Fact and Fiction: Debunking Myths in the US Healthcare System

Umut Sarpel, MD; Bruce C. Vladeck, PhD; Celia M. Divino, MD; Paul E. Klotman, MD


Annals of Surgery. 2008;247(4):563-569. 

In This Article

Myth 4: A Free Market Is the Best Way to Get the Highest Quality Health Insurance for the Lowest Cost

Competition for goods and services generates maximum quality for minimal price. Policy makers often refer to this tenet when defending the multipayer system that exists in the United States. However, a free market only works when the consumer can use buying power to influence the price and quality of goods. In the current healthcare system, insurance is usually purchased by third parties (ie, employers), not by the consumer directly. Also, healthcare is not a discretionary desire; patients cannot delay purchase until prices drop. As a result, the consumer is not in charge of directing the market and thus there is no feedback loop to increase quality or reduce cost. The current system is not a free-market but is instead a for-profit system driven by private insurance providers who are immune to the checks and balances associated with the free-market ideal. This system, which has been in place for decades, has led to increases in healthcare expenditures, poorer health outcomes, and less choice in providers.

Despite the lack of market influence, many consumers still prefer private insurance companies over government-run programs. There is a pervasive belief that the government is fundamentally inefficient, and any private health insurance company will be better run than a public one. In truth, federal health insurance is much more cost-efficient than private insurance because of its ability to streamline costs. The existence of multiple private insurance companies increases the complexity of the system and administrative costs. At present, the US system is overrun by hundreds of for-profit insurance providers. Medicare's administrative costs run less than 3%, whereas private insurance administrative costs are above 16% of budget (Figure 4). [38,39,40] These funds are spent on increasing revenue by aggressive marketing and billing, and decreasing losses with programs such as utilization reviews (labor-intensive patient chart surveys performed to monitor billing practices). This policy does save individual insurance companies money, but there is a substantial overhead involved in this labor-intensive process. Furthermore, there is no evidence that utilization reviews decrease the national healthcare expenditure, they merely shift the financial burden away from the individual company.[41] Private insurance companies vie to cut their own costs without regard to the effects on the national healthcare expenditures.

Administrative cost as percent of benefits. Reproduced with permission from The Commonwealth Fund.

Other nations with single-payer systems, where only one agency provides insurance, demonstrate significantly lower administrative costs.[42] In the United States, the total administrative costs alone were over $100 billion in 2002.[38] Furthermore, administrative costs are the fastest-growing component of national healthcare expenditures.[39,40] The largest savings lie in decreasing the administrative costs of insurance companies, which are inseparable from a for-profit system.

Finally, because of the special nature of healthcare, even a functional free market system would not result in high quality medical care for all its consumers. There is no incentive in a profit-driven market to attend to low-yield issues such as mental healthcare, preventive care, and chronic illnesses. These fields of medicine are considered money sinks; although clinically important, they do not generate profit for insurance companies. As a result, these areas tend to be neglected. For example among the elderly, those in HMOs were more likely to suffer a decline in health over a 4-year period than those in a nonmanaged care plan (54% versus 28%).[43] In a profit-driven system, there is no mechanism for those without buying power to affect their care.


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