The problem with US healthcare is not capitalism

Among the world's rich countries, Americans are the most likely to say their healthcare system needs fundamental change. They are right. They are also wrong about why.

The standard diagnosis runs roughly: too much capitalism, too much profit, too many private companies, too little government. The corollary is the inverse — more rules, more oversight, a single payer, perhaps the whole thing nationalized. I think this gets the mechanism almost exactly backwards. The dysfunctional parts of American healthcare are not the parts where markets are working. They are the parts where markets have been jammed by half a century of accreted regulation that hides prices, restricts supply, separates the patient from the buyer, and rewards every incumbent with the scale to work the maze.

What we call the American healthcare system is not capitalism. It is something much stranger: a government-protected cartel that profits from looking like a market. The rest of this essay is an attempt to show how that happened, and what to do about it.

Regulation built the cartel

A handful of specific rules deserve most of the blame for hospital consolidation. Each one sounds technical in isolation. Together they describe an industrial policy the American government would never admit to having.

Certificate-of-need laws. In thirty-five states, you cannot build a new hospital wing, add MRI capacity, or open an ambulatory surgery center without a state permit. Existing providers are usually allowed to formally object — which means incumbents help decide whether their future competitors will be allowed to exist. The DOJ and FTC have been pointing out the absurdity for forty years. The laws survive because incumbents like them.

Section 6001 of the ACA. This rule barred any new physician-owned hospital built after 2010 from billing Medicare or Medicaid, and severely restricted the ability of existing ones to expand. The stated justification was self-dealing. The practical effect was to close off the single most credible source of new competition to incumbent hospital systems — doctors banding together to build their own. The big systems were left free to keep consolidating; the doctors who might have challenged them were locked out of the market that pays roughly half the country's hospital bills.

Site-of-service billing. When a hospital acquires an independent practice and reclassifies it as a "hospital outpatient department," Medicare and most private insurers immediately start paying more for the same visit, in the same building, with the same doctor. The rule is, in effect, a federal subsidy for hospital acquisitions of independent practices, paid in perpetuity.

Stark law. Designed to stop physicians from steering patients to facilities they own, Stark has become so byzantine that compliance itself is a moat. Large hospital systems employ legal teams that structure compensation to reward in-house referrals within the boundaries of the law; independent practices cannot. The rule does not stop self-dealing. It restricts self-dealing to the largest players.

340B drug pricing. Manufacturers must sell certain drugs at deep discounts to qualifying hospitals. The hospitals are not required to pass any of the discount on to patients. So a 340B-eligible hospital can buy a cancer drug for $1,000, bill insurance $5,000, and pocket the spread. The result is a powerful incentive to acquire oncology practices and route their prescriptions through the loophole.

You can add the hospital property-tax exemption, state-directed Medicaid payments, and Medicare's conditions of participation to the same list. None of these rules look like industrial policy from inside the legislative text. All of them function as industrial policy from outside it. They privilege size, lobbying capacity, and administrative depth, and they turn the question of who survives in American medicine from who treats patients best into who navigates the maze best.

A 2016 study in Annals of Internal Medicine found that for every hour primary care physicians spent on direct patient care, they spent close to two on EHR documentation and desk work, with another one to two hours of after-hours charting on top. A modern independent practice needs multiple administrators per physician just to keep up with billing, claim denials, compliance, quality reporting, and the federal conditions of participation in Medicare. Practices that cannot afford the overhead sell to the nearest health system. The system then collects the site-of-service uplift, the 340B spread, and the negotiating leverage that comes with local market share.

Private equity reads the same rules

Private equity has been accused of a great deal in healthcare, and most of the indictment is fair. But almost none of it is novel. PE is just the kind of capital pool patient enough to read what the rules already permit.

