Health Policy

Why the Health Care System Is Incapable of Reducing Its Own Costs: A Brief Structural System Analysis


Leading lights of the health insurance industry are crying that Medicare For All or any kind of universal health reform would “crash the system” and “destroy healthcare as we know it.”

They say that like it’s a bad thing.

They say we should trust them and their cost-cutting efforts to bring all Americans more affordable health care.

We should not trust them, because the system as it is currently structured economically is incapable of reducing costs.

Why? Let’s do a quick structural analysis. This is how health care actually works.

Health care, in the neatly packaged phrase of Nick Soman, CEO of, is a “system designed to create reimbursable events.” For all that we talk of being “patient-centered” and “accountable,” the fee-for-service, incident-oriented system is simply not designed to march toward those lofty goals.

A machine for creating reimbursable events

The health care system is a machine for creating reimbursable events. This means that its systemic business aim is to maximize reimbursable events and to increase their price, that is, to maximize the energy the system can draw in from its customers.

There’s Point 1: health care provider organizations are designed and energized to increase reimbursable events and drive up their costs.

This system is self-limiting, as drawing ever-increasing energy from its customers actually debilitates those customers (individuals, employers, governments) and causes them to find ways to reduce payments or opt out of the system altogether.

Health insurers, on the other hand, have a somewhat more complex situation. Insurers are paid by their ability to finance these reimbursable events, spreading the risks, and keeping a percentage of the flow for administration, marketing, and profit, limited by the Affordable Care Act to 15% or 20% of the total. So the systemic business aim of a health insurance business is to get the risk right, so that the actual payout for reimbursable events comes as close as possible to the lower bound of the medical loss ratio.

There’s Point 2: Health insurers get paid a percentage of the total cost. They have no incentive to reduce the total cost, and every incentive to increase it.

Let’s be honest: In this picture, neither the health care providers nor the insurers find any institutional advantage in providing actual lower costs per life, per case, or per procedure. Incentives are not aligned with outcomes.

The “affordable” part of the Affordable Care Act was about forcing modified community rating on insurance companies (so that at least for older and more compromised people, health insurance would be more affordable) and about getting insurers to compete for the low end of the market. But the many health plan executives I have worked with over the years tell me that they do not want the low end of the market. The ideal customer is the middle of the market, the stable customers, the not-so-sick-or-expensive customers. If you design your premium structure to catch a lot of people who are purely price-shopping, your medical loss ratio will climb above 100%, you will have to raise your premiums next year to recoup, and all those price shoppers will go away.

There’s Point 3: Because of this structure, no one wants to compete for the bottom in healthcare markets.

At the same time, health care providers have by and large avoided opportunities to take on some risk, to be transparent about their costs, or to guarantee their patients anything at all. Instead they have mostly stuck with the fee-for-service model, largely because of institutional inertia. Change can be expensive, difficult, and requires strong leadership. Adjusting internal information silos to provide the complete picture of a patient, to track quality metrics, to transparently measure physician outcomes, and so forth is disruptive—but it is what’s required to win.

Rather than radically move off of the fee-for-service model, health care providers have consolidated enough that in many markets they now hold monopoly-like power. In those markets a health insurer or major employer aiming to build a lower-cost alternative system within the region simply cannot provide its members a full array of health services without paying the high prices of these consolidated health care systems. And the insurer cannot pick apart the provider, which insists on whole-system contracts. This combination of consolidation and lack of transparency means that there is no real competition on price and quality among health care providers—and therefore no possibility of real competition among insurance companies. There is no competitive market in health care.

There’s Point 4: The lock-in between large monopoly-like health systems and the few dominant health insurers makes a true competitive market in healthcare impossible.

All this will remain true as long as the market is dominated by the opaque, fee-for-service, treat-to-code payment system that accounts for the vast majority of healthcare payments today. When that changes, when other payment systems such as competitive bundles, subscriptions, direct pay primary and others gain serious market share, the system will shift, the walls will come tumbling down.

The very structure of health care, as it exists today, means that no major player across the entire market is truly competing to provide the best medical care at the lowest cost.

The only serious way to evaluate any “reform” that lays claim to lowering prices is to ask: How does this reform plan change that?

Joe Flower has 40 years of experience in the healthcare world and has emerged as a thought leader on the deep forces changing the system in the United States and around the world.