of profits the healthcare provider wants. And all insurers negotiate very similar "discounts", to what the provider wants to charge, so there's no real change. There's some evidence this works with elective procedures where you can choose, like I said. But for non-elective care, especially emergency, the monopoly means you really can't.
    – Graham
    Commented Mar 8, 2020 at 12:30
  • 1
    @toolforger The point of the question was asking why US insurers all charge about the same for the same service. Are you claiming that isn't true? If you think the evidence doesn't show that's the case, it belongs in a frame-challenge answer, not in a comment. The EU is not subject to the broken-by-design insanity of the US medical system, and the EU therefore gives direct evidence that more stringent controls on healthcare providers gives cheaper medical care of at least the same quality.
    – Graham
    Commented Mar 8, 2020 at 22:16

Let me answer the question at the end, which is really simple.

How do existing nationalized healthcare systems seek to mitigate this issue?

In most countries where healthcare is universal and free-to consumer (i.e. they don't specifically make payments for individual treatments) the funding comes from mandatory contributions, usually levied on employers and employees. These are collected in the same way as taxes. The contributions are usually proportional to income, possibly with a maximum. (There are other approaches but we will consider this one for now).

Technically the government is a monopoly and could set any rate they want for contributions, but the reality is that they don't, because they will be voted out if they raise these charges, just like they will be voted out if they raise taxes too much.

Healthcare costs of a government run scheme are lower for a number of reasons:

  1. Lower administration costs (Most government run healthcare spends <5% on Administration. US private healthcare providers spend 25-30%)
  2. No profits A good chunk of US healthcare costs just go to pay shareholders
  3. Better prices due to better negotiating power. Healthcare providers on a national or provincial level can negotiate much better deals with suppliers than individual healthcare companies.

TLDR: Healthcare costs won't be raised uncontrollably for the same reason taxes aren't raised uncontrollably.

  • 3
    I always appreciate your answers, @DJClayworth. Did you consider that our governments often leverage debt instead of raising taxes for a project then later raises the taxes to service the incurred debt at a higher cost?
    – user30575
    Commented Mar 6, 2020 at 20:39
  • Then exactly the same applies. If the electorate doesn't want the government to raise debt then they vote them out. Commented Mar 6, 2020 at 21:02
  • 2
    Thank you for the response. I suppose asking how strong of a motivator raising debt is to voters would qualify as a separate question.
    – user30575
    Commented Mar 6, 2020 at 22:30
  • 1
    When my wife had an op her NHS hospital was having difficulty locating a bed when she came out of theatre (i.e. normal NHS pressures). Eventually they got permission to put her in the private wing (at NHS expense). The luxury was beyond compare to the NHS but she didn't enjoy it, because she found being by herself miserable compared to an NHS bay with three other patients, and people to natter with. The medical care was identical, but one can see why private costs so much - it is all the ancilliary stuff - the fresh flowers, the low density accomodation, the cordon bleu food etc.
    – WS2
    Commented May 23, 2021 at 18:34

Maybe I read too fast, but I didn’t see this. After working ten years for a large non-profit health care system, much of that in the financial department, it is my unproven opinion that part of it is because the insurance companies make contracts with doctors to accept certain amounts, and there’s a limit to how low a doctor will go before refusing the offer. The patient has to either go to a doctor that accepted his insurer’s price or pay a lot more. And most have to accept the insurer their employer subsidizes or pay a huge amount more. And if we accept Medicare, there is no negotiation there—we’re required to accept Medicare’s unrealistic decision, which is usually below our cost. Which means we have to get more than cost from commercials to break even.

