The reason almost doesn’t matter. Maybe there is concern for a brain tumor. Maybe a herniated disc is making you drag your foot. Maybe the diagnosis is still uncertain, and the MRI is supposed to help find it. The physician has decided that the scan is necessary.

That should be the hard part. It often isn’t.

At many hospitals, ordering an MRI is not one action but a chain of them. Select an indication from a dropdown menu. Type the indication again in a free-text box. Complete a metal-safety form. Enter a phone or pager number for urgent results. Attach a diagnosis code, even when the diagnosis is already in the note and elsewhere in the order.

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In many systems, the order also opens a decision tree asking why the patient needs an MRI rather than a CT scan, an x-ray, or some other test. CMS paused its Medicare Appropriate Use Criteria program in 2024, but local utilization controls and old EHR configurations do not necessarily vanish when a federal rule does. A requirement can outlive the policy that helped create it.

Physicians learn the workarounds. Save the phone number in a favorite order. Copy the indication from the note. Pick the diagnosis code that makes the screen go away. None of these adaptations is dramatic enough to inspire a revolt. Each saves a few seconds. Together, they become the unofficial operating system of medical care.

The same thing happens elsewhere. A hospital decides that recurring daily laboratory orders encourage unnecessary testing, so it disables them. Physicians then create new routines to make sure necessary labs are ordered each morning. A critical result may generate a call from the laboratory, a second call from the nurse, and an electronic alert from the mobile EHR. Each notification has a defensible purpose. The cumulative system is absurd.

Political scientist Steven Teles gave this style of government a name in his 2013 essay “Kludgeocracy in America” (credit to Michael Zirwas, MD, who brought the term to my attention on X). A kludge is an improvised fix: something added because redesigning the underlying system is too difficult. A kludgeocracy is what happens when those fixes accumulate into the system itself. American policy becomes a stack of tax preferences, reporting systems, and indirect subsidies that no one would design from scratch.

That describes American health care perfectly

.

The rules did not appear from nowhere. Physicians sometimes order unnecessary tests. Imaging can expose patients to incidental findings and downstream procedures. Repeated laboratory testing can waste money and blood. Safety checks prevent real mistakes. Insurers, hospitals, and government programs have legitimate reasons to care about utilization, cost, and quality.

The problem is not that every rule is foolish. The problem is that almost every rule transfers its operating cost to someone else, usually the clinician and the patient.

Third-party payment makes this worse. When patients are insulated from the price of an MRI or a laboratory test, payers respond with utilization controls. But utilization control is not free. We hide the financial price from the clinical encounter, then reintroduce it as an administrative price.

A 2019 JAMA review estimated that administrative complexity accounted for $265.6 billion in annual waste. That figure is an estimate, and not every administrative task is wasteful, but the scale is difficult to dismiss. In the AMA’s latest prior-authorization survey, physicians and their staff reported handling about 40 requests per physician each week and spending roughly 13 hours on them. A time-and-motion study found that ambulatory physicians spent almost two hours on EHR and desk work for every hour of direct clinical face time, plus another one to two hours at night.

The burden does more than irritate doctors. It changes the structure of medicine.

In 2024, 42.2% of physicians worked in private practice, down from 60.1% in 2012. The AMA survey behind those figures identified inadequate payment, costly resources, and regulatory and administrative burdens as important reasons practices are sold. That does not prove that every dropdown menu causes a physician to sell to a hospital. It does show the direction of the pressure. A fixed compliance cost is easier for a large system to absorb than for a small independent practice.

The large system then builds an administrative and IT infrastructure to manage the rules. That infrastructure needs its own workflows, meetings, and safeguards. New people are hired to manage the old people who were hired to manage the original rule. The attempt to control costs creates a new category of costs.

This is the vicious cycle of health-care kludgeocracy: complexity creates work; work creates consolidation; consolidation creates distance between decisions and consequences; distance creates demands for more oversight; and oversight creates more complexity.

Cash-pay practices and direct primary care offer a partial escape. When the patient, physician, and price are close together, much of the billing machinery and prior-authorization apparatus can disappear. A cash transaction does not need permission from an insurer.

Before adding a new rule, the payer or hospital should answer three questions: Who will do the work? How much time will it take? What old requirement will be removed in exchange? Rules should automatically sunset unless their owners can show that they improve outcomes or reduce total cost. Whenever possible, the organization demanding the information should absorb the burden of collecting it rather than pushing another click onto the clinician.

No single reform will fix a system built from a thousand patches. But we can stop pretending that each patch is free.

American health care does not need another workaround. It needs, in medical terms, a kludgeectomy.

Yet most Americans would not like the result.

If Congress passes a law providing universal coverage, there will need to be some way to manage utilization and prevent the new system from exploding the budget. That means care must be rationed in some way. It might mean cutting payments to doctors, hospitals, and pharmaceutical companies. It might mean deciding that some specialties should be paid more than others. These are all forms of rationing. If you reduce specialist pay, you will eventually get longer waits for specialists. If you reduce primary care pay further, you will get even longer waits for primary care.

To see why, consider a hypothetical. Imagine Congress decides that food is an essential public good and that everyone should have food insurance.

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Every American receives a food card. There are no premiums, deductibles, or copayments. You go to the grocery store, choose the food you want, and the federal government pays the bill. No one is denied food because they cannot afford it. Employers no longer need to offer food benefits. The system is universal, equitable, and administratively simple.

The federal government would understandably want to standardize how much it pays grocery stores. So it would create a national food reimbursement schedule. Apples would be reimbursed at one price, eggs at another, beef at another, and rice at another. Perhaps the government would adjust those rates for geography, season, transportation costs, and store size. It might create special bonuses for rural grocery stores or extra payments for fruits and vegetables.

If everything in the grocery store is free at the point of purchase, many people will select the Wagyu beef and organic free-range eggs. You would quickly see shortages of some items and surpluses of others. People who knew when shipments of the most desirable foods arrived, or who knew how to work the system, would get the best selection. Others, perhaps those with full-time jobs or busy home lives, would be left with whatever remained.

Price signals would be largely eliminated. But the system would also eliminate a great deal of administrative activity. Grocery chains would spend less time negotiating with suppliers. There would be less price competition among stores. Advertising might decline because consumers would no longer care as much about prices. Price transparency would disappear almost completely.

Stores might no longer need customer loyalty programs. Coupons would disappear. If the government adopted global budgets, it could make the system simpler still. Each grocery store would receive a fixed annual amount to feed its local population.

The administrative savings would be immense. But so would the food shortages.

A national board would have to determine the correct reimbursement for every product in every community. If it paid too much for beef, stores would stock too much beef and suppliers would redirect resources toward cattle production. Then bacon might become difficult to find. If it paid too little for eggs, eggs would disappear from shelves. If the national payment for avocados worked in California but did not cover transportation and spoilage in Alaska, stores in Alaska would stop carrying avocados.

People would be upset. Sure, the avocados are theoretically free, but what good is that if you cannot find one?

In response, the government would create a geographic adjustment, followed by a seasonal adjustment, followed by a rural access adjustment, followed by a quality bonus. Before long, the simple national food system would begin accumulating the same complexity it was designed to eliminate.

There is no single correct price for an egg. The price depends on hundreds of inputs, including feed, labor, and local demand. Those conditions change constantly. No committee in Washington can collect and process all of that information in real time. Markets do it imperfectly through millions of transactions.

We have seen how quickly the price of eggs can change over the past few years. When eggs become more expensive, consumers buy fewer of them, switch to other foods, or sacrifice spending elsewhere. Producers receive the signal to increase supply. None of this happens perfectly or instantaneously, but prices convey information that no central planner possesses.

Healthcare is much more complex than food. Its supply chains are more complicated, its services are more prone to asymmetric information, and its prices are far less transparent. Yet we imagine that a central administration can efficiently distribute healthcare resources when the same idea applied to food would seem laughably unrealistic.

The cost of treating pneumonia depends on the patient’s age, medical history, severity of illness, and dozens of other factors. A neurosurgical operation cannot be standardized like a box of cereal. Even two patients with the same diagnosis code may require completely different levels of judgment, time, technology, and postoperative care.

For physicians, Medicare assigns relative values to thousands of services and converts those values into dollar payments. For hospitals, it sorts admissions into diagnosis-related groups and pays a predetermined amount. For outpatient care, it uses another payment system. For drugs, devices, rehabilitation, home health, and nursing facilities, it uses still more administered prices.

When Medicare pays too much for a service, capital and physicians flow toward it. When Medicare pays too little, access contracts. The system then tries to repair the resulting distortions through a myriad of technocratic tweaks, for example, quality metrics. These corrections create more opportunities for lobbying, further distortions in the market, and additional administrative complexity.

We already complain that the United States has too few primary care physicians and too many highly paid procedural specialists. If pediatricians were paid like orthopedic surgeons, we would probably have more pediatricians. We might also have fewer orthopedic surgeons and longer waits for knee replacements.

The underlying problem is that no central authority knows the correct number of pediatricians, orthopedic surgeons, or operating rooms that each community needs. Even if it did, pediatricians, orthopedic surgeons, hospitals, device manufacturers, and every other organized interest would be trying to influence the bureaucrats making those decisions.

So how do other countries reduce their administrative costs? Famously, the United States covers fewer people at a much higher cost. Other countries constrain their budgets and use administratively simpler systems. They sacrifice responsiveness and efficient resource allocation in exchange for administrative simplicity.

Take the NHS. The government establishes a budget and allocates resources through the health service. Market price signals play a much smaller role in prompting the expansion of service lines and increases in capacity. If the budget does not support more infrastructure, those things do not get built.

The NHS currently has more than six million patients waiting for treatment, with more than 100,000 waiting over a year. The rationing mechanism is administratively simple: establish a budget and allow the queue to absorb the difference between demand and available capacity.

The result is patients opting back into the private market. About 12 percent of Britons now have private medical insurance, despite already paying taxes to support the NHS.

Canada provides a similar lesson. Provincial governments finance medically necessary hospital and physician services through public insurance, using hospital budgets and administered physician fees rather than relying primarily on prices to coordinate supply and demand. The result is relatively simple billing for the patient.

Yet when prices are prevented from directing additional capital and labor toward areas of shortage, waiting times grow. The median wait times in Canada are over a year for a neurosurgery consultation, 6 months for an MRI, and over a month for an ultrasound.

Canadians are also severely restricted in their ability to purchase private insurance for services covered by the public system. As a result, some travel abroad to obtain care. Approximately 50,000 Canadians leave the country for medical treatment in a typical year, often paying substantial out-of-pocket costs to do so.

In many countries with universal public systems, there is also substantial uptake of private health coverage. From the Nordic countries to Australia, these administratively “simple” systems often rely on private care to provide additional capacity, faster access, or greater choice. Nearly half of Australians have private hospital insurance, while more than half have some form of private general-treatment coverage.

The private sector keeps reappearing because administrative simplicity comes with less responsive resource allocation, just as it would under our universal food coverage example. No central planner can know the changing demand for hip replacements in North Dakota, how much it costs to keep a primary care clinic operating in Charleston.

This is the mistake in treating lower administrative spending as an unqualified measure of efficiency.

A global budget is easy to understand. The government gives a hospital a fixed amount of money and tells it to care for the population. There are fewer claims to adjudicate and fewer contracts to negotiate. But once the hospital reaches the limits of that budget, the remaining decisions do not go away. Someone must decide whether to add operating-room hours, or make the patients wait.

Those are allocation decisions. They carry real costs, even when those costs never appear on an administrative ledger.

This is why the National Food Insurance analogy matters. Congress could make paying for food administratively simple by creating one budget and one national price schedule. But once everyone could order whatever they wanted without seeing the price, demand would rise. The government would then have to decide how much beef, fruit, bread, and milk the country should produce and what each should cost.

