The Myth of American Free-Market Healthcare

The assumption that U.S. healthcare is currently based on unfettered market principles just isn’t true.

A popular talking point among admirers of single-payer health systems is that the American experiment with free market healthcare has failed. Skyrocketing costs, chronically high rates of uninsurance and underinsurance, administrative overhead and lagging life expectancy are offered as evidence that a market-oriented health market cannot meet the needs of a modern society. A government-financed program with universal coverage, the argument goes, will deliver better outcomes at lower cost.

Opponents of single-payer health systems typically defend the U.S. approach by citing our superior cancer survival rates, shorter wait times for services, or faster pace of biotech innovation. These responses are fair, but there’s a more foundational problem: The core assumption that U.S. healthcare is currently based on unfettered market principles just isn’t true.

As the chart below shows, the share of national health expenditures controlled by private insurers and directly by consumers has fallen sharply over the last half-century. In 1970, private health insurance and out-of-pocket expenses accounted for 75 percent of total national health expenditures. By 2020, that share had fallen below 50 percent. The growth of Medicaid and Medicare – which are entirely funded by federal and state governments – is largely responsible for these trends. And although they are often overlooked in health policy discussions, other government programs – including the Children’s Health Insurance Program (CHIP), Department of Defense and Veterans’ Affairs health systems, Indian Health Service, school health, general assistance, and a host of health initiatives run by local governments – account for about 15 percent of total national health expenditures.

In 2019, Census figures show that approximately 183 million people in the U.S. had employer-sponsored insurance, 33 million were covered by private plans on the individual market, 59 million received Medicare coverage, and 56 million were on Medicaid. Some of these numbers have changed significantly during the COVID-19 pandemic, generally toward even greater reliance on public financing. Medicaid enrollment, for example, has grown rapidly since early 2020.

These trends are partly rooted in demographics. As the U.S. population has aged, a larger proportion has become eligible for Medicare. But there’s more to the story. Even among non-seniors, the role of the public sector in providing insurance coverage has grown rapidly; since the 1970s, the proportion of non-seniors with some type of public health plan has grown nearly four-fold (see the graph below), from about 6 percent to more than 23 percent. This is largely attributable to repeated expansions of Medicaid and changes to Medicare rules that have allowed certain people with disabilities or specific illnesses to qualify for benefits.

Why is a health system in which government entities directly control more than half of spending routinely described as “free market,” “market-oriented,” or dominated by private interests?

Even the shrinking slice of national health spending ostensibly controlled by private insurers and consumers is subject to vast, ever-multiplying federal, state and local restrictions, mandates, subsidies, taxes, and other regulations. Just to give a few examples:

• Certificate of Need programs give state regulators the authority to prevent private companies from building new health facilities or investing in new equipment;

• The FDA tightly regulates the pharmaceutical treatments patients can access;

• Government licensing boards establish scope of practice restrictions and entry requirements for virtually every clinical occupation, from brain surgeon to certified nurse assistants.

• Insurance regulators limit how quickly private insurers can raise prices, mandate that certain benefits must be covered, and restrict how prices can vary across enrollees;

• Some states – and, until recently, the federal government – mandate that individuals purchase health insurance;

• Hospitals must comply with hundreds of regulatory requirements, ranging from mandatory staffing levels to data reporting and claims processing.

• Some states impose price controls on hospitals and pharmaceutical companies, and cap what commercial insurers can be charged for services.

• The federal government provides tax subsidies through health insurance exchanges, as well as preferential tax treatment of Health Savings Accounts and employer-sponsored health plans.

The point isn’t that all healthcare regulations are frivolous or harmful. Market failures do exist, and government intervention can sometimes help correct them. Depending on the area of regulation, the U.S. sometimes has stricter (as is the case with professional scope of practice) or more accommodating (as is the case with novel drug approval) rules than other comparable countries. But the notion that private enterprise, with little or no government oversight, is rampant in the U.S. healthcare system is plainly false.

Could it be that the U.S. is still the most free market system among industrialized countries? Here again, the data tell a different story. The chart below shows the percentage of total health spending in every country of the Organization for Economic Co-operation and Development (OECD) that is categorized as “government/compulsory” (which includes care that is directly financed by the government, social insurance, and compulsory private insurance). The members of the G7, to which the U.S. healthcare system is often unfavorably compared, are colored in orange. The U.S. (in green) ranks 9th out of the OECD’s 38 countries, and 4th out of the G7 countries. Although the United Kingdom and Canada are widely regarded as having government-run health systems, the United States still ranks higher in terms of the percentage of health spending controlled by the public sector.

The simple fact is that no industrialized country has a health system that even approaches what might plausibly be called a free market – and the U.S. is no closer to that extreme than most of its peers.