America’s Healthcare Dilemma: The Economics of Unconstrained Demand - by Lance Amundsen LCA13@yahoo.com
America spends more on healthcare than any other industrialized nation—roughly 20% of GDP—yet the outcomes fail to justify the expense. The reason lies in a structural flaw: healthcare operates on an unconstrained demand model fueled by third-party payment systems. Without significant reforms, this model will not only continue to spiral costs but also pose an economic security risk to the nation.
The Problem: A Market Without Constraints
In a typical market, consumers make purchasing decisions with their own money, balancing cost and value. In U.S. healthcare, however, consumers primarily spend “other people’s money”—namely, that of insurance companies, employers, or the government. This disconnect from direct financial responsibility removes the incentive to seek value, driving demand higher and pushing prices upward.
A Starbucks Analogy
Imagine you could buy as much coffee as you wanted with only a 15-cent copay. Would you consider the cost of a $6 latte? Probably not. Soon, demand for premium coffee would skyrocket, and Starbucks might even charge $10 or $100 to meet growing expectations. This is precisely how U.S. healthcare operates: with unconstrained demand driving both excessive supply and inflated prices.
Insurance Companies: The Only Governor
In this dysfunctional market, insurance companies emerge as the sole entity attempting to constrain demand. They do so by denying claims, limiting coverage, or raising copays. While unpopular, these actions are the only mechanisms keeping demand—and costs—from becoming even more untenable.
Why Costs Keep Rising
Despite insurance companies’ interventions, healthcare costs in the U.S. remain disproportionately high compared to other nations. Administrative inefficiencies, high drug prices, and unregulated service pricing amplify the problem. A report from the Commonwealth Fund found that the U.S. spends nearly twice as much per capita on healthcare as other developed nations like Germany or Canada, without better outcomes.
Lessons from Single-Payer Systems
Countries with single-payer systems manage costs through mechanisms like budget caps, negotiated prices, and rationing care. These approaches create constraints on both supply and demand, leading to more sustainable healthcare spending. For example, the UK’s National Health Service operates with a fixed budget, forcing prioritization of essential services over elective ones.
The Unchecked Role of Suppliers
In the U.S., suppliers (hospitals, pharmaceutical companies, and device manufacturers) operate without significant price constraints. They capitalize on the lack of demand limitations, charging higher prices simply because they can. A RAND Corporation study found that U.S. hospitals charge private insurers 247% more than what Medicare pays for the same services.
The Economic Consequences
Healthcare costs aren’t just a personal burden—they’re a national one. With healthcare encompassing one-fifth of the economy, any disruption to the system, whether through cyberattacks or economic crises, could have catastrophic consequences. The American Enterprise Institute has warned of the systemic risks posed by an over-reliant healthcare sector.
A Call for Systemic Reform
Fixing this issue requires addressing the root causes. Encouraging price transparency, limiting third-party payment systems, and introducing value-based care models are potential solutions. Policymakers should also explore adopting supply-side constraints or hybrid models that incorporate elements of single-payer systems while preserving market competition.
Citing Thought Leaders
This analysis aligns with perspectives shared by prominent economists and healthcare experts:
• Milton Friedman, in his critique of third-party payment systems, emphasized how they distort the healthcare market.
• Dr. Atul Gawande, in his essay The Cost Conundrum, highlighted how regional spending disparities arise from unchecked supplier incentives.
• Elizabeth Rosenthal, author of An American Sickness, detailed how profit motives inflate costs across the system.
Consumer Behavior Must Change
Ultimately, consumers must have “skin in the game” to curb excessive demand. High-deductible health plans and health savings accounts (HSAs) are steps in the right direction, as they make individuals more aware of the true cost of care. However, these measures must be paired with broader systemic changes to be effective.
Insurance Companies: Villains or Unsung Heroes?
While insurance companies often bear public ire for denying coverage, their role as demand governors is essential under the current model. Without them, costs would rise even faster, and healthcare spending would further crowd out other vital sectors like education and infrastructure.
The Global Comparison
Countries like Switzerland and Singapore offer alternative models worth studying. Both balance public and private contributions while enforcing cost control mechanisms that prevent runaway expenses. Singapore’s use of mandatory medical savings accounts combined with catastrophic coverage is particularly notable.
The Cost of Inaction
Failing to reform the system will have dire consequences. As healthcare spending continues to outpace GDP growth, it will exert greater pressure on government budgets, private employers, and individual households. The Congressional Budget Office projects that by 2030, federal healthcare spending alone will consume 30% of GDP.
A Security Risk We Can’t Ignore
The economic risks posed by the healthcare sector are not merely financial but also strategic. As cyber threats grow, targeting an industry that constitutes a fifth of the economy could destabilize the entire country. The U.S. cannot afford to ignore this vulnerability.
What Needs to Change
Reforms must focus on aligning incentives across all stakeholders—patients, providers, and insurers. Transparency in pricing, caps on excessive profits, and a shift to value-based care can help create a more balanced system. Policymakers must prioritize these changes to safeguard the nation’s economic and physical health.
Conclusion: A Broken System Requires Bold Action
America’s healthcare system is as broken as it can be. But the solutions are within reach if we are willing to learn from other nations and rethink entrenched practices. The stakes are too high—economically, socially, and strategically—to maintain the status quo.