  • 1
    I've heard the "Medicare reimbursements at below cost" story from a number of health care professionals in various fields. I wonder if there is any data on the cumulative impact of this across the entire industry.
    – bta
    Commented Mar 5, 2020 at 19:27
  • Interestingly, at least once in my time of posting payments, Medicare paid ten times what we billed for a particular procedure. And we were required to accept it—not that we complained after all the low ones!
    – WGroleau
    Commented Mar 5, 2020 at 22:29
  • 1
    @WGroleau, "not that we complained...": and yet such complaints would be far more likely to be heard and taken seriously, and thus also be more likely to help reform inaccurate payment formulas in general.
    – agc
    Commented Mar 6, 2020 at 8:00
  • We—and many others—have made many complaints about the problem in general. Failure to make an issue of one extremely rare overpayment doesn’t imply otherwise.
    – WGroleau
    Commented Mar 6, 2020 at 13:05
  • Note also that commercial insurers and docs negotiate prices acceptable to both. With Medicare, there is no negotiation; they made their list and it’s take it or leave it.
    – WGroleau
    Commented Mar 6, 2020 at 13:11

The premiums are there to cover the cost of drugs, hospital prescription drugs, reagents and lab testing compounds, and hospital machinery, mainly.

US pharma companies invest a great amount of their funds into stock buyback, purchasing their own shares to satisfy investors and pay corporate exec bonuses.


Pfizer alone in a 4 year period paid 80 billion in stock buyback and dividends. This 80 billion came from where? Quote : "Yet from 2011 through 2015, Pfizer spent an equivalent of 71% of its profits on buybacks while also distributing 52% of its profits as dividends"

This racket allows the company to grow, while keeping prices high, and because investors like the whole arrangement insurance companies can continue to keep charging exorbitant amounts to US citizens to preserve the status quo.

It is essentially Wall Street fleecing the everyman, while lobbyists run around shouting "deregulation" and "free market" to make sure this racket isn't obstructed by sensible, humane legislation.

In technical summary, the US healthcare system is a feedback loop where profits are reinvested into their own share price, to attract further investment, raise prices even further and consolidate the oligopoly even further. Insurance premium prices are secondary to that, driven by those costs.

  • I'm having trouble digesting the quote. How is Pfizer able to liquidate 123% (71% buybacks + 53% dividends) of its profits?
    – user30575
    Commented Mar 6, 2020 at 20:32
  • 1
    @psaxton My understanding of the quote is that the amount spent on buybacks was equivalent to 71% of the actual profits. The distribution of those profits as dividends was equal to 52%. The 71% could be taken from some source other than cash flow, such as existing cash on hand, last years tax returns, or new debt.
    – user5155
    Commented Mar 7, 2020 at 7:52
  • @JeffLambert good catch, I missed the "equivalent of" qualifier to "71% of it's profits".
    – user30575
    Commented Mar 8, 2020 at 17:20
  • @psaxton Also be aware (I confirmed this only later) that the total > 100% literally means that Pfizer borrowed(s) money to fund these exec payments. Perhaps this is why it's 2020 and anti-cancer/Alzheimer OTC medicines are still science fiction?
    – Frank
    Commented Mar 30, 2020 at 9:53

Because health insurance is intentionally designed to subvert market forces.

Competition of the sort that tends to lower prices requires meaningful consumer choices and accurate consumer knowledge. Health insurance subverts choice by coercing consumers into group policies tied to their employment, and restricting which providers the consumer can use and how often they can change policies and providers. And it subverts knowledge by obfuscating how much the consumer is really paying (through employer matched contributions) and what services they're actually paying for. Insurance also subverts the incentive for providers to compete on price, replacing it with a perverse incentive to bill insurance for the maximum allowed. It is primarily this perverse incentive, not the private insurance industry's profits, that drives up health care costs. Therefore, replacing private insurance with government managed programs like Medicare will not help control costs.

Compare the corrupting influence of health insurance to the way society has addressed another universal need: food. The SNAP program (a.k.a. food stamps) does not corrupt the market for food because recipients are not restricted in where they can shop and only minimally restricted in what products they can buy. Crucially, SNAP benefits are only received by the poorest segment of the population, and SNAP recipients pay the same price as everyone else for the same products. Imagine what would happen if grocery stores were allowed to charge a different "food stamp price" for a loaf of bread.

Insurance makes sense only where natural market failures prevent a market from existing. For example, there can be no market for emergency care for the simple reason that people don't shop around when they're bleeding out. But for preventative care, the competitive market that would otherwise exist is fundamentally incompatible with insurance. "Affordable Care" requires making health insurance illegal, not mandatory, and creating a SNAP-like program to ensure that everyone has access to basic preventative care at the market price.

