Socialized Healthcare vs. The American Healthcare System

Does America actually benefit from a free market system? Or, is that a myth?

This article deviates from my usual content around health tech and innovation. This publication is not intended to be political in nature and I want to reiterate that everything I write stems from some evidence-based source or from novel interpretations from my own data analysis. However, with the election coming up I think the issues discussed in this article are both timely and fundamental to how innovation occurs in the U.S. healthcare system.

For many of you, this article will not come as a surprise. But for others who have not been immersed in this world, this article will provide some interesting concepts for you to consider. As always, thanks for being a reader and I hope that my articles are informative and useful to you as you observe the healthcare market from your own perspectives.

Introduction

Healthcare reform has long been a contentious issue in American politics, often framed as a choice between two opposing systems: the "socialized" healthcare model exemplified by countries like Canada, and the American system, frequently touted as a competitive free market. Proponents of the current U.S. system argue that market forces drive innovation, efficiency, and quality in healthcare delivery. However, a closer examination reveals a startling truth: genuine competition in American healthcare is largely a myth especially when narrowing in on healthcare services (i.e., doctors, hospitals, and insurers). In some other narrow markets such as pharmaceutical products and medical devices, there are some fiercely competitive areas, but these are sub-markets of a much larger machine that can be generally classified as non-competitive or much less competitive.

This article posits that the American healthcare system, far from being a bastion of free-market principles, is a hybrid model that captures the worst of both worlds. It fails to harness the purported benefits of true market competition while also lacking the cost controls and universal coverage of single-payer systems. This paradoxical structure results in a system that is neither truly competitive nor centrally and equitably managed, ultimately leading to higher costs and poorer outcomes for many Americans.

International Comparisons: The High Cost of American Healthcare

Despite claims that market competition drives efficiency and quality in American healthcare, international comparisons paint a starkly different picture. If you have ever taken a health economics class or spent time discussing health policy around Washington, D.C. or within academic circles, you will find that most people are aware (and, frequently state) that the U.S. heath system spends far more per person for comparatively worse outcomes and health. According to data from the Organization for Economic Co-operation and Development (OECD), the United States spends far more on healthcare than any other high-income nation, with per capita health expenditures reaching $11,945 in 2020 - more than twice the OECD average. Yet, this high spending fails to translate into superior health outcomes or system performance.

The U.S. consistently ranks poorly among developed nations in metrics such as life expectancy, infant mortality, and preventable deaths. A 2021 Commonwealth Fund report comparing 11 high-income countries placed the U.S. last overall in healthcare system performance, despite higher spending. Countries with more regulated or single-payer systems, such as Norway, the Netherlands, and Australia, achieved better health outcomes and higher patient satisfaction at a fraction of the cost. These comparisons starkly illustrate that the supposed benefits of market competition in American healthcare - improved quality, efficiency, and innovation - are not materializing in ways that benefit the overall health of the population or the affordability of care.

However, while this conclusion is true and has been consistently reaffirmed over the last decade, the U.S. healthcare system is also still a major innovator on the world stage. As is often said, the U.S. health system contains many sub-systems some of which provide the best care in the world and some that perform poorly. This observation is more a product of systemic incentives than the quality-enhancing value of a competitive market.

The Consolidated Health Insurance Market

One of the key pillars of a competitive market is the presence of numerous firms offering similar services, allowing consumers to choose based on quality and price. This is the hallmark of competitive markets that have been touted throughout economics as generally beneficial to society. From a policy perspective, health insurance coverage of some form is seen as a critical component of access to care for the U.S. population. Without health insurance coverage, whether from a government source or not, financial barriers may inhibit the use of health services for individuals. Thus, health insurance markets are a critical first stop on our examination of the competitiveness of the US healthcare market as a whole.

The health insurance market in the United States is highly consolidated, with a few large players dominating most markets. According to a 2021 American Medical Association report, in 73% of metropolitan statistical areas (MSAs), the health insurance market is "highly concentrated" as defined by federal antitrust guidelines. In 46% of MSAs, a single insurer had a market share of 50% or more. This level of consolidation severely limits consumer choice and reduces the incentives for insurers to compete on price or quality of service.

Essentially, if you don’t like your insurance provider, you are stuck with it. For innovative health tech companies looking to work with or sell to health insurers, this consolidation also harms innovation because there is a lack of incentive to innovate without a need to compete for covered lives. Why should health insurers improve their offerings or innovate when they already capture so much of the U.S. healthcare spend?

Hospital Market Consolidation

The hospital and provider sector, too, has seen significant consolidation over the past few decades, both horizontally (hospitals merging with other hospitals) and vertically (hospitals acquiring physician practices and other care facilities).

Horizontal consolidation has led to the creation of large hospital systems that dominate regional markets. A 2020 study published in Health Affairs found that 90% of metropolitan areas had highly concentrated hospital markets by 2016. This concentration gives hospitals significant bargaining power over insurers and can lead to higher prices for patients. However, this may be in response to unfettered consolidation in the insurance market (and vice versa) as providers of care must respond to the pricing power gained by insurers through their own consolidation.

Vertical integration, where hospitals acquire physician practices and other care facilities, further reduces competition. This trend has accelerated in recent years, with the percentage of hospital-employed physicians increasing from 29% in 2012 to 42% in 2020, according to a Physicians Advocacy Institute report. Such integration can create closed networks that limit patient choice and make it difficult for independent providers to compete.

Regardless of causal drivers of these two trends, it is clear that the Federal Trade Commission and other anti-trust regulators have generally declined to intervene despite the likely negative effects on healthcare spending, costs to consumers, and innovation efforts. Importantly, there are questions around the FTC’s authority to regulate non-profit organizations, the majority of hospitals.

To put it simply, why would I, as a hospital, need to provide a better experience of care or better outcomes when I am the only game in town? Patients have no choice but to use my facilities and services in their local areas.

Here once more we have a disincentive for hospitals to innovate, to digitize, to change their operating model for the better. Aside from innovations that lead to operational cost savings, other innovations are not a necessity to maintain market share as in other more competitive industries.

Government's Role in Healthcare Funding

Importantly, regardless of the market concentration of hospitals and insurers, the commonly uttered phrase of “keep the government out of my healthcare” is equally misplaced. Contrary to the narrative of American healthcare as a free market, private system, over half of U.S. healthcare spending is already funded by government programs. Medicare, Medicaid, the Veterans Health Administration, and other public health programs account for a significant portion of healthcare expenditures. This high level of government involvement further undermines the notion of a purely market-driven system.

Importantly, for innovative product companies, health technology start-ups, and upstart care delivery businesses the government decisions around coverage and payment rates for their part of the market also impacts the decisions make by private insurers and state Medicaid programs. If Medicare does not pay for something, then its much less likely that a commercial health plan will do so. Thus, the decisions made by the government payors affect the overall decisions make in the market further limiting the concept of a free-marker.

Inelastic Demand and Market Failure: The Core Principle at Play

One of the fundamental assumptions of a functioning free market is that consumers can choose to forgo a product or service if the price is too high for the given value received, thereby putting downward pressure on prices. Or, they can select a different firm to buy from if value is higher. This is true for products where demand is relatively elastic (i.e., the consumer is sensitive to price). However, healthcare demand is largely inelastic, meaning that people's need, or demand, for medical services doesn't significantly decrease even as prices rise. In many cases in healthcare, the demand is extremely inelastic such as when someone requires a hospitalization for a life threatening condition, or a drug that serves to keep someone alive.

In simple terms, when you're having a heart attack, you don't shop around for the best-priced emergency room. When you're diagnosed with cancer, you don't choose to forgo treatment because it's expensive (sometimes people do). This inelasticity of demand means that healthcare providers can often raise prices without seeing a corresponding drop in demand, leading to market failure and high prices for the general public.

This characteristic of healthcare demand, combined with the general agreement that healthcare is a fundamental service that should be available to all Americans, creates a situation where the free market alone cannot efficiently allocate resources or control costs. Thus, in these scenarios across history it is critical for effective government intervention.

My Health Reform Conclusion

This next statement is my humble opinion, but it is clear that there are really two options to solve the current market failures. We can increase actual competition in the market or we can move toward the systems of other higher performing OECD countries. Increasing competition will be a tremendously difficult or expensive process that could be achieved through multiple strategies. First, the FTC and state analogs could break up health systems and insurers into multiple firms to foster competition. Second, the government could subsidize the entry of competitors in certain markets. Third, the government itself could become a competitor via a policy intervention such as a “public option.” Fourth, we could move to a true single payor system with careful government regulation (which would be a significant shock to the system and could be executed in many orientations and forms). All of these would require a great deal of political support and resources to achieve and we are likely far beyond the point at which significant anti-trust activities could be effective.

While it seems like it may be a bit too late, the U.S. government has recognized the lack of competition as a significant issue and has recently appointed a chief competition officer under the Department of Health and Human Services.

Conclusion

The myth of competition in American healthcare has led to a system that fails to deliver on the promises of either a free market or a socialized model. The highly consolidated insurance and hospital markets, significant government funding, and inelastic demand for healthcare services all contribute to a system that lacks true competition.

This American hybrid model captures the worst aspects of both systems: it fails to control costs or ensure universal coverage like single-payer systems, while also failing to deliver the efficiency and innovation promised by free-market advocates. The result is a healthcare system that is both expensive and inequitable, leaving many Americans struggling to access and afford necessary care.

As we continue to debate healthcare reform, it's crucial to move beyond the false dichotomy of "socialized" versus "free market" healthcare. Instead, we must recognize the current system for what it is: a hybrid model that isn't working for many Americans. Only by acknowledging this reality can we begin to have meaningful discussions about how to create a healthcare system that truly serves the needs of all citizens, whether through thoughtful regulation, systemic reform, or a combination of approaches.