Because it doesn’t operate as a market.
Americans are told that high medical costs are inevitable. Medicine is complex. Technology advances. The population is aging. Saving lives, we’re assured, simply costs more.
But that explanation collapses the moment we look at parts of medicine that operate under different economic rules.
Consider LASIK eye surgery. Since its introduction in the 1990s, the procedure has become safer, more precise, and more technologically advanced. Yet when adjusted for inflation, the price for the procedure has remained stable or even dropped. Cosmetic surgery shows a similar pattern: improving quality, competitive pricing, transparent costs.
These are not simple services. They require advanced equipment, skilled specialists, and serious safety standards. What they lack is something else: third-party payment distortion. Patients pay directly. Prices are visible. Providers compete openly. Poor outcomes damage provider reputations. Demand attracts new entrants.
In other words, these segments behave like markets.
Now contrast that with the broader American healthcare system.
In 2024, US national health expenditures reached roughly $5.3 trillion—about $15,474 per person—consuming 18.0% of GDP. That is nearly double the share spent by many peer nations. The difference is not primarily that Americans receive vastly more care. It is that prices for services, procedures, and drugs are dramatically higher.
The question is not why medicine is advanced. The question is why American healthcare behaves so differently from other advanced industries.
The answer lies in incentives and structure.
Most Americans do not pay directly for most services. Private insurance, Medicare, and Medicaid stand between patient and provider.
When consumers are insulated from marginal costs, price sensitivity declines. When providers negotiate primarily with insurers rather than patients, prices become opaque. Real-time price comparison is rare.
In almost any other industry, rising prices trigger consumer restraint and competitive entry. In healthcare, those corrective signals are muted.
The result is predictable: prices rise faster than inflation, and there is little downward pressure to discipline them.
America’s legal environment further amplifies costs. Physicians practice in a system where omission is often punished more severely than excess. Ordering an extra test is safer than explaining why it wasn’t necessary.
Individually, this behavior is rational—no physician wants to defend an omission in court. Systemically, it embeds overutilization into standard practice.
Insurance amplifies this effect. When patients are insulated from marginal costs at the point of service, friction disappears. The clinician gains legal protection. The patient has already paid through premiums. The insurer distributes the aggregate cost across the pool.
This is a classic moral hazard. Decision-makers face limited marginal downside, while costs diffuse system-wide. Utilization rises. Baselines shift upward. Outcomes do not necessarily improve proportionately.
In most industries, rising demand attracts new entrants. Supply expands. Prices moderate to reflect competition.
In medicine, entry is tightly controlled. Medical school seats, residencies, specialist certifications, and licensing approvals expand slowly and administratively. These constraints create persistent scarcity, even as aging populations and expanding diagnostics increase demand.
The same logic applies to drugs and medical devices. Regulatory approval requires enormous trials, documentation, and compliance systems. The capital burden filters out smaller competitors before they ever reach patients. Only large incumbents survive the gauntlet.
The result: reduced competition, embedded approval costs, and sustained pricing power. Regulation here functions not as safety oversight—it functions as a barrier that entrenches incumbents and inflates cost.
Modern medical practice also carries heavy fixed costs: malpractice premiums, accreditation, electronic health records, reporting mandates, billing staff, and insurer-driven documentation. Fragmented payers, billing codes, and prior authorizations multiply administrative overhead. Entire departments exist solely to navigate reimbursement.
These are not clinical costs. They are transaction costs. They must be recovered somewhere—ultimately, through higher premiums, taxes, or direct billing.
Meanwhile, hospital consolidation has accelerated over the past two decades. In many metropolitan areas, one or two health systems dominate. Mergers increase negotiating leverage against insurers. Insurers pass higher negotiated rates to employers and consumers.
When entry barriers are high and consolidation increases, pricing power stabilizes. Competitive discipline weakens. Customers rarely have the visibility or choice to discipline inefficient providers.
Across the system, the structure repeats:
- Patients are insulated from price signals.
- Providers face litigation risk that rewards excess.
- Entry barriers restrict supply.
- Regulatory and capital hurdles entrench incumbents.
- Administrative layers raise fixed costs.
- Market concentration amplifies pricing leverage.
None of these forces require bad actors—only predictable behavior in distorted incentives.
Where markets function—as in elective procedures—prices stabilize or fall while quality improves. Where markets are constrained, costs climb relentlessly.
The lesson is not that medicine should be deregulated recklessly. It is that incentives matter more than intentions. When consumers lack price visibility, supply cannot expand freely; regulation entrenches incumbents, and high costs are inevitable.
Healthcare inflation is not a mystery. It is predictable. Until Americans restore transparency, competition, and accountability, rising costs will remain a feature, not a surprise.