  • 2
    "Insurance makes sense only where natural market failures prevent a market from existing. For example, there can be no market for emergency care for the simple reason that people don't shop around when they're bleeding out." This isn't true. Insurance makes sense whenever you have a low probability of a high cost, because people are willing to give up some money in the average case for making the worst case less bad. This is rational because losing $10x can be more than 10 times as bad as losing $x (e.g. if it means you can't make rent). Commented Mar 7, 2020 at 10:28
  • This analysis missed an important fact. The consumer in this case is the employer, and they are price sensitive. An employer will quickly discard an expensive provider in favour of a cheaper one that provides the same services. Commented May 23, 2021 at 21:24

The most logical thing is supply and demand.

Healthcare has a high demand due to it being pretty much mandatory due to the consequences of nothing it being disastrous. This is contrary to many other products/services on the market. (there is for example no downside to not going to a movie theater or not buying a new tv)

A practical example that I experienced was when I had to drive my mother to the dentist on a Saturday evening after her tooth broke and she was in horrible pain. We got charged nearly 200 euros for the treatment while during regular hours it would have been close to half price. But we had no choice other than to accept because he was the only one in the region working at that time and she was in horrible pain.

And that's the situation for healthcare in general...you can't avoid it and they know it. So without the risk of pricing themselves out of existence they only need to worry about competition. And with so few competitors they are able to make arrangements which is not uncommon in other fields as well.

A small scale example I once read about were construction companies who kept the prices high based on a mutual agreement, but each one of the companies had a claim on a certain area where they were allowed to go below the others on the price. This way each one was ensured to their own client base and were able to keep the prices high.

But even without such agreements, if you know your product HAS to be bought you won't undercut your competitor by more then 1% because why would you? People often prefer to stay where they are and think in the short term cost/hassle switching would bring them. It's not like you can walk into a store, grab a bag of health insurance for 5 bucks and walk out and be done.

  • 2
    Your "small scale example" is flawed in that you only include two construction firms. You have not explained what keeps other construction firms from entering. Or indeed, what keeps other kinds of companies from starting a construction division. At the same time, you have not explained what keeps insurance companies from offering insurance in other locations.
    – puppetsock
    Commented Mar 5, 2020 at 16:09
  • 2
    @puppetsock i never mentioned a number in the example, it were all the larger companies in the region. sure the smaller bits were still up for grabs by others but the major ones were monopolized by that small group. And the reason to localize your assets as an insurance company or any other business is to minimize competition. To many fishers in the same pond won't work.
    – A.bakker
    Commented Mar 5, 2020 at 16:20
  • 7
    more importantly, I can choose not to have a coffee if I don't like the price. I don't get to chose not to fix my broken leg. It's not that there are multiple suppliers, its that the demand for coffee is elastic, where the demand for healthcare primarily isn't elastic.
    – Leliel
    Commented Mar 5, 2020 at 18:48

Some parts that has not been mentioned yet.

Part of the evil cycle is that the "price" to become a doctor in the US is much higher than elsewhere.

Then there is the lack of transparency. You cannot get a price for something like a childbirth. (If you can prove it is coordinated it would be illegal)

But I really don't understand why a big employer like Walmart doesn't make their own hospital/school for doctors and outcompete the rest of the market.

  • 8
    The answer to why more doctors aren't being trained has 2 parts: First, they are (just slowly), second, it's made really really hard by the AMA
    – user30539
    Commented Mar 5, 2020 at 14:22
  • 2
    Welcome to Walmart. Your doctor will see you now
    – JimmyJames
    Commented Mar 11, 2020 at 20:29

Fundamentally, because the insurance companies don't set the prices of medical care. Sure, they can bargain, and often get price reductions, but there are limits to that. Doctors & hospitals need to cover operating costs, drug & medical equipment makers aren't interested in selling below cost, &c.

As for why medical costs (and hence insurance prices) rise faster than inflation, a major factor is the development of new treatments that work better than old ones* (or at least one hopes they do), but cost more.

*If indeed there even was a treatment: consider the cost of developing a vaccine for the current coronavirus.