Federal merger review under the Hart-Scott-Rodino Act only triggers above $126.4 million as of 2025. Most physician-practice acquisitions sit well below that threshold. A firm can buy a dermatology practice in Phoenix, then another, then forty more across the metro, and never trigger antitrust review for a single transaction. Between 2012 and 2021, PE acquisitions of physician practices grew roughly 600%. Fewer than 10% of those deals crossed the HSR threshold.

The aggregate result is what you would predict. A 2023 American Antitrust Institute report identified at least one PE firm holding above 30% specialty market share in 108 metropolitan areas, and above 50% in 50 of them. A JAMA Health Forum study of dermatology, gastroenterology, and ophthalmology practices found that PE-acquired clinics charged about $71 more per claim (a 20% increase) and were paid about $23 more per claim (an 11% increase) than matched controls, while also generating substantially more visits per patient.

You can call this private-equity rapaciousness. But corporate law made the consolidation cheap, antitrust law made it invisible, and site-of-service rules made it profitable.

The patient is not the customer

A functional market needs a customer — someone who pays for the product and uses it. American healthcare does not really have one.

Average employer-sponsored premiums in 2025 reached $9,325 for single coverage and $26,993 for a family. Almost no one writes those checks personally. The employer pays most of the cost as a tax-advantaged benefit, which means the employer, not the patient, is the insurer's real customer. Insurers do not compete to win loyalty from people who get sick. They compete for HR departments, which want predictable costs and minimal headaches.

It gets stranger the closer you look. Most large employers do not even buy insurance in the conventional sense — they self-fund, paying their employees' claims directly out of corporate cash, with an insurance company retained only to administer the network and process paperwork. About 63% of covered workers are in plans structured this way. So when people talk about "insurance company profits," they are often describing administrative fees paid by employers to manage claims the employer ultimately pays. The insurer is closer to a billing vendor than a risk-bearing principal.

Americans also change jobs every few years, and so they change health plans every few years. Any return on long-term preventive care — diabetes management, smoking cessation, early cancer screening — accrues to whichever insurer happens to hold the policy when the payoff lands. The system talks a great deal about prevention and spends very little money on it.

None of this architecture is natural. It was bolted together during World War II, when federal wage controls exempted employer health benefits from the cap and the IRS subsequently ruled that employer-paid premiums were not taxable income. Every benefits law since has entrenched it. The result is the largest non-cash subsidy in the US tax code — roughly $300 billion a year — paid specifically to people who happen to get insurance through work. It is the biggest structural distortion in American healthcare, and almost no one in either political party will touch it.

Two problems, often mistaken for one

Two distinct things are true about American healthcare and worth keeping straight. Prices are opaque. Insurance covers too much. They reinforce each other, but they are different problems with different fixes.

On opacity: the federal hospital price-transparency rule has been in effect since 2021, and compliance is famously poor. Hospitals post machine-readable rate files in formats that are unparseable in practice, list "shoppable services" inconsistently, and treat the enforcement penalty as a cost of doing business. To be fair to hospitals, the larger ones are often willing to quote a real cash-pay number if you call billing directly. Smaller physician practices frequently can't, because the nominal price depends on which insurer is paying and at what contracted rate. The opacity is structural, not conspiratorial.

On coverage: American health insurance is built around prepayment, not catastrophe. Your homeowner's policy does not cover a leaky faucet. Your auto policy does not cover an oil change. Your health policy pays for an annual physical, a generic prescription, and a visit for a stubbed toe. Some of this has a defensible logic — preventive care has positive externalities, and the tax treatment of premiums pushes everything toward the insurance wrapper — but the cumulative effect is that every routine transaction is laundered through a third party that has no incentive to make the underlying price visible.

The two problems amplify each other. If insurance covered only genuine catastrophe, opacity would matter much less for the rest: patients would shop directly for routine care, providers would have to post real prices, and the market would behave the way every other consumer market behaves. Conversely, if prices were genuinely transparent, the absurdity of routing $200 transactions through a third-party payer would be obvious — nobody would buy a prepayment plan whose administrative overhead exceeded its savings.