If prices were not allowed to adjust, the adjustment would happen somewhere else. A waiting list would form. People with money would shop at a private store or drive across the border.

Healthcare is no different in that respect.

So yes, we could save a great deal of money by eliminating administrative waste. We could create one payment system, one national fee schedule, and one global budget. The paperwork might become much simpler.

But simplicity is not free. The cost would appear elsewhere: shortages, queues, and political lobbying, plus the additional cost of high taxes plus the out of pocket cost for those who exit the system.

Most Americans would not like that tradeoff.

The argument usually arrives as a conversation-ender, often with a snide, “Well, Medicare only spends 6% on administration, therefore it must be more efficient.”

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Of course, anyone who has watched the government do much of anything knows that efficiency is not exactly its strong suit. Even the things the government is supposedly good at, like war, tax collection, and national parks, tend to be run with layers of process and waste. How much have we burned through on failed fighter jet plans?

Then comes the second move: private insurance wastes money on marketing, administration, and, of course, that evil term: profits.

That sounds persuasive until you ask the most basic economic question: for whom is Medicare actually efficient?

Medicare does not have magically low administrative costs. It has narrowly measured administrative costs, unusually expensive beneficiaries, and a large hidden bureaucracy that is offloaded to entities outside of CMS. The official number may be low on the Medicare ledger, but that does not mean the administrative burden has disappeared.

Ask any physician who has dropped Medicare. They will often tell you their administrative costs dropped dramatically. No more conditions of participation, quality metric reporting, Medicare audits, Stark law headaches… the list goes on.

This is the part physicians understand instinctively because we live inside the machinery. Medicare is not a frictionless payment system. It is a world of CPT and ICD-10 codes. CMS did not single-handedly create every bad EHR, but federal policy helped make inefficient EHRs unavoidable, and the result is that clinicians now spend staggering amounts of time feeding the record rather than caring for patients.

The official Medicare numbers are not fake. They are simply incomplete for the political work they are being asked to do. The 2026 Medicare Trustees Report estimated that Medicare covered 69.3 million people in 2025 and spent about $1.21 trillion. The same report lists relatively small explicit administrative expense lines, including about $5.9 billion in Part B administrative expenses, equal to 1.0 percent of Part B expenditures, and about $0.5 billion in federal administrative expenses for Part D.

The first trick is the denominator. Medicare beneficiaries are older and sicker than the average privately insured person, so Medicare spends far more in medical claims per enrollee. When administrative costs are presented as a percentage of total spending, a program that pays very large medical bills will naturally look administratively leaner.

CMS national health expenditure data show that, in 2020, per-person personal healthcare spending for adults age 65 and older was $22,356, more than five times spending for children and nearly two and a half times spending for working-age adults. Older adults were about 17 percent of the population but accounted for roughly 37 percent of personal healthcare spending.

Imagine two insurers spend the same amount administering a patient. One patient generates $5,000 in annual claims. The other generates $25,000. The same administrative cost will look five times smaller as a percentage of claims in the second case. Nothing about that proves the second insurer is more efficient. It proves the patient is more expensive.

The second trick is the accounting boundary. Medicare’s official administrative cost includes payments to Medicare Administrative Contractors, the private contractors that process claims and perform much of the operational work of traditional Medicare. But they offload a lot more.

Medicare offloads collection of premiums to other branches of the government. Where a private insurance company has to spend money on premium collection, Medicare relies on the IRS to collect the taxes to pay for its services. No cost to CMS there.

Medicare also offloads the work of describing and valuing the billing units for physicians. Much of this happens through the CPT and RUC machinery, maintained outside CMS by the AMA and specialty societies. There are millions of dollars worth of time from physicians and staff for which Medicare never pays. Then, of course, physicians pay for coding courses. Practices pay coders, who also attend those coding courses. Staff spend hours learning how to navigate CPT codes and documentation rules. None of that shows up as CMS administrative overhead. Meanwhile, private insurance companies are responsible for negotiating their own distinct contracts with numerous provider groups.

Then, of course, there are the quality metrics.

One study in JAMA Health Forum estimated that physician practices spent an average of $12,811 per physician and more than 200 hours per physician to participate in MIPS in 2019. The authors estimated that physicians themselves accounted for more than half of the financial cost, because physician time was absorbed by compliance rather than patient care. Another study in Health Affairs estimated that U.S. physician practices spent an average of 785 hours per physician per year on quality-measure reporting, at a total annual cost of more than $15.4 billion. A study of hospital quality reporting in JAMA estimated that reporting 162 quality metrics required more than 108,000 staff-hours and about $5 million in annual personnel costs at one major academic medical center.

These are not abstractions. These are hours and dollars that could have been spent on actual patient care. And this is exactly the sort of cost that disappears when we pretend Medicare’s administrative cost is whatever CMS spends directly to run the program.

The third trick is cost-shifting. Government programs are very good at making costs vanish from one ledger by imposing them on another. A regulation can look cheap to the agency that issued it if the work of compliance is performed by someone else.

This is one of the underappreciated ways bureaucracy drives consolidation. Large hospital systems can absorb the administrative burden. Small independent practices cannot. When policy makes fixed administrative costs unavoidable, it favors scale. Then policymakers express surprise when physicians sell their practices to hospitals, prices rise, and patients lose access to independent doctors.

The data point in that story is no longer subtle. GAO reported that at least 47 percent of physicians were consolidated with hospital systems in 2024, up from less than 30 percent in 2012. GAO also noted that physician-hospital consolidation can increase Medicare spending when services move into more expensive hospital-based settings.

None of this means private insurance is innocent. Private insurance has its own enormous administrative machinery. Some of it is duplicative. Much of it is maddening. Every physician in America has lost hours of life to insurer portals and peer-to-peer calls that seem designed less to improve care than to exhaust the person trying to provide it.

But we should be careful with the word “waste.” In ordinary markets, advertising, profit, sales, customer service, contracting, and risk management are not automatically waste. We do not say the iPhone is inefficient because Apple advertises and earns a profit. Those activities may be costly, but in a functioning market they are part of how firms compete. If Apple could sell as many iPhones with half of its advertising budget, it would cut that cost in an instant. The problem in healthcare is not that private insurers have administrative costs. The problem is that our third-party payment system hides prices, insulates patients from tradeoffs, and forces clinicians to negotiate with payers rather than directly with the people receiving care.

Private insurance deserves plenty of criticism. Yet private insurance, if the market is working as it should, disciplines itself. Whichever insurer can keep administrative costs the lowest should outcompete the others by providing quality coverage at lower prices. There are plenty of reasons the market is distorted and not working as efficiently as it should, but the underlying principle is the same. There is no comparable discipline on Medicare. There is no true competition with other forms of insurance keeping the system honest.

Medicare does not become efficient merely because it avoids some private-sector costs while imposing a different set of public-sector costs. Just because Medicare lacks a marketing department does not automatically mean it is efficient.

There is also a deeper point that rarely appears in these debates: low administrative spending is not automatically good. A trillion-dollar public program needs oversight. If it does not spend enough on administration up front, it will spend more later through improper payments, blunt audits, or after-the-fact enforcement. CMS reported FY2025 improper payment estimates of $28.83 billion for Medicare fee-for-service, $23.67 billion for Medicare Advantage, and $4.23 billion for Part D. Maybe a little more administration would be a good thing here.

This is the central error in the Medicare expansion argument. It takes a narrow accounting ratio and treats it as a complete economic fact.

The physician’s unpaid evening documentation, the quality department at the hospital, and the compliance officers are all costs. The patient waiting six months because independent practices in the area stopped taking new Medicare patients is a cost.

Healthcare policy should begin with acknowledging scarcity, tradeoffs, and incentives. That means asking not only how much Medicare spends on its own administration, but how much administrative work Medicare causes other people to perform.

The point is not that Medicare is all bad. Medicare pays for a tremendous amount of necessary care. Every hospital in America depends on it. Millions of elderly and disabled patients would be in deep trouble without it. The point is that we should stop using a narrow overhead statistic as if it settles the question of efficiency.

It does not.

Administrative costs do not disappear simply because the government does not count them.

There are two big items in this rule that could help bring independent doctors and freestanding outpatient facilities closer to parity with large hospital systems.

First, CMS is proposing to pay hospitals significantly less for medications acquired under the 340B drug discount program. Second, CMS is proposing to stop paying certain hospital-owned outpatient departments more for routine imaging that could safely be done in a physician office or freestanding imaging center.

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The 340B program is no longer the drug discount program envisioned in 1992 when it was enacted. It has grown into an $80+ billion-a-year subsidy stream for large hospital corporations. HRSA reports that covered entities purchased $81.4 billion in covered outpatient drugs through the program in 2024. The program encourages behavior that can increase federal spending and insurance premiums. It incentivizes hospitals to prescribe higher-priced drugs and consolidate by purchasing independent clinics. It increases prices by forcing insurance plans to forgo rebates. CBO has warned that the program can increase federal spending through these mechanisms, while GAO has documented persistent oversight weaknesses.

A major issue with the program is the lack of oversight. GAO said HRSA’s audits do not fully assess duplicate-discount compliance and that HRSA’s oversight does not ensure that only eligible hospitals participate.

So Cassidy’s bill is best understood as an attempt to make 340B behave more like a patient-centered safety-net program without actually converting it into one.

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CMS is voluntarily recalculating 2027 Medicare Advantage Quality Bonus Payment ratings for certain contracts after Clover Health successfully challenged CMS’s 2026 Star Ratings methodology. The recalculation will only raise ratings, not lower them; Clover’s PPO contract reportedly moved from 3.5 to 4.5 stars after a federal court found problems with the agency’s use of certain measures. (healthcarefinancenews.com)

The stakes are not just like changing your Yelp review. Medicare Advantage Star Ratings help beneficiaries compare plans, but they also determine Quality Bonus Payments and affect rebates, meaning the “quality” score is also a federal payment formula. (cms.gov)

Market-Based Analysis

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Early in the COVID pandemic, he asked me about the rules. He was not trying to make a political point. He was trying to make sense of what he was being told.

Why did he need to wear a mask while waiting for a table at a restaurant, but not while eating? Why did his two year old need to wear a mask at daycare, but take it off to nap? Why were playgrounds locked up? Why could people exercise on the beach, but not sit there with their family?

And perhaps most damaging of all, why was protest described by many as a public health imperative, while keeping a business open was treated as reckless?

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That is when a lot of ordinary people started losing trust. Not because they suddenly became anti science. Not because they were too stupid to understand public health. Because they could see the inconsistency, the hypocrisy, and the moving goalposts.

The California Medical Association recently published an op ed by Dr Alex McDonald warning about the politicization of medicine. In many ways, I agree with him. Physicians should be concerned when patients make medical decisions based on “identity and partisanship” rather than evidence. Political leaders should not use medicine as a tribal weapon. Patients should not distrust effective treatments simply because the wrong person endorsed them.

But that is exactly the problem with the piece.

It treats the collapse of trust as if it began with Trump, RFK Jr., Casey Means, or Elon Musk’s purchase of Twitter. The withdrawn Casey Means nomination was unfortunate, but it was a symptom of the disease, not the cause.

During the COVID pandemic, patients watched public health become inseparable from politics. They watched leaders defend restrictions with absolute certainty, then redefine the goal when those restrictions failed, lingered, or caused obvious collateral damage. They watched dissenting physicians and scientists treated not merely as wrong, but as dangerous.

Schools are the clearest example. By March 30, 2020, almost every public school district in the country was closed. Then, in the summer of 2020, the Trump Administration pushed to fully reopen schools that fall, pointing to guidance from the American Academy of Pediatrics (AAP), which emphasized the benefits of in-person education. Shortly thereafter, the AAP changed its position, distancing itself from Trump and calling for a more cautious approach.

By January 2021, 53.4 percent of United States K 12 students were still in virtual only schools. Even after schools largely reopened, restrictions continued. CDC research found that from August 2021 through June 2022, more than 14.6 million students were affected by an estimated 25,907 COVID related school closure events. California kept school masking requirements until March 2022.

A later review found that school reopenings in low transmission areas with appropriate mitigation generally were not followed by increased community transmission. Yet parents who wanted schools open were often treated as reckless or anti-science. It turned out they were actually correct.

The same selective certainty applied to lockdowns more broadly. California maintained business restrictions through June 2021, with vaccine card verification requirements for many activities until Spring 2022. Mask mandates also persisted into February of 2022, and were required on airplanes until April 2022.

Sweden is a good example of why this mattered. They aggressively re-opened schools and businesses and their overall performance complicated the confident story that strict lockdowns were the only rational path.

California should be especially humble here. While Governor Gavin Newsom imposed those sweeping restrictions on businesses, schools, and ordinary life, he was also caught dining at the French Laundry with executives from the same California Medical Association that published this op ed. People remember that. They remember being told to sacrifice by leaders and institutions that seemed to view the rules as optional for themselves.

They also remember AB 2098, a law allowing COVID misinformation by physicians to be treated as unprofessional conduct. Newsom signed it. A federal court later preliminarily enjoined enforcement against some plaintiffs because the law was unconstitutionally vague.

So when the CMA now publishes an essay warning that politicians should stay in their lane, some of us have questions. Which lane was the CMA in when its executives dined with Newsom at a fancy restaurant while ordinary Californians were being told to cancel normal life?

This is not how trust is rebuilt.

When Dr. McDonald wonders why Americans don’t trust vaccines, he needs to look at both sides of the political aisle. Americans were repeatedly told that the COVID vaccine prevented the spread of COVID. President Biden even said vaccinated people were “not going to get COVID”. This was false. President Biden blamed the unvaccinated for prolonging the pandemic and supported mandates that affected large portions of the workforce. The White House later warned unvaccinated Americans of a winter of severe illness and death.

That rhetoric is just as reckless and devoid of truth as anything that came from the political right.

Americans were also told the COVID vaccine was safe. While it largely was, political leaders were also quick to dismiss emerging evidence of the risk of cardiac complications in young men. When dissent is suppressed, Americans start to wonder what other half-truths and misinformation they are being fed. Institutional trust erodes quickly.

Americans clearly saw this suppression of free speech. Federal officials in the Biden Administration regularly communicated with social media companies about censoring COVID discussions. The Fifth Circuit found that some officials had coerced or significantly encouraged platforms. Mark Zuckerberg subsequently said senior Biden officials pressured Meta to censor COVID content.

Patients saw all of this.

Like my friend, they wondered why schools were closed so long, why they didn’t have to wear a mask at the airport bar but they did in the airplane, and why sitting on the beach alone was illegal unless you happened to be exercising.

And then they were told that the real problem was misinformation.

The breakdown in trust did not begin with the current Presidential Administration. It was accelerated by leaders and institutions across the political spectrum, including many who spoke in the name of science while behaving with stunning political blindness.

Physicians should defend evidence. They should defend vaccines when vaccines are supported by data. They should defend the doctor patient relationship from political interference.

But they should also defend humility.

They should be willing to say that some COVID policies were wrong, some lasted too long, some were defended too aggressively, and some did real harm. They should be willing to admit that trust was not destroyed only by one political tribe.

The CMA publishing a piece like this does not rebuild trust. It reminds people why they lost it.

Except in healthcare.

There, the statistics are more dire: growth in labor productivity of about 1.5% from 1993 to 2022.

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So while the average American worker is nearly twice as productive, the average hour of hospital labor is only about 1.5 percent more productive.

That is an astonishing fact.

This is despite massive improvements in healthcare technology, including imaging, laboratory medicine, devices, and pharmaceuticals. Many surgical techniques have been refined with smaller incisions and minimally invasive tools to cut down on operative time and hospital stays.

What’s even more astounding is that healthcare labor productivity has been flat during the information technology revolution. In 1993, patient charts were on paper. Lab results had to be printed out and physically placed in the chart, visible only to the person who possessed the physical copy. X-ray, CT, and MRI results were printed on plastic films that had to be hung on light boxes in the office. There was almost no portability of records.

Now we have digital records, lab results, and imaging that are far more portable than anything we had in the age of paper. Yet we are no more productive than we were then.

In a normal market, thirty years of flat productivity would signal a dying industry. It would mean that competitors were coming. Capital would flee. Customers would demand better. New entrants would find ways to do the same job cheaper, faster, or more conveniently. But in American healthcare, flat productivity does not signal failure in the usual market sense. It signals a protected, heavily regulated, third-party-paid system functioning more or less as designed.

Hospitals have not been forced to become more productive because the economic system around them does not reward productivity in the way normal markets do. The patient is not really the customer. Payment is filtered through Medicare rules, Medicaid supplemental schemes, and opaque cross-subsidies that no ordinary human being could possibly understand. In such a system, the path to survival is not necessarily to deliver more care at lower cost. It is to become better at navigating the payment maze.

This is the productivity paradox in American hospitals. We have extraordinary medical technology, highly trained clinicians, and an economy that has learned how to make nearly everything else more efficient. Yet the hospital, the central institution of American healthcare, appears to have resisted the productivity revolution.

The usual explanation is Baumol’s cost disease. Medicine, we are told, is a high-touch service industry. You cannot automate compassion. Patients are older, sicker, more complex, and more medically fragile than they were thirty years ago. Therefore, the argument goes, we should not expect hospitals to achieve productivity gains comparable to manufacturing, retail, logistics, or software.

This is the kind of half-truth that protects an inefficient system from scrutiny.

Yes, healing is different from making widgets. But anyone who has practiced medicine over the last few decades knows that clinical work itself has not been frozen in amber. We are not practicing 1993 medicine. MRI did not replace the neurological exam, but it radically compressed diagnostic uncertainty. Countless other technologies have improved the speed and precision of care. Much of what once required exploratory surgery, serial exams, prolonged hospitalization, or educated guesswork can now be seen, measured, and treated with tools that would have seemed miraculous to physicians a generation ago.

Ask any practicing physician where the missing productivity went, and he will not give you a lecture on Baumol. He will point to the electronic health record and the endless parade of mandatory clicks that seem to multiply faster than any real clinical need.

The Annals of Internal Medicine time-motion study on ambulatory physicians found that for every hour physicians spent in direct clinical face time with patients, they spent nearly two additional hours on EHR and desk work during the clinic day. Outside office hours, they spent another one to two hours each night doing additional clerical and computer work.

This is where the productivity gains went. The time saved by better technology was consumed by more administrative work and data entry. We invented tools that should have made the physician more productive, then wrapped those tools in billing rules and compliance rituals until they became a tax on clinical judgment.

The EHR was sold as a tool for better information. But the EHR did not emerge into a functioning market for medical care. It emerged into a reimbursement bureaucracy. Medicare’s “meaningful use” program required physicians using certified EHR technology to capture, exchange, and report specific clinical data and quality measures, beginning in 2011. That transformed the chart from a clinical record into a billing document that happened to contain some medical information.

That distinction matters. A clinical note is supposed to communicate what is wrong with the patient and what we are going to do about it. A billing note is a different product. We pretend they are the same document because the fiction is convenient for everyone except the people actually taking care of patients.

In many clinics, expensive clinical labor is now deployed to feed the chart before the visit even begins. Some of this work is clinically useful. Much of it is defensive. The purpose is not always to understand the patient better. Often it is to make the chart billable, auditable, and administratively complete. You’ve probably experienced this every time you go to a doctor’s visit and are asked to fill out a stack of paperwork.

The hospital labor force reflects the same problem. Paragon notes that hospital employees per bed rose from 4.56 in 2000 to 6.32 in 2023, a 39 percent increase. To be fair, some of that may reflect more complex inpatient care as simpler services move outpatient. But it also raises the obvious question: how many of those additional workers are making patients better, and how many are helping the institution survive the administrative complexity we have built around care?

The defenders of the status quo will object that healthcare is complicated. They are right. But they often draw exactly the wrong conclusion from that fact.

Because healthcare is complicated, we should be more humble about centralized control, not more ambitious. Complexity is an argument for better feedback, not an argument for more bureaucracy. It is an argument for prices that patients can see, contracts that physicians can understand, and institutions that must compete on value rather than market power and coding sophistication. That’s how efficiency is rewarded.

In the rest of the economy, software tends to reduce friction. It lets a small business manage payroll, inventory, communication, accounting, advertising, and sales with tools that would once have required entire departments. In healthcare, software often does the opposite. It creates new work, new alerts, new compliance pathways, new reporting obligations, and new opportunities for denial.

That is the difference between technology disciplined by customers and technology disciplined by regulators and payers.

This is why the “Baumol’s cost disease” story is so incomplete. It treats hospital productivity stagnation as if it were an unavoidable feature of human care. But the lived reality of medicine suggests something more specific and more damning. We did not fail to invent productivity-enhancing tools. We invented many of them. Then we embedded them in a financing system that converted clinical time into administrative output.

The MRI made diagnosis faster. The EHR made documenting the diagnosis slower.

Because this is ultimately a policy choice, we should stop pretending that the solution is another layer of policy complexity. The answer begins with the recognition that productivity in medicine will not improve until the people delivering care are rewarded for delivering care, rather than for feeding the documentation machine.

American hospitals do not have flat productivity because healing is immune to improvement. They have flat productivity because we have built a financing and regulatory structure that protects inefficiency and rewards administrative sophistication at the expense of true efficiency. Until that changes, technology will keep making medicine more expensive rather than more productive.

So it’s understandable to feel a little spiteful joy when California physicians see a ballot measure aimed at capping hospital executive pay.

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The proposal, now eligible for the November 2026 ballot, would limit compensation for certain health care executives, managers, and administrators to $450,000 per year in total annual compensation. This includes salary, bonuses, stock options, company vehicles, paid time off, and other benefits. Even a parking space could count toward compensation.

It would also restrict severance above that amount, require annual reporting, and allow enforcement by the Attorney General or taxpayer litigation. The cap would rise annually by the lesser of inflation or 3.5 percent. The measure applies to covered hospitals and medical entities, including nonprofit and for-profit hospitals and some medical groups.

The political appeal is obvious. SEIU-UHW, which is backing the measure, argues that excessive executive pay should be redirected toward patient care, staffing, and lower costs. That message is not hard to sell for the populists among us.

I understand the temptation to cheer. I have spent enough time inside hospitals to know that the resentment is not imaginary. It is not crazy for a burned-out doctor to look at an eight-figure executive compensation package and feel moral disgust.

But that doesn’t fix the economics.

A wage cap is a price control on labor. That does not stop being true because the labor belongs to executives rather than nurses or physicians. Economists have shown for generations that price controls distort the signals that help allocate scarce resources. Price ceilings do not eliminate demand; they change how demand is satisfied.

That is the first problem with the California proposal. It assumes that if a hospital board is prohibited from paying a chief executive more than $450,000, they’ll retain the same executive talent and the excess money will simply flow to bedside care. That is possible in a narrow accounting sense, but it is not how complex organizations behave. If a large health system believes it needs a certain type of managerial skill, it will still seek those things. It may call them something else. It may outsource them. It may pay for them through consulting contracts, management services agreements, affiliated entities, deferred compensation, perks, or layers of subordinate executives.

Hospitals are incredibly complex organizations. I’ve long argued we should simplify many of the rules, but for now the rules are there, and it requires a specific skill set to navigate them. It also requires someone willing to work long-hours, making politically impactful, uncomfortable decisions. A hospital that cannot legally pay one competent executive the market-clearing rate may hire multiple vice presidents, consultants, contractors, and compliance specialists to divide the same work across titles. The measure’s drafters appear aware of this risk, which is why the compensation definition is broad and why the proposal reaches some contractors and subcontractors who exercise executive, managerial, or administrative authority. But that only illustrates the point. Once policy tries to centrally define and police the price of managerial work, the game shifts. The hospital does not become simpler. The compliance apparatus becomes larger.

This matters because administrative bloat is already one of the defining features of American medicine. California alone had an estimated 57,310 medical and health services managers in 2023, according to federal occupational data, though that category is narrower than the full universe of health care administrators, compliance staff, billing personnel, and managerial employees.

Meanwhile, the California Medical Association has come out strongly against the proposal, warning that it could affect physicians, nurses, and health care leaders who take on administrative, training, or leadership roles, and could destabilize access to care. As someone who wants more sites able to deliver care, including independent physician-owned hospitals, ASCs, and practices, I don’t like the idea of more compliance. These rules will harm physician-owned facilities and practices more than the large corporations. Large corporations have teams of lawyers to navigate complex rules. The independent neurosurgery practice does not.

High hospital executive pay is not the root cause of American health care dysfunction. It is one expression of a politically protected system in which enormous sums flow through opaque institutions that consumers cannot easily discipline. Hospital prices are not high because the CEO’s salary appears on a tax filing. They are high because hospital systems have acquired market power and because there is more money to be made in gaming various governmental revenue streams than there is in delivering a good product.

The evidence on consolidation is not subtle. KFF has summarized a large body of research finding that hospital consolidation tends to raise prices, with stronger evidence for price effects than for quality improvement. KFF has also found that one or two health systems controlled the entire market for inpatient hospital care in nearly half of metropolitan areas in 2024. GAO reported that hospital-physician consolidation has risen substantially and is generally associated with increased spending and prices, while the evidence for improved quality is weak or mixed. RAND’s hospital price work found that private insurers and employers paid, on average, 254 percent of Medicare rates for the same services in 2022, with hospital market power helping explain some of the variation.

California health care spending reached roughly $405 billion in 2020, according to the state’s Office of Health Care Affordability. National health expenditures reached $5.3 trillion in 2024, with hospital care remaining one of the largest categories of spending. Against numbers of that scale, executive compensation may be politically inflammatory but still fiscally small. That does not mean it is virtuous. It means we should be honest about magnitude.

There is also a historical warning here. In 1993, Congress tried to restrain executive pay by limiting the corporate tax deduction for compensation above $1 million for certain top executives, while leaving an exception for performance-based pay such as stock options. The predictable result was not an age of executive modesty. Compensation shifted in form. Stock options and performance-linked pay became a much larger part of executive compensation, and some researchers have argued that the $1 million limit effectively became a target for base pay rather than a ceiling on total compensation.

That is the recurring pattern of price controls. Politicians cap the visible number. Markets and institutions migrate to the less visible channel. Somehow the bureaucracy always survives the reform.

None of this excuses hospital executives. Many of them are rent-seekers in the plainest sense of the term. They operate inside institutions that have become expert at extracting revenue from complexity. Some of these leaders talk the language of mission while presiding over systems that sue patients and demand public subsidies. The anger aimed at them is not irrational.

A salary cap feels satisfying because it gives the public a villain and then symbolically punishes him. But good policy has to do more than satisfy resentment. It has to improve incentives. A hospital executive pay cap risks doing the opposite. It leaves the consolidated hospital system in place because large systems have the compliance infrastructure to deal with the new rules. Meanwhile, we haven’t touched site neutrality, 340B, and a host of other policies that drive consolidation in the first place.

Physicians should be especially wary of this kind of populism. The moral impulse behind this measure is understandable. The economic logic is not. A wage cap treats the visible irritation while leaving the pathology untouched. If California wants to make health care less expensive and more humane, it should go after the structures that made hospital executives so powerful in the first place.

Now, of course, the blood thinner was causing a problem. She had blood in her head, and if it continued to bleed, it could become life-threatening. So doctors had to stop her blood thinner. When the bleeding got a bit bigger on a repeat CT scan, the team reversed the blood thinner with a medication that restored her blood’s natural ability to clot. The bleeding in her head stopped getting bigger, and she was stable.

Two days later she suffered a massive stroke and died.

Was it an error to reverse her blood-thinning medication? We can never know the counterfactual. Had she continued her blood thinner, there is a chance the intracranial bleeding would have stopped anyway. Maybe she avoids having the stroke and lives another few years. Maybe the hemorrhage continues and she dies after undergoing an unsuccessful operation to save her life. We can never know.

But this is exactly the kind of case that becomes dangerous when judged backward by a reviewer who already knows the outcome. If she dies of the expanding brain bleed, the reviewer can ask why anyone continued anticoagulation in an elderly fall patient with blood in her head. If she dies of the stroke after anticoagulation is reversed, the reviewer can ask why anyone stopped the medicine that was protecting her from embolic stroke. The same clinical tradeoff can be condemned from opposite directions depending entirely on which bad outcome occurred.

You have probably heard the viral claim that doctors’ errors are the “third leading cause of death.” That story is not a sober accounting of negligent medical practice. It is based on a few severely flawed studies that take the brutal uncertainty of caring for sick patients, reclassify bad outcomes as preventable deaths, and then use the resulting number to justify an ever-expanding bureaucracy.

Of course, patient safety is important. But too often, the safety narrative refuses to admit the central fact of clinical medicine: doctors are not piloting healthy passengers through a well-engineered system. We are treating human beings whose bodies are failing in complex, overlapping, and often irreversible ways.

That is not a theoretical concern. In one JAMA study of hospital deaths, physician reviewers often disagreed about preventability, and the authors concluded that preventability can be “in the eye of the reviewer.” They found that while 22.7 percent of reviewed deaths were judged at least “possibly” preventable, only 6 percent were rated probably or definitely preventable. After accounting for prognosis, reliability, and the likely survival benefit of optimal care, they estimated that only about 0.5 percent of patients who died would have lived at least three months in good cognitive health if optimal care had been provided.

Yet, there is a persistent claim: that doctors are just offing patients. And it is often emphasized with the analogy that doctors are killing the equivalent of several jumbo jets full of patients every week. Then comes the inevitable appeal to aviation. If commercial pilots crashed planes at this rate, we are told, the public would revolt. Therefore, hospitals must be more like airlines.

It is a powerful analogy. It is also wrong.

Not wrong because doctors never make mistakes. We do. Every physician who has practiced long enough carries memories that do not leave. Medicine is practiced by human beings, on human beings, under uncertainty, and the stakes are often unforgiving.

But taking care of patients is not the same as flying an airplane. Every patient eventually dies. Thankfully, not every Boeing ends up in a fiery wreck strewn about fields, mountains, or oceans. Pilots generally fly an airplane only after it has been maintained and cleared. Physicians often enter the care of a patient when they are already near death, as if a pilot took over the plane as it was on fire and heading toward a mountain.

Much of medicine consists of choosing between competing dangers while knowing that either choice may end badly. Crash the plane into the forest or into the ocean. Either way, it’s going down. This is the trap hidden inside many medical error statistics. They treat adverse outcomes as if they were self-evidently preventable, instead of bad things that happen to sick people.

The modern version of this story traces back largely to two highly influential publications: the Institute of Medicine’s 1999 report, To Err Is Human, and a 2016 BMJ paper by Marty Makary and Michael Daniel arguing that medical error should be considered the third leading cause of death in the United States. The IOM report relied heavily on earlier chart-review studies from Colorado, Utah, and New York, then extrapolated those findings to the country as a whole. Using the Colorado and Utah data, the report estimated 44,000 deaths per year from medical errors; using the New York data, the estimate rose as high as 98,000. Makary and Daniel later popularized a much larger figure, more than 250,000 deaths annually.

These numbers entered public discourse as if they were direct measurements. They were not. The IOM estimates were extrapolations from state-level retrospective chart reviews. The Makary estimate was built by combining prior studies that used different methods, without a formal meta-analysis and without fully accounting for statistical uncertainty. AHRQ’s patient safety review notes that determining preventability is difficult, that physician reviewers often show only moderate agreement, and that the Makary estimate extrapolated from studies using different methodologies.

That is the first problem: the numbers sound precise, but the underlying judgment is often subjective.

The second problem is even more important. The underlying studies often struggled to determine whether an adverse event actually caused the death. Shojania and Dixon-Woods, writing in BMJ Quality & Safety, criticized the “third leading cause” claim for exactly this reason. They argued that the estimate combined prior studies too simplistically, failed to follow accepted standards for quantitative synthesis, and did not adequately address whether the adverse events detected by review tools actually contributed to death. Critically ill patients have more interventions, more adverse events, and higher mortality. That does not mean the adverse event killed them. It may mean that while an error occurred, it did not meaningfully change the outcome. Again, to the airline analogy, it’s as if a pilot gets judged for hitting a little turbulence in a plane that’s destined to crash anyway.

This is not an abstract statistical quibble. It is the difference between a patient who dies because a doctor gave the wrong drug and a patient who dies because she had metastatic cancer, septic shock, renal failure, delirium, and then experienced an adverse event during the last days of life. They are not morally or clinically the same thing.

More recent evidence suggests the older headline estimates were too high. A 2020 systematic review and meta-analysis in the Journal of General Internal Medicine estimated that about 3.1 percent of hospital deaths were preventable. Applied to the United States, that corresponded to roughly 22,000 preventable deaths per year, and about 7,000 among patients with a life expectancy greater than three months. That is still a serious number. It is not nothing. But it is not the third leading cause of death in America. It’s not even close.

The difference matters because the patients in these studies are not randomly selected healthy Americans walking around in perfect condition until a doctor harms them. They are hospitalized patients, often elderly, frail, chronically ill, acutely decompensating, or already near death. Many are receiving multiple interventions precisely because their baseline risk is high. That does not excuse preventable harm. But a bad outcome in such a patient is not automatically evidence of an error.

The public is uncomfortable with this because the public wants medicine to be deterministic. They want to prevent the next error with a new rule.

There is a tragic irony here. The exaggeration of preventable error can make genuine patient safety worse. When every adverse event becomes evidence of system failure, physicians learn to avoid risk, and systems learn to game the metrics to obscure the actual truth.

That may protect the institution. It does not necessarily help the patient.

After To Err Is Human, American medicine embraced a vast quality and safety apparatus. Some of it was valuable. Surgical time-outs, central line infection prevention, standardized handoffs, and checklists for high-risk recurring tasks can reduce harm. Pronovost’s central-line work, for example, produced large reductions in catheter-related bloodstream infections, and the WHO surgical checklist study found lower complication and death rates after checklist implementation. No serious critic should deny that safety systems can work when they target concrete, recurring, preventable failures.

But now the checklist has ballooned into a bureaucratic obstruction to actual patient care. In some hospitals, it has expanded into a lengthy ritual, including everything in the checklist from team introductions to acknowledgment of the patient’s pronouns (this is true, not hyperbole).

The problem is that the safety movement did not stop at identifying clear, preventable failures. It became a governing philosophy. It gave administrators, regulators, payers, and quality officers a moral language for controlling the clinical encounter.

From that point forward, more and more of medicine became subject to measurement from above. Physicians were asked to satisfy more and more quality metrics. As the saying goes, “not everything that counts can be counted, and not everything that can be counted counts.”

This burden is not theoretical. A Health Affairs study by Lawrence Casalino and colleagues estimated that physician practices in four common specialties spent an average of 785 hours per physician per year dealing with quality measure reporting, at a cost of more than $15.4 billion annually. That is time, labor, and attention pulled away from actual patient care and redirected toward measurement infrastructure.

Hospitals face the same machinery on a larger scale. A JAMA study found that Johns Hopkins Hospital was reporting 162 quality metrics across multiple programs. The authors estimated that collecting and reporting those metrics required 108,478 person-hours and more than $5 million in personnel costs, plus more than $600,000 in vendor fees, in a single year. Extrapolated across thousands of acute care hospitals, the authors suggested the national burden runs into the billions.

Private practices feel this even more acutely. A small independent physician group does not have an army of compliance officers. It has doctors, nurses, medical assistants, and maybe a thin administrative staff trying to keep the doors open. Every new reporting requirement adds fixed cost. Large hospital systems can absorb those costs, spread them across departments, and then use compliance complexity as another reason independent physicians should sell. This is one way the quality-metric industrial complex becomes another force driving consolidation.

That consolidation is not hypothetical. The AMA’s 2024 physician practice benchmark found that only 42.2 percent of physicians were working in private practice, down from 60.1 percent in 2012. Over the same period, the share of physicians working for hospital-owned practices or directly employed by hospitals increased. Regulation does not always harm the largest incumbents. Often, it protects them by raising the fixed cost of survival.

This is one of the recurring patterns in American health care. A problem is identified, often a real one. A centralized solution is proposed. The solution requires measurement, reporting, enforcement, and administrative infrastructure. Large organizations adapt. Small organizations struggle. The burden then becomes an argument for more consolidation, more standardization, and more bureaucracy. Eventually, the original problem remains, but now we have fewer independent physicians, higher costs, and more people whose jobs depend on the machinery continuing to expand.

And once the metric becomes the target, the system starts optimizing for the metric.

Anyone who has worked in hospitals has seen versions of this. Patients are transferred between services in ways that make the mortality numbers look better for one department and worse for another. Documentation specialists hound doctors to capture every comorbidity so the patient appears as sick as possible on admission, which improves risk-adjusted performance. Hospitals test urine on admission, in part because if an infection is coded as “present on admission,” it is quantified differently than if it is coded as hospital-acquired. CMS policy explicitly distinguishes conditions present on admission from selected hospital-acquired conditions, and hospitals can face payment consequences for certain conditions not present on admission.

In some cases, the metrics actually cause more deaths. This happened when the readmission reduction program successfully reduced the number of heart failure patients being readmitted to the hospital. Unfortunately, as readmissions dropped, mortality rose. Patients who needed readmission were sent home, rather than bring down the hospital’s statistics. They died because of a metric.

The more we attach money, reputation, and punishment to simplified metrics, the more sophisticated institutions become at managing the numerator, the denominator, and the documentation surrounding both.

These are all byproducts of a system that rewards metrics more than patient care because people thought the metrics could fix patient care.

They cannot.

Bad things happen to sick people. That sentence sounds harsh only because modern health care has trained us to speak as if mortality itself were a quality defect. But every physician knows it is true. The doctor is not the only causal force in the room.

The medical error narrative, as commonly presented, offers the public a fantasy that enough regulation can make illness behave like a mechanical system. It tells policymakers that if doctors would simply comply with more rules, hundreds of thousands of deaths might disappear.

The honest path is harder. It begins by admitting that medical care involves tradeoffs, not guarantees.

Doctors should be accountable. But accountability built on inflated statistics and bad analogies will not make patients safer. It is doing the opposite, replacing judgment with metric gaming.

Doctors are not crashing jumbo jets. They are caring for fragile human beings in a world where risk cannot be abolished, only moved around. The sooner we admit that, the sooner we can have a serious conversation about patient safety.

The current debate over hospital consolidation is increasingly becoming a debate over information. Regulators can only challenge transactions they can see, investigate, and understand. Hospitals, meanwhile, argue that transaction review requirements can become costly and burdensome. The tension is visible in the FTC’s renewed focus on healthcare competition and certificate-of-need laws described in the FTC’s new healthcare playbook, alongside hospital industry efforts to expand exemptions from premerger filing requirements discussed in the latest debate over Hart-Scott-Rodino filings.

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But in California, getting that injection for a Medi-Cal patient can mean a wait measured in months. In my world, a six-month wait is not unusual.

Part of this is a payment-and-capacity problem. This is not some exotic operation. It is ordinary pain medicine. Yet for my patient, who is sitting in front of me in real pain, the system cannot reliably provide it in a timely fashion.

And yet California’s Medicaid program can find a way to pay for “Traditional Healers” and “Natural Helpers.”

The official language is more sanitized than that. California’s Medi-Cal program, through its CalAIM waiver structure, now covers “traditional health care practices” for certain Medi-Cal and CHIP beneficiaries. DHCS says Traditional Healer services may include traditional music, songs, dancing, drumming, ceremonies, rituals, herbal remedies, and spirituality. The state also says it does not require Traditional Healers or Natural Helpers to have a separate state license or certification.

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That fact alone is jarring enough. But the deeper issue is not merely that California has decided to pay for spiritual or quasi-spiritual services through Medicaid. The deeper issue is that this example opens a window into how Medicaid financing actually works. It shows how a program that most ordinary people imagine as health insurance for the poor has become a complicated fiscal machine, one that mixes state money, federal money, hospital taxes, local transfers, managed-care contractors, waiver authority, and political discretion. By the time the money comes out the other end, almost no one can tell who is really paying, who is really benefiting, and what care is being crowded out.

The point is not that every Traditional Healer is committing fraud. That would be the wrong claim, and it would be unfair. Cultural support is not fraud just because it is not Western medicine. The point is narrower and more important: Medicaid has built a financing architecture in which the most concrete medical services often face the hardest prospective review and the worst funding, while some of the hardest-to-verify services are policed mainly through retrospective oversight. That is the kind of architecture that makes fraud easier in hospice, home health, autism therapy, and other services where the payer cannot easily see what actually happened. We see this in national headlines today.

To understand how California can pay for something like this, you need to understand four pieces of Medicaid financing. First, Medicaid is jointly funded by states and the federal government through matching funds. Second, much of Medicaid is now run through managed-care plans that receive a monthly payment per enrollee. Third, states can use waivers to pay for things ordinary Medicaid rules might not otherwise cover. Fourth, states can use provider taxes, local transfers, supplemental payments, and state-directed payments to make the true source and destination of Medicaid dollars almost impossible for a normal person to follow.

Medicaid Is Not One Checkbook

Most Americans understand Medicare a little more easily than Medicaid. Medicare is a federal program, mostly for the elderly and disabled. Medicaid is different. Medicaid is jointly financed by the federal government and the states. Every state runs its own program within broad federal rules, and the federal government matches state Medicaid spending according to a formula called the Federal Medical Assistance Percentage, or FMAP.

KFF’s Medicaid financing overview explains the basic structure well. Medicaid is administered by states within broad federal rules and jointly funded by states and the federal government through a federal matching program with no preset cap. Poorer states generally receive a higher match. Wealthier states receive less. The statutory floor for the traditional Medicaid match is 50 percent, meaning the federal government pays at least half of ordinary Medicaid benefit costs.

Traditionally, Medicaid covered certain categories of low-income people: poor children, poor pregnant women, low-income parents, the disabled, and poor elderly patients needing long-term care. The Affordable Care Act expanded Medicaid to cover low-income able-bodied adults, and for that expansion population the federal government pays 90 percent of the bill. In federal fiscal year 2024, total Medicaid spending was about $919 billion, with the federal government paying roughly $594 billion and states paying about $325 billion.

This is the first thing to understand: Medicaid is built around matching funds. If a state spends an eligible Medicaid dollar, Washington sends money back. If the match rate is 50 percent, the state puts up 50 cents and the federal government puts up 50 cents. If the match rate is 90 percent, the state puts up 10 cents and the federal government puts up 90 cents.

That matching structure changes the politics of spending. If Sacramento spends a purely state dollar on something, California taxpayers bear the full cost. But if Sacramento can define that same expenditure as Medicaid spending, it may pull in federal matching dollars. That does not make the spending free. It just moves part of the bill to federal taxpayers. It also creates a strong incentive for states to expand the category of what counts as Medicaid and for whom that coverage is offered.

How Medicaid Pays for Care

The simplest version of Medicaid is fee-for-service. A patient sees a doctor, receives a service, and the state Medicaid program pays a fee for that service. An office visit has one rate. A CT scan has another rate. A hospital stay has another. This is the easiest model to understand because it resembles a direct transaction, although with the government standing between the patient and the clinician.

If a doctor visit costs $50 and the patient is part of the ACA Medicaid expansion group, the state may pay only $5 while the federal government pays $45. If the patient is in a traditional eligibility group in a state with a 50 percent match, the state pays $25 and the federal government pays $25.

Fee-for-service has obvious problems. If the state pays every time a service is delivered, there is an incentive to deliver more services and more intense services. A state can still impose utilization management. But the basic payment logic is transactional: a covered service is billed, documented, and paid.

That model is especially vulnerable when the service is hard to verify after the fact. It is one thing to confirm that an MRI was performed. It is another to confirm whether a home health visit happened for the hours billed, whether a hospice patient was truly eligible, whether an autism therapy session was one-on-one or group care, or whether a traditional healing encounter delivered what the claim form says it delivered.

So states moved heavily into managed care. Instead of paying each doctor and hospital directly for each individual service, the state contracts with a managed care organization, or MCO, and pays that plan a fixed amount per member per month. This is called a capitated payment. The managed-care organization then administers the insurance benefit. It builds networks, negotiates with providers, manages utilization, and takes financial risk. If the plan spends less than the capitation payment while meeting its contractual obligations, it can keep the difference. If it spends more, it loses money.

Different states choose MCOs in different ways. Some use competitive procurement, where plans respond to a request for proposals and the state selects plans based on network adequacy, quality, administrative capacity, cost, and other factors. Some states or counties have multiple plans from which patients can choose. Others have only one dominant public or quasi-public plan. California has a complicated hybrid structure, with county organized health systems in some counties, two-plan models in others, and more competitive plan environments in places like Sacramento and San Diego.

Because managed care gives states more budget predictability and delegates utilization management to plans, states have shifted much of Medicaid into MCOs. KFF reports that capitated payments to comprehensive Medicaid managed-care organizations accounted for about half of Medicaid spending in federal fiscal year 2024.

The law requires these managed-care rates to be “actuarially sound.” In plain English, that means the state cannot just make up a number. The payment rate has to be developed according to actuarial standards and be adequate to cover the reasonable, appropriate, and attainable costs of providing covered Medicaid services to the enrolled population under the contract. Federal regulations require CMS review and approval of those rates.

Actuarial soundness does not mean a Medicaid plan won an open auction to treat patients for the lowest price. It means the state, its actuaries, the managed-care plan, and CMS agree that the per-member-per-month payment is projected to cover the cost of covered services for that population. The state may use competitive procurement, require network and quality demonstrations, and select one or more plans by county. But the rate still has to fit within a CMS-approved actuarial framework.

Confused yet? It gets more confusing.

Federal rules say what Medicaid must cover. Whether under fee-for-service or managed care, Medicaid has mandatory benefits and optional benefits. Physician services, hospital services, nursing facility care, laboratory services, and many other core services fall within the traditional medical benefit structure. But as you can probably guess, “faith healers” are not on the ordinary list of mandatory Medicaid benefits.

So how does something like that get covered? How does a state decide to cover something extra and still get the federal government to pick up part of the bill?

The Waiver: How Exceptions Become Policy

Now we get to the machinery that allows Medicaid to pay for things most people would not intuitively think of as medical care.

Section 1115 of the Social Security Act gives the federal government authority to approve experimental, pilot, or demonstration projects that are likely to promote the objectives of Medicaid. CMS says these demonstrations must be budget neutral to the federal government, meaning federal Medicaid spending under the waiver should not exceed what federal spending would have been without it. Federal guidance also explains that Section 1115 can authorize federal matching funds for state expenditures that would not otherwise be eligible for federal Medicaid reimbursement.

That last sentence is the key. A waiver can take something that ordinary Medicaid rules might not pay for and turn it into matchable Medicaid spending.

California’s CalAIM waiver is one of these demonstrations. CMS approved California’s Traditional Health Care Practices amendment in October 2024. Once approved, the state could treat certain traditional healing services as Medicaid expenditures and claim federal matching funds under the terms of the demonstration.

The theory is simple. California comes to CMS and says that these services will help Medicaid beneficiaries. The state submits projections suggesting that the program will remain budget neutral because the new spending will be offset by reduced spending elsewhere or by other assumptions embedded in the waiver model. CMS reviews the proposal and approves the demonstration if it decides the waiver promotes Medicaid’s objectives and satisfies federal requirements.

But the counterfactual is modeled, not proven. Budget neutrality is built against a hypothetical without-waiver baseline. That may satisfy a federal budget office, but it does not prove that the new service actually improved care or saved money in the world where patients live.

This was supposed to be a tool for experimentation. In theory, states could test whether a new way of delivering care improves outcomes and saves money. That is not inherently bad. Medicaid is a huge program. The country is diverse. States differ. A rigid national rulebook will not always make sense.

But the same flexibility can also become a loophole. Once the door opens to “demonstrations,” the definition of health care can expand. Housing supports, Uber rides, and food vouchers all become health care. Some of these programs may be humane. Some may even be useful. But every expansion changes Medicaid from a safety-net medical program into a general social-policy financing vehicle.

It also lets states direct money toward favored priorities while the federal government picks up much of the tab. If the spending is tied to the ACA expansion population, the federal government can pick up 90 percent. The state is responsible for fiscal discipline, but the federal government is paying most of the bill.

What Exactly Is California Paying For?

The state’s own documents are worth reading because they show how elastic the language has become.

California says Traditional Healer services may include practices such as music, songs, dancing, drumming, ceremonies, rituals, herbal remedies, and other forms of spirituality. Natural Helper services may include community navigation, psychosocial support, trauma support, wellness support, and assistance with self-management and recovery. The state says these services are part of substance use disorder treatment for eligible beneficiaries in participating counties and facilities. DHCS says it does not require Traditional Healers or Natural Helpers to hold a state license or certification.

There are also documentation and claiming rules. Participating providers must submit opt-in packages. Counties and DHCS have roles in approval, claims processing, and monitoring. Claims must be submitted through Drug Medi-Cal Organized Delivery System counties. So it would be inaccurate to say there is literally no oversight.

But what the state does not do is the very thing it often does to physicians: require an outside reviewer to decide whether this service is clinically necessary for this patient before payment. In fact, DHCS says neither DHCS nor DMC-ODS counties may determine whether a traditional health care practice is culturally or clinically appropriate for an individual Medi-Cal member. That decision is made by the Traditional Healer or Natural Helper.

That is the asymmetry.

A neurosurgeon trying to get an MRI or an injection for a patient with neurologic symptoms may have to justify the request to a distant reviewer using documentation, guidelines, imaging criteria, and clinical evidence. But for these traditional practices, the state is far more deferential. The clinical appropriateness decision is not made by the payer. It is made within the very structure being paid.

The payment rates are not symbolic either. For state fiscal year 2025–2026, DHCS lists an all-inclusive rate of $801 for eligible Traditional Healer and Natural Helper services in certain settings. For services not eligible for the all-inclusive rate, DHCS lists $801 for Traditional Healer services and $335.37 for Natural Helper services.

A reasonable person can support culturally respectful care while still asking a very basic question: why is Medicaid, a program that routinely struggles to provide timely access to physicians, imaging, surgery, psychiatry, and addiction treatment, paying hundreds of dollars per encounter for services that include ceremonies, rituals, drumming, and spirituality?

Where Opacity Becomes Fraud Risk

This is where the argument must be careful.

The Traditional Healer benefit is not fraud. Fraud is a crime. Cultural support is not fraud just because it is not Western medicine. A ceremony is not a false claim merely because a physician would not prescribe it.

The point is not that Traditional Healers are fraudsters. The point is that Medicaid becomes vulnerable when it pays for services that are difficult for an outsider to verify, delivered outside ordinary clinical settings, billed by encounter or time, and policed mainly through documentation after the fact.

That pattern keeps showing up in the parts of government health care that produce scandals.

Hospice fraud often turns on whether a patient was truly terminal, whether the patient even knew he was enrolled in hospice, and whether services were actually provided. California officials recently charged 21 people in an alleged $267 million Medi-Cal hospice fraud scheme involving stolen identities, 14 hospice companies, and billing for services tied to people who allegedly had no idea their identities had been used.

Home health fraud often turns on whether an aide actually showed up, for how many hours, and whether the patient truly needed the service. In 2026, Reuters reported that CMS imposed a six-month nationwide moratorium on new Medicare enrollments for home health and hospice providers, citing fraud concerns. The policy itself may or may not be well designed, but the reason for it is revealing: these are services where billing can outrun verification.

Autism therapy has become a similar warning sign. The Wall Street Journal reported that Indiana barred Piece by Piece Autism Centers from Medicaid after the company received about $340,000 per patient on average in 2023. In Connecticut, local reporting described an autism-related Medicaid fraud case involving thousands of allegedly false behavioral therapy claims for services that were not performed or not properly supervised. These cases differ in their details, but the vulnerability is similar: when a payer is billed for hours, encounters, supervision, and subjective services it cannot easily observe, the system becomes much easier to game.

Even the official improper payment data should be understood with care. Improper payments are not the same thing as fraud. KFF notes that improper payments are often the result of missing documentation, insufficient information, or failure to follow administrative requirements rather than proof that the patient, provider, or service was illegitimate. CMS’s 2025 Medicaid improper payment data estimated a national rolling Medicaid improper payment rate of about 6 percent.

But improper payments still matter because they reveal the basic administrative problem. The government is trying to run a massive program with billions of claims, millions of enrollees, thousands of provider types, multiple financing streams, and services that range from a complex brain surgery to a home health visit to an autism therapy session to a spiritual healing encounter. Some of those services are easy to verify. Many are not.

This is why the faith-healer example is so useful. It makes the verification problem visible. If Medicaid pays for an MRI, we can generally confirm that an MRI occurred. If Medicaid pays for surgery, there is an operative note, anesthesia record, implant log, hospital bill, and recovery course. These systems are imperfect, but the service is concrete.

But if Medicaid pays for a traditional healing encounter that may include music, drumming, ceremony, herbal remedies, spirituality, or psychosocial support, what exactly is the outside reviewer verifying? That a claim form was submitted? That a note was written? That the provider said the encounter occurred? That the participating organization deemed the practitioner qualified? That the service was culturally appropriate according to the very people delivering it?

That is not the same type of oversight physicians face when they request conventional care.

Again, that does not prove fraud. It proves that the ordinary tools of medical verification are weaker. And when the tools of verification are weak, the system becomes easier for bad actors to exploit.

So back to my patient with the herniated disc. He is covered under managed care, so there is a layer of utilization review. To be clear, I do not object to utilization management in principle. I do not believe insurance companies or taxpayers should pay for a service simply because a doctor says so. Public money should be scrutinized. Some utilization management is necessary.

But the system applies skepticism unevenly.

When a physician requests a steroid injection the system demands documentation, medical necessity, guidelines, and often prior authorization. But when a service is politically protected, culturally framed, waiver-approved, and difficult to verify, the same system can become remarkably deferential.

The Federal Match Game

To understand why states pursue arrangements like this, one must return to the match.

Suppose California spends $10 million on a state-only program. California pays $10 million. But suppose California can place that program inside Medicaid and claim a 50 percent federal match. Now California pays $5 million and the federal government pays $5 million. If the match is 90 percent, California pays $1 million and the federal government pays $9 million.

That is why Medicaid waivers are so attractive. They transform the political economy of spending. A state program that would be expensive with state-only dollars becomes easier to justify when federal taxpayers pick up a large share of the bill.

But money does not become free because the bill is divided between governments. Federal taxpayers are still taxpayers and Medicaid administrative capacity is still finite.

The deeper problem is that matching funds weaken fiscal discipline. When a state buys something with its own money, voters can at least see the tradeoff more clearly. When a state buys something with Medicaid matching funds, the price is disguised. The state can say, in effect, “we only paid 10%.” But the country paid the whole thing.

California is a useful case study because Medi-Cal has become enormous. The program covers roughly 15 million people (double from 2010 levels), and per-enrollee spending has grown 5.4% year-over-year, outpacing inflation. In 2026, California officials were dealing with a multibillion-dollar Medi-Cal financing gap, with the state borrowing $3.44 billion and requesting another $2.8 billion to cover program costs, according to Associated Press reporting. That is the strange reality of modern Medicaid: the program can be huge, expensive, and still unable to reliably provide timely access to ordinary care.

Provider Taxes, Local Transfers, and the Art of Making the State Share Appear

The financing gets even stranger because states do not always fund their Medicaid share through ordinary state tax revenue. They can use provider taxes, intergovernmental transfers, and certified public expenditures.

A provider tax is exactly what it sounds like. The state taxes a class of health care providers, such as hospitals, managed-care organizations, or nursing facilities, and uses the revenue as part of the non-federal share of Medicaid spending. Because those taxes are considered non-federal spending, that spending then draws down federal matching funds. Often, the same provider class that pays the tax receives increased Medicaid payments.

This is legal within federal limits, but the fiscal effect can be very different from what the public imagines. KFF explains that states use provider taxes, intergovernmental transfers, and certified public expenditures to help finance the non-federal share of Medicaid. MACPAC has explained that provider-financed payments can make the effective federal share higher than the statutory FMAP. In one example, if a state has a 60 percent FMAP and a provider pays an $8 tax that helps finance a $100 Medicaid payment, the federal government still contributes $60, while the provider nets $92 after tax. The effective federal share of the net payment becomes about 65 percent rather than 60 percent.

An intergovernmental transfer, or IGT, is a transfer of public funds from a local government entity to the state Medicaid agency. A county hospital, public hospital district, or local government can transfer money to the state. The state uses that money as the non-federal share and claims federal matching dollars.

Certified public expenditures, or CPEs, work differently. A public entity certifies that it has spent money on Medicaid-eligible services, and the state uses that certified spending to claim federal matching funds.

In plain English, states have learned how to turn provider and local-government money into federal Medicaid money.

Some of this supports real care. Some of it keeps safety-net hospitals alive. Some of it raises Medicaid payments closer to Medicare or commercial rates, which can improve access if designed properly. But the mechanism also makes Medicaid less transparent. A voter hears that the state is spending more on Medicaid. A hospital says it is being taxed. A federal agency says it is matching state expenditures. A managed-care plan says it is passing through state-directed payments.

This is not simply Medicaid paying doctors for poor patients. This is Medicaid as fiscal engineering. A provider tax can become the state share. The state share can become federal matching funds. The matching funds can become higher payments. The higher payments can move through managed-care plans as state-directed payments. Each piece can be legally defensible. Together, they make the program almost impossible for voters to audit.

State-Directed Payments: The Managed-Care Back Door

There is one more piece of the machinery that matters: state-directed payments.

Remember, in managed care, the state pays an MCO a monthly capitation payment, and the MCO pays doctors, hospitals, and other providers. In theory, this means the plan is managing cost and utilization. But states can also direct managed-care plans to make specific payments to providers.

Sometimes this can be used to support rural providers and keep a facility’s doors open when patient volume is low. Sometimes it can help bring Medicaid reimbursement closer to Medicare or commercial rates for services where there are shortages. Sometimes it can help safety-net providers survive. And sometimes it can route enormous sums to politically connected hospital systems that have learned to cry poor while expanding their market power.

CMS explains that federal Medicaid managed-care rules allow states to direct certain payments by managed-care plans to providers. MACPAC describes these arrangements as including minimum fee schedules, value-based payments, and uniform rate increases. Some states have used them to make large additional payments to providers in ways that resemble supplemental payments in fee-for-service Medicaid.

The scale is enormous. MACPAC reported that between February 2023 and August 2024, CMS approved 302 distinct directed-payment arrangements in 40 states and Puerto Rico, with projected spending of $110.2 billion per year. Many of the largest arrangements were directed to hospitals and financed through provider taxes or intergovernmental transfers. MACPAC also noted that rigorous evaluations are limited and that provider-level data gaps make it hard to assess whether these payments actually achieve their stated goals.

This matters because it shows how far Medicaid has moved from the simple idea of paying for care for poor patients. The modern program is a web of capitation payments, supplemental payments, directed payments, waiver expenditures, provider taxes, local transfers, and federal matching claims.

Some of these mechanisms may be necessary in a badly distorted system. But taken together, they create a program in which the loudest and most politically organized actors often do better than the quietest and sickest patients.

The Zero-Sum Reality

Defenders of expansive Medicaid waivers often reject the idea that there is a tradeoff. They will say the Traditional Healer benefit is small relative to the Medicaid budget. They will say it is targeted. They will say it is culturally appropriate. They will say it does not directly take away an MRI from a patient with back pain.

Some of that may be technically true in the narrow accounting sense. Medicaid is not a coffee can filled with dollar bills where one person’s drumming ceremony directly removes another person’s epidural steroid injection. The financing is more complicated than that.

California and CMS were able to build a pathway to pay for Traditional Healers and Natural Helpers. They were able to define the benefit, identify eligible settings, authorize federal matching funds, establish payment methodologies, describe documentation rules, and clarify claiming procedures. The state can figure out how to reimburse ceremonies, rituals, drumming, herbal remedies, and spirituality through Medicaid.

Yet patients are still waiting 6 months for a legitimate medical procedure which should take 6 days to arrange.

A safety-net program must make choices. It cannot fund everything. It cannot be health insurance, housing policy, food policy, income support, cultural restoration, spiritual counseling, addiction treatment, hospital subsidy, managed-care profit center, and general-purpose federal matching strategy all at once without losing sight of its central purpose.

Coverage is not the same as care. A Medicaid card does not decompress a spinal cord. The inputs that matter in medicine are stubbornly concrete. Physician time and capacity is scarce. Pretending otherwise does not make us compassionate. It makes us unserious.

A Safety Net Needs a Floor, Not a Slush Fund

Medicaid was created for a moral purpose. It was supposed to provide medical care to people who could not otherwise afford it. That mission is worth defending.

But precisely because the safety net matters, it must be disciplined. Scarcity is not cruelty. Scarcity is the reason discipline is necessary. If we pretend Medicaid can be everything, the people with the least power will be the first to discover that it is not very good at being anything.

A serious Medicaid program would start with a floor. It would guarantee access to essential, evidence-based medical care. It would pay enough to maintain real physician networks. It would reduce administrative friction for high-value care. It would measure success by whether patients can actually see doctors, obtain imaging, receive treatment, and recover function. It would treat the time of physicians, nurses, and patients as valuable and reward them for taking on these challenging patients. It would stop confusing coverage expansions with care delivery.

Instead, we have built a system that often underpays real clinicians, overpays intermediaries, subsidizes consolidated hospital systems, creates an architecture in which fraud is easier to hide, hides prices, taxes providers to draw down federal funds, and then congratulates itself for funding “innovation.”

Now that same system can pay for Traditional Healers while patients wait for ordinary medicine.

When a state can find the administrative will to reimburse rituals but cannot reliably get a patient timely specialty care, the problem is not a lack of money alone. It is a collapse of priorities.

And in Medicaid, as in all of health care, the people who pay the highest price for collapsed priorities are usually the patients with the fewest choices.

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That insight explains a great deal of American healthcare.

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Every physician has heard the phrase: “Insurance will cover it.” It is usually said innocently. The patient is not being greedy. The doctor is not necessarily being wasteful. Both are responding to the incentives in front of them. If the price is hidden, if the bill is routed through a third party, and if the cost returns later through premiums and deductibles, then no one at the point of care is forced to ask the basic economic question: is this worth what it costs?

That question cannot be avoided forever. Scarcity does not disappear because something is covered. The cost is simply socialized among millions of taxpayers and premium payers. But someone still pays. The only question is whether the person receiving the service sees the price clearly enough to make a real tradeoff.

That brings us to insurance. When you pay for something with insurance, you are using money pooled from premium payers by the insurance company. Insurance works because it is a way to pool risk. In simplified form, the equation looks like this:

Premium = probability of event × cost of event + administrative margin

That formula works when the event is rare and financially devastating. A house fire is unlikely, but ruinous. A catastrophic car accident is unlikely, but expensive. These are the kinds of risks insurance was designed to handle. The probability is low, the cost is high, and the administrative margin is worth paying because the alternative is financial disaster.

This is why actuarial discipline matters. If an insurer overestimates the probability of an event, its product becomes overpriced and competitors undercut it. If it underestimates the probability, it pays out more than it collects and eventually fails. Markets punish bad math.

Routine medical care does not fit this model. Over a lifetime, the probability that a person will need ordinary medical care approaches 100 percent. That changes the equation.

Premium = cost of care + administrative margin

At that point, you are no longer buying insurance in the traditional sense. Millions of people are prepaying for expected consumption through a middleman. And the middleman must be paid. Applying an insurance margin to a predictable event guarantees that the total cost will be higher than the underlying service. But because the care is prepaid by millions of individuals, almost no one pays attention to the ultimate cost.

We understand this everywhere except healthcare.

We have confused health care with health insurance. We have routed predictable medical needs through a financing mechanism designed for rare catastrophes. We are spending someone else’s money on ourselves through an insurance structure built for events that are supposed to be unlikely. Friedman explains the behavior. The insurance formula explains the cost.

This is also why utilization management expands. Once routine care is paid for by a third party, demand rises because the visible price falls. But the real cost has not disappeared. It has only moved. So the payer has to regain control through utilization management, whether that means prior authorization, quality metrics, or compliance regimes like Stark Law. These are not random irritations. They are the rationing tools of a system that hides prices at the point of care.

None of this is free. Administrative spending in American healthcare is enormous, and every routine transaction routed through insurance adds another layer of billing, compliance, and adjudication. The bureaucracy is not incidental to the model. It is built into the price.

Patients experience this as madness. They pay premiums every month, often through wages they never see. Many are paying the insurance margin without receiving the practical benefit of insurance. They are insured against routine care but still exposed to routine costs.

The usual defense is that if patients pay directly for routine care, they will skip necessary treatment. There is truth in that concern, especially for poor and very sick patients. But it does not follow that every primary care interaction should be laundered through an insurance company. Helping vulnerable patients afford care is not the same thing as hiding the price of care from everyone.

A more honest system would restore insurance to its proper role. Health insurance should protect families from financial catastrophe. It should be there for the ICU stay, the cancer diagnosis, the premature birth, the trauma admission, and the kind of medical disaster no ordinary household can budget for. That is what insurance is good at. That is why insurance exists.

Routine care should look more like a normal market. Prices should be visible. Patients should have agency. Physicians should be accountable to the people they treat, not to a claims-processing bureaucracy.

Direct Primary Care is not a complete solution, but it shows what becomes possible when ordinary care is removed from the insurance machine. The patient pays a clear monthly fee. The physician does not bill a third party. The relationship becomes simpler, more direct, and more accountable.

The objection, of course, is that healthcare is special. And it is. A sick patient is not the same as a shopper buying tires. No serious physician believes medicine can be reduced entirely to retail economics.

But healthcare being special does not make it immune to tradeoffs and costs. The tragedy of American healthcare is that we tried to make care affordable by hiding prices, and in doing so made care less affordable.

Insurance is necessary. Catastrophic coverage is essential. No civilized society should be indifferent to a family bankrupted by serious illness. But that is precisely why insurance should be reserved for what insurance does well. When we use it to finance everything, we make it worse at protecting us from the things that truly matter.

Primary care is not a catastrophic event. It is the ordinary maintenance of human life. Treating it like an insurable catastrophe has distorted prices, buried physicians in bureaucracy, and trained patients to believe care is affordable only when the cost is hidden from them.

And when the cost is hidden, we are back to Friedman. We are spending someone else’s money on ourselves. We are doing it through an insurance mechanism designed to price rare, expensive events. But routine care is not rare. The probability is effectively one.

Once you understand that, the equation becomes hard to ignore:

Premium = cost of care + administrative margin

That is not insurance. That is prepaid bureaucracy.

Sometimes the most radical healthcare reform is just arithmetic.

In 1850, Frédéric Bastiat gave us the parable of the broken window. A boy breaks a shopkeeper’s window. The shopkeeper pays a glazier to fix it. The townspeople see the glazier working, see the money changing hands, and conclude that the broken window has stimulated the economy.

What they fail to see is what the shopkeeper would have done with that money had the window never been broken. He might have bought new shoes, improved his shop, lowered his prices, invested in new inventory, or saved the money for some future opportunity. The glazier’s work is visible. The lost alternative is not. Bastiat’s lesson was that we should judge economic activity not merely by the jobs it creates, but by the productive possibilities it displaces.

The repair may be necessary. But the breakage did not make society richer. It forced scarce labor and capital into restoration rather than creation.

Healthcare is becoming the broken window of the American macroeconomy.

I say this as someone who has spent his professional life in medicine. I do not regard healthcare as unimportant. No decent society can be indifferent to illness. But moral importance and economic productivity are not the same thing. Much of medicine is defensive spending. A successful operation may return someone to work, and that has enormous human value. But an economy cannot confuse the necessary work of repair with the compounding work of building.

When a society moves more of its workforce into managing illness, that labor is no longer available to raise productivity elsewhere. There is always a tradeoff. The existence of a job does not tell us whether that job reflects prosperity or dysfunction.

The data coming out of California should make people uncomfortable. From March 2022 to March 2026, healthcare and social assistance employment in California grew 25.3 percent, faster than any other state. California’s total job growth over that period was only 3.4 percent. Remove healthcare and social assistance, and employment in the rest of California’s economy actually declined by 0.3 percent. Healthcare now accounts for 17.4 percent of all jobs in California, up three percentage points in four years. Here is the underlying EIG/BLS data analysis.

This is not some trivial regional curiosity. California is supposed to be the future. Yet in the state most associated with the artificial intelligence boom, recent labor-market growth has been propped up by healthcare and social assistance. A state that should be exporting productivity to the rest of the world is increasingly hiring people to manage the costs of sickness.

That is not a healthy sign.

The most revealing part of the California data is not simply that healthcare grew. Some healthcare growth is real. But the composition matters. EIG found that services for the elderly and disabled added 211,000 jobs, representing nearly half of the state’s care-sector job growth in the detailed QCEW data window. This is the picture of a wealthy state trading down into lower-wage, publicly financed care work while higher-value sectors stagnate.

And then there is the fraud problem. Hospice fraud does not explain all of California’s healthcare job growth, and it would be sloppy to pretend that it does. But it is a warning sign about what happens when public money flows through weak oversight. California’s own state auditor found in 2022 that Los Angeles County had experienced roughly a 1,500 percent increase in hospice agencies since 2010, including indicators of large-scale fraud, likely fraudulent billing, and apparent use of stolen medical personnel identities to obtain licenses. The auditor found that one Van Nuys building was reported as housing more than 150 licensed hospice and home health agencies.

The problem has not stayed theoretical. In April 2026, California’s attorney general and Department of Health Care Services announced charges in a hospice fraud scheme involving 14 hospice companies and roughly $267 million in improper billing. The state says no hospice services were rendered in that scheme. California has revoked more than 280 hospice licenses, placed hundreds more providers under investigation, and kept a moratorium on new hospice licenses.

This is the broken-window economy in its purest form. First, the taxpayer funds the program. Then the bureaucracy writes the rules. Then companies learn how to bill the rules. Then regulators discover abuse. Then the state hires more people to investigate and prosecute the abuse. At each step, employment rises. We simply created an elaborate employment ecosystem around the repair of a policy failure.

This is why the phrase “healthcare jobs” can obscure more than it reveals. We also employ armies of people to manage the healthcare bureaucracy created by the unholy alliance of government care and private insurance.

The country pays for all of this in ways most people never see. Healthcare spending reached $5.3 trillion in 2024, or 18 percent of GDP. Medicare, Medicaid, private insurance, out-of-pocket spending, employers, households, federal taxpayers, state taxpayers, and local governments all share the bill. But sharing the bill only hides the true cost.

Employer-sponsored insurance is the clearest example. Workers often think their employer “pays” for healthcare, but employers do not have a magic pile of healthcare money separate from compensation. Premiums are part of labor cost. When healthcare prices rise, employers eventually adjust. They hold down wages or reduce hiring. The cost shows up somewhere.

This is not ideological speculation. Zarek Brot-Goldberg, Zack Cooper, Stuart Craig, Lev Klarnet, Ithai Lurie, and Corbin Miller found that rising healthcare prices act like a de facto payroll tax. Using hospital mergers as a source of price increases, they estimate that a 1 percent increase in healthcare prices lowers payroll and employment at non-healthcare firms by about 0.4 percent. At the county level, a 1 percent increase in healthcare prices reduces labor income by 0.27 percent and increases flows into unemployment.

That is the unseen cost of healthcare job growth. One sector expands while the rest of the economy quietly absorbs the burden.

There is an obvious counterargument. America is aging. Older people need more care. Medicine can do more than it could do 50 years ago, and patients understandably want the benefit of that progress. CMS reports that older adults were about 17 percent of the population in 2020 but accounted for about 37 percent of personal healthcare spending. Per-person spending for those 65 and older was more than five times higher than spending per child and almost two and a half times higher than spending per working-age person.

All of that is true. But economics is about tradeoffs. A country can support a large repair sector if its productive sector is strong enough. It can care for the elderly, the disabled, and the sick if the rest of the economy is growing, innovating, building, and producing real surplus. But when the repair sector becomes the growth sector, we should ask what has gone wrong. An economy can handle many people caring for the frail and sick. It cannot become a giant claims-processing machine attached to a stagnant productive base.

The goal should not be to shrink necessary care. The goal should be to stop confusing the growth of healthcare bureaucracy with prosperity. The next time a politician celebrates healthcare as the engine of job growth, we should ask a simple Bastiat question: what are we not seeing?

We see the hospital expansion. What we do not see are the houses not built, the wages not paid, the businesses not started, the independent practices not sustained, and the innovations never attempted because labor and capital were diverted into managing the rising cost of repair.

Healthcare is necessary. The broken window still has to be fixed. But a country that mistakes window repair for growth has stopped understanding wealth

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The stories also revealed how difficult it is to separate fraud control from market structure. Medicare and Medicaid operate through sprawling payment streams with diffuse accountability and weak consumer discipline. That predictably creates opportunities for gaming. But the tools government uses to respond, such as enrollment moratoriums or payment deferrals, often favor large incumbents that can absorb compliance costs while smaller operators struggle. Enforcement becomes a competitive force in itself.

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Another pattern emerged around technology. AI and electronic prior authorization are being sold as efficiency tools, but the real question is who captures the efficiency gains. Administrative simplification can reduce physician burden. It can also entrench dominant EHR vendors, strengthen hospital systems, and automate existing distortions faster. In healthcare, technology rarely lands in a neutral environment. It lands inside a payment system already shaped by Medicare incentives, opaque pricing, utilization controls, and regulatory arbitrage.

And beneath nearly every story sits the same fiscal reality. Medicare and Medicaid are no longer just insurance programs. They are financing systems for hospitals, leverage points for federal-state bargaining, and increasingly tools for industrial policy. Once government becomes the primary payer, every rule change becomes a fight over distribution.

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The problem is that the slogan does not survive contact with arithmetic.

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In fiscal year 2024, the Department of Health and Human Services spent $1.721 trillion. The Department of Defense spent $826.3 billion in agency outlays. HHS was not a minor social program hiding in the shadow of the Pentagon. It was more than twice the size of the Defense Department by that measure. The HHS total was driven overwhelmingly by the Centers for Medicare and Medicaid Services, which accounted for about $1.5 trillion of HHS spending. Even if one uses SIPRI’s broader international definition of U.S. military expenditure, which puts American military spending at $997 billion in 2024, the basic point does not change. The federal government is not a military machine that occasionally pays for healthcare. It is a gigantic health insurance company with a very expensive military attached.

Zoom out beyond the federal budget, to the economy as a whole, and the picture becomes even harder to square with the usual story. Total U.S. health spending reached $5.3 trillion in 2024, or 18.0 percent of GDP. Medicare alone accounted for $1.118 trillion. Medicaid accounted for $931.7 billion. Private health insurance accounted for another $1.645 trillion. That is 18 percent of GDP, taken from taxes, payroll, and premiums, routed through numerous third parties, and handed to various entities to provide healthcare. Meanwhile, the military takes roughly 3.4 percent of our GDP.

This distinction matters because bad arithmetic leads to bad politics. It is easy to say patients would be better off if we simply took money from the Pentagon and dropped it into HHS. But I do not see how anyone who has spent time inside American healthcare can believe that with a straight face.

The system doesn’t lack money.

The money just flows through a machine that is exquisitely designed to reward everything except simple, affordable, accountable care.

To say this is not to deny the reality patients experience. Medicaid patients routinely struggle to get timely specialty care, even for procedures that, in a cash market, can cost only a few thousand dollars. Even privately insured patients often feel like they’re getting second-rate care. But that is exactly the point. American healthcare can be lavishly funded at the institutional level and brutal at the patient level. A hospital can build a tower, expand a billing department, acquire physician practices, employ armies of coders, and still leave a working mother unable to get an affordable appointment for her child.

The deeper problem is that American healthcare is not a normal market. It is a centrally planned, inefficient behemoth. And dumping more funding into a distorted system does not necessarily buy more care. It can buy more distortion. It can inflate hospital prices, reward consolidation, expand compliance departments, deepen dependence on third-party payment, and give incumbents another reason not to change. A dollar routed through a badly designed payment machine does not reach the patient.

The great irony is that many of the people who complain most loudly about healthcare costs keep asking for more of the thing that created them: more government. Then, when prices rise and access remains miserable, they conclude that the answer must be still more money.

The Pentagon wastes money. Of course it does. Every large bureaucracy wastes money, and defense procurement is not exactly a monastery of thrift. But the idea that American healthcare is poor because defense is rich is a myth. It allows us to avoid the harder question: why does a country spending $5.3 trillion on healthcare still make ordinary patients feel like they are begging for access to a system they already paid for?

That question is much more uncomfortable than “bombs versus bandages,” because it points back at the machinery of healthcare itself, and how government intervention created this mess.

Taking the entire defense budget and dumping it into HHS would not produce a golden age of patient care. It would make an already enormous department even larger. Unless the incentives changed, the new money would flow where the old money already flows: toward hospitals with market power, administrative infrastructure, billing sophistication, compliance machinery, and political leverage.

Healthcare scarcity in America is not caused primarily by the Pentagon. It is caused by a payment architecture that hides prices, suppresses tradeoffs, rewards rent extraction, and protects incumbents from competition. We do not need to pretend the military is cheap to see this. We only need to stop pretending healthcare is poor.

“Human beings are born with different capacities. If they are free, they are not equal. And if they are equal, they are not free.”
— Aleksandr Solzhenitsyn

That is an uncomfortable sentence, especially in healthcare, where we desperately want to believe equality and abundance can coexist.

All doctors have stories about ultra-wealthy patients. Imagine a hypothetical ultra wealthy brain injured patient. The family is able to build a private rehabilitation hospital inside the home, pay for around-the-clock nursing, multiple therapists, home modifications, continuous oversight, and state of the art equipment. All without waiting lists or prior authorization.

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Many people see this and instinctively conclude that something has gone wrong. I look at it differently.

The real question is not whether this is unequal. Of course it is. And no system in the world would be able to provide that level of abundance to every patient. But Solzhenitsyn’s point was that equality and freedom are often competing values, and pretending otherwise usually ends with less of both.

This is the central tension that healthcare policy tries desperately to avoid admitting. We want freedom and equality simultaneously. We want every patient to have identical access to every possible treatment while also preserving choice, innovation, physician autonomy, and incentives for people to invest enormous amounts of time and capital into healthcare. But these goals conflict.

Healthcare is made of scarce things. There are only so many operating rooms to go around. Physicians cannot spend adequate time with too many patients. No slogan changes this, and calling healthcare a “human right” does not magically produce an infinite supply of neurosurgeons, nurses, or rehabilitation specialists.

In a free system, wealthy patients fly for second opinions, take time off work to dedicate to their treatment, and have all the resources available to them. In some systems, those freedoms are severely curtailed. You cannot simply bypass the queue by paying for more care inside the system. Equality is preserved by restricting freedom. You can pay out of pocket for things that are not covered by insurance, but if it is covered, the ability to pay out of pocket is restricted.

This is what many advocates of healthcare equality refuse to confront. A system that forbids private augmentation does not create abundance. It simply limits everyone to the same constrained baseline.

If a wealthy family wants to hire additional therapists, bring rehabilitation into the home, pay nurses directly, or create a better recovery environment for a loved one, what exactly is accomplished by forbidding it? Does the poor patient receive more therapy because the rich patient received less? Does the nurse suddenly appear elsewhere? Does the rehabilitation facility become less crowded? Usually not. More often, everyone is simply flattened downward toward the same bureaucratically managed average.

This flattening impulse is increasingly common in healthcare policy. We see it in attacks on concierge medicine. We see it in hostility toward physician-owned hospitals. We see it in attempts to prevent physicians from opting out of government payment systems. We see it in the moral outrage anytime someone purchases faster or more customized care.

But medicine has never been equal, and pretending otherwise simply obscures where the inequality actually exists.

A politically connected hospital executive has advantages over an ordinary patient. A professor at an elite academic center has advantages over a rural laborer. A physician’s family member often gets informal access and guidance that others do not. A patient who speaks the native language fluently and understands the healthcare system navigates it differently than someone who does not. Even in fully socialized systems, influential people quietly obtain better access, faster referrals, and private options.

The wealthy also create demand signals. When affluent patients spend enormous amounts of money on rehabilitation, diagnostics, devices, or personalized care, they signal that these things have value. Capital and labor then flow toward providing them. You get more doctors, therapists, technology. You’ve used price signals to solve access problems. Over time, what began as elite and expensive often becomes more common and more affordable.

The rich do not merely consume innovation. In many cases, they subsidize its early development and this private augmentation often creates experimentation and innovation that centralized systems cannot.

The first versions of almost everything are expensive. New technologies, new devices, new delivery models, and new organizational structures rarely emerge fully formed as cheap universal public goods. They begin inefficiently. They are adopted first by people willing and able to spend more. Over time, competition, iteration, and scale drive costs down and spread access outward.

This is true far beyond healthcare. Air travel, automobiles, smartphones, MRI scanners, laparoscopic surgery, and biologic drugs were all once accessible only to elites or major institutions. The wealthy and the ambitious effectively subsidized early adoption.

Healthcare reformers often speak as if private spending is inherently parasitic. In reality, private spending is often part of the discovery process. It allows physicians and patients to experiment outside rigid centralized structures. Some experiments fail. Some are wasteful. But others become the standard of care years later.

Central planning struggles with this because centralized systems are inherently conservative. Bureaucracies are designed to standardize, not discover. A public payer cannot easily individualize around every patient preference, every family circumstance, or every novel therapeutic idea. It must create categories, rules, payment schedules, and eligibility criteria. It must compress reality into billing codes and coverage determinations.

This is one reason modern healthcare increasingly feels inhuman. Patients become units moving through administrative pathways rather than individuals with different