Two quick things. I think health is going through two transition phases, one is baby boomers are placing huge demands on the sector and also companies are trying to maximise their profits for new drugs and devices while they can. Three hundred years from now drugs and medical equipment will be so commonplace you may have an MRI in your home


I can certainly understand where my own health insurance is concerned because with the passage of the Affordable Care Act (ACA), my health insurance premiums tripled in size the first year it took effect. Yes, there was a subsidy in place to help compensate for my expenses, but it still means that more money entered the health care marketplace courtesy of Uncle Sam. That same effect happened with nearly everyone, including employers.

If supply-and-demand is indeed the primary (but not sole) determinant of pricing (and I believe that's true), then clearly a huge new influx of cash into an industry overall is going to drive nominal prices up for everyone within that industry. After all, supply-and-demand applies to money too, just as it applies to goods and services.

This massive increase in cash spent happened because the ACA mandated a number of new, required coverages that forced everyone to contribute more to the health insurance pie. It also occurred because more people were being covered who hadn't been covered previously.

When you increase the amount of available cash in an industry, prices are likely to keep going up regardless of how much competition there is. Sure, if there is sufficient competition, the marketplace can compensate for the increased cash in the long run, but that can only happen if there is enough profitable opportunity for health insurers to offer savings on insurance premiums. The same ACA also put a lot of restrictions on insurers for the same reasons you inferred in your question, so it's not like there was a whole lot of room left for the effects of competition to accomplish anything helpful.

The problem has only gotten worse since then. Here in Connecticut where I live, we're down to exactly one (1) private health insurance plan option at the Bronze level and two (2) at the silver level, and both are expensive as heck. Even the Bronze plan is approximately four times as expensive as my insurance used to be before the ACA. All of the other health insurance options have been withdrawn from the marketplace by the insurers. Why? Because the combination of higher costs and legal restrictions on what they charge has driven them from the marketplace. Similar situations are occurring across the country.

https://www.economicshelp.org/blog/111/inflation/money-supply-inflation/ https://www.thebalance.com/cost-of-obamacare-3306050

  • Please add references to support your answer.
    – JJJ
    Commented Mar 13, 2020 at 17:28
  • @JJforTransparencyandMonica I've added a couple of sources to help provide some data. It's a bit difficult to do because so much of what's published out there is spun statistically to make it look like spending didn't go up, but the second one shows how severely the Obama administration initially underestimated how much the program would cost when the CBO substantially increased that number shortly afterward. The first article is a good general discussion on the impact of monetary expansion on an industry. Commented Mar 13, 2020 at 19:46

The price of healthcare has about quintupled since 1970. That's after adjusting for inflation.

We can speculate on why, but the question of the healthcare debate in the United States, maybe the only question, is how to distribute those losses.

And distribute them we must: neither the market nor the electorate (which are really the same thing in the end, the collective action of American citizens) will countenance a drastic reduction in the scope or quality of care to rein this in. The money will get spent, the question is how and where.

Profit margins in healthcare are generally slim, which is why all the healthcare companies are national super-conglomerates: it reduces the risk of failure due to those slim margins. In absolute terms sure they make money by the metric tonne. But it also means that there are limits to what you can squeeze out of that industry in terms of improving efficiency. Because there is no magic bucket to pull money out of.

But boy howdy do people ever want there to be one. Some believe in a magic bucket called "competition" because when the competition engine is firing properly it can be almost magical in generating beneficent outcomes. But there are also well known failure modes for the competitive model. It sure hasn't stopped the price from quintupling.

Some people believe in a magic bucket called "the government" because when the government engine is firing properly like the competition engine it generates outcomes that are almost magical. But all too often people conveniently forget that the government money bucket is actually all of us citizens. When you say you think the government should pay for something, you are in effect saying I think my friends and neighbors should pay for something. And maybe they should, but the rhetoric I hear both in the media and in person sounds more magical bucket-ish.

So in summary to answer your question, competition seems to have already worked in the sense that profit margins in healthcare are slimmer than most industries, which is to say that without competition it would have been even worse than it is. That didn't stop the price from quintupling in real inflation-adjusted dollars, and it's not clear just what more competition remains to be unleashed. And now we have to deal with the fallout of that, which of course no one wants. So they blame "greedy corporations" and "over-reaching regulation" so they don't have to face the fact that it just costs more, and somewhere we're going to have to eat that cost somehow.