The HSA is the closest thing to a quiet revolution

A Health Savings Account is a tax-advantaged account paired with a high-deductible plan. Money goes in pre-tax, grows tax-free, and comes out tax-free for qualified medical spending. The account belongs to the patient — not to the employer, not to the insurer. It rolls over indefinitely. After sixty-five, unused funds can be withdrawn for any purpose at ordinary income rates, like a traditional IRA.

The point of the structure is that it puts a real consumer back into the transaction. When patients spend their own pre-tax dollars on a routine MRI, they start asking what it costs. Providers that get asked enough times start posting prices, and providers that post prices end up undercutting each other. The boring market dynamics that govern every other consumer category begin to apply.

About a quarter of covered workers are now in an HSA-eligible plan, up from essentially zero in 2004. Where these plans have been paired with real consumer behavior — direct-pay primary care, transparent cash-price imaging centers, the small but growing network of independent surgery centers that publish their fees online — you can see the rest of the system by contrast. A cash-pay knee MRI at the Surgery Center of Oklahoma is roughly $500. The same scan billed through insurance at a hospital outpatient department often runs $3,000 or more. The difference is not the scanner.

This is not a complete answer. Catastrophic care still needs real insurance, and emergencies cannot be price-shopped from a stretcher. (Neither can a burst pipe at 1 a.m. — homeowner insurance handles that, and no one treats it as a moral failure of the housing market.) But HSAs prove that the price-discovery mechanism in healthcare is not dead. It has just been zoned out of most of the system.

Healthcare is scarce, and someone always rations

Whether we like it or not, healthcare is finite.

There are only so many cardiologists, so many MRI machines, so many ICU beds, so many specialist hours in a day. You cannot solve a doctor shortage by declaring healthcare a right, any more than you can solve a housing shortage by declaring everyone deserves a house. Every system that exists rations care. The only meaningful question is the mechanism.

Markets ration through price. Single-payer systems ration through queues, eligibility rules, and treatment criteria. Both produce people who do not get the care they wanted when they wanted it. The British NHS does not send insurance-style rejection letters; it sends NICE guidelines, commissioning decisions, funding requests, and waitlists. Canadians wait, on the most recent Fraser Institute data, a median of around thirty weeks between a GP referral and treatment. That is not worse than American denial in some absolute sense. It is the same scarcity, dressed in different paperwork.

This matters because the moral case against insurers rests on a quiet assumption that someone, somewhere, could simply decide to approve everything. No one can. A waitlist is a price paid in time, anxiety, and worse outcomes.

The standard counterargument — just adopt universal healthcare — solves the wrong problem. The disease of American medicine is not that some people pay and others do not. It is that the system is wildly inefficient, prices are invisible, and competition has been suppressed in exactly the places it would discipline costs. A single payer does not fix any of this; it entrenches it. You still have scarcity; you just rename the rationing. A denied claim becomes a "waitlist"; a coverage exclusion becomes a "NICE guideline"; a specialist appointment becomes a referral that takes seven months. The decision-maker is no longer a claims adjuster the patient can at least curse by name — it is a national committee setting policy for sixty million people at once, with no direct visibility into any individual case. The English understand this so well that those who can afford it now buy private insurance on top of the NHS just to skip the queue, sustaining a roughly £7-billion parallel market sitting alongside the "free" public one. Meanwhile NHS spending has grown by roughly two-thirds in real terms since 2000, and the service still routinely misses its own treatment-time targets, because the structure that was supposed to control costs has no internal mechanism to discover them.

The deeper problem is what a single national buyer does to the supply side. Monopsony is a single point of failure on every question that requires local knowledge: which clinic to open, which technology to invest in, which drug is worth developing for a small patient population. A pharmaceutical company is much less likely to gamble on a treatment for a rare disease if the one customer in the market may or may not buy it. A new clinic cannot test a better delivery model if the reimbursement rate is set by a committee in another city. An inefficient hospital cannot be dislodged when the only alternative is itself. Efficiency comes from competition: providers fighting for patients, insurers fighting for employers, innovators racing each other to a market. Single-payer eliminates all three of those fights in one stroke and replaces them with a centralised buyer who, in the American case, would be the same federal government that produced the VA scandal, the Medicare claims backlog, and the HealthCare.gov launch — not an institution anyone serious would hand one-sixth of the economy to without a fight. Universal coverage is a defensible goal. Single-payer is the worst available way to pursue it.

Insurer profits are smaller than people think

If insurers are not the villain people imagine, then where does the money go?

At the industry level, NAIC's 2024 report puts health insurer net margins at about 0.8% — down from 2.2% the previous year. Compared with the cultural narrative of insurance as extraction, those numbers are surprisingly thin. The bulk of healthcare spending flows to providers, drugs, devices, and administrative overhead. Insurer profit is a small slice on top.

The more interesting story is what the regulation rewards. The Affordable Care Act's medical loss ratio rule requires insurers to spend 80 to 85% of premiums on medical care, or rebate the difference. The intent was to cap profits as a percentage of premium. The implication is that if profit is capped as a percentage of premium, the only way to grow profit in absolute dollars is to grow the premium base. There is a credible structural argument that this creates exactly the wrong incentive — to wave through cost increases rather than fight them.

In a well-functioning market, insurers would provide downward pricing pressure upon providers. If insurers profits are capped, and their incentive is to raise costs, then this pricing pressure no longer exists.

The argument underneath the argument

Most healthcare debates are arguments about human nature in disguise.

One side believes the problem is selfishness — insurer selfishness, hospital selfishness, drug-company selfishness — and that the solution is to put better people in charge with better rules. The other side begins from a less flattering premise: that everyone in the system is self-interested, including the regulators and the bureaucrats and the politicians, and the only useful design question is what structure still works when you take that for granted.

Thomas Sowell called these the unconstrained and the constrained visions. The unconstrained vision keeps reaching for one more board, one more reimbursement formula, one more safeguard, on the assumption that the right authority with the right intentions can manage a system this complex from above. The constrained vision says no central intelligence can. Markets work, when they work, by distributing decisions across millions of people who know their own situations, weigh their own trade-offs, and signal preferences through prices. Replace that distributed system with central control and what you typically get is not moral clarity. You get complexity, and complexity is the natural habitat of incumbents.

That is the bind American healthcare is in. The country did not deregulate it into dysfunction. It regulated it into a government-protected cartel, and then mistook the cartel for capitalism.

What I would actually do

Everything I would change moves in one direction: fewer rules, clearer prices, a tighter link between the person choosing care and the person paying for it.

1. Repeal CON laws and Section 6001. Let new clinics, hospitals, and surgery centers compete on their merits.
2. End site-of-service billing. Pay the same amount for the same service regardless of which corporation owns the building.
3. Enforce real price transparency with penalties. A cash price for a routine service should be a phone call away.
4. Cap or eliminate the employer tax exclusion for health benefits, and redirect the savings into universal HSA contributions and a catastrophic backstop. The exclusion is the single largest distortion in the system.
5. Make the HSA-plus-high-deductible architecture the default rather than the boutique option. Pair it with transparent pricing and a real ecosystem of direct-pay providers, and let consumer behavior do the work no regulator can do from Washington.

None of this is morally pure. Markets are not morally pure. But prices, profits, and competition are feedback mechanisms — they expose trade-offs, surface bad cost structures, and force failure into the open. American healthcare has buried all three under a layer of administrative complexity that only the largest incumbents can navigate, and then asked patients to be grateful for the result.

The system does not suffer from too much capitalism. It suffers from too little, and from the durable American belief that one more rule, one more board, one more reimbursement formula will finally tame it.