  • 8
    This theory fails to address the striking disparities in public health costs and outcomes between different national medical systems, which given the logic of this answer, should be more expensive and worse in Europe than the allegedly more competitive US.
    – agc
    Commented Mar 6, 2020 at 8:10
  • 2
    @agc Fair. As for that, the US has most of the best medical schools. Doctors from all over the world immigrate here. If you follow the link above, it also discusses several other things that are significantly more expensive in the US than elsewhere. In healthcare, the likely cause is decreased institutional risk tolerance: if there is one thing Americans are uniquely good at it is being litigious. Some of that shows up directly as malpractice insurance, a lot of it is the hidden cost of procedures that require extra highly-trained and highly-paid staff to ensure something doesn't go wrong. Commented Mar 6, 2020 at 12:15
  • 1
    It sounds like you're saying the US has the best Law schools, and resultingly the best boutique medical schools.
    – agc
    Commented Mar 6, 2020 at 17:03
  • 6
    "Profit margins in healthcare are generally slim" I literally laughed out loud at this.
    – barbecue
    Commented Mar 6, 2020 at 18:47
  • 1
    @barbecue Dad worked in human resources for a hospital for years. Margin was 2-3%. Some years less. My first job out of college was for a company that serviced nursing homes. Same story. Nor is there a measurable difference in care (on average) between for-profit and non-profit hospitals, so it's not like all the cost increase is going to profit. You can laugh all you want, but again that's why they're all super-huge mega conglomerates. Commented Mar 17, 2020 at 11:26

The wrong question is being asked. For starters, the term, "Universal health care" is a misnomer and is not what proponents of socialized medicine have in mind. What the OP is really asking about is why a totally government-run healthcare system is inferior to a totally free-market healthcare system.

What you'll find by studying the US healthcare system is that it's a hybrid comprised of public, government-subsidized healthcare (Medicaid, Medicare, VA) and private, free-market healthcare. What drives up the costs of our healthcare are the government-run components. There isn't anything that the government does more efficiently and effectively than what the private sector does. The reason is there are no incentives to make healthcare more efficient and effective when the healthcare recipients and providers have no control over how the system operates. Conversely, in a free-market healthcare system, both the providers and the recipients do have control over how the system operates.

in a free-market healthcare system, recipients can choose to obtain care from among several providers based on their quality of care and the fees charged for it. When providers are competing for the same customers, they have incentives to offer high quality care at affordable prices. In the government-run healthcare system, the government limits access to a very small number of providers that recipients can choose to see. Also, since these providers receive the same amount of money regardless of the service they offer, the quality of care suffers. In other words, as long as someone else is paying for it, there are no built-in incentives to offer better quality care at lower care costs.

The other downside of a fully, government-run healthcare system is the actual costs of providing care compared to the actual rates of reimbursement. Medicaid pays 40 cents for every dollar of healthcare provided regardless of how many people are receiving care. For many healthcare providers, including hospitals and clinics, their operating costs exceed what they are being reimbursed for the services they provide. Their only options to stay in business is to ration care by putting people onto waiting lists and/or denying care to high-risk groups of people (like the elderly).

Even with rationing, hospitals and clinics will close and many doctors and nurses will quit the profession because they cannot earn enough to make ends meet.

The other confounding factor that socialist Democrats are pushing is calling healthcare, "a right" and making it "free" when, in fact, it has to be paid by the majority of taxpayers, namely the Middle Class. But, what does "Healthcare is a right" even mean?

Does it mean that I can go into any hospital, as many times as I want, and demand services that are not medically necessary like getting cosmetic surgery? Also, since they want to offer free healthcare to illegal aliens, that means having even longer lines and waiting times for simple treatments, let alone treatments for serious illnesses.

  • 19
    Except that in a number of contries similar to the US, there is government run healthcare that achives as good or better patient outcomes with less per-capita spend. "Healthcare is a right" means not choosing between bancrupcy and death.
    – Caleth
    Commented Mar 5, 2020 at 20:07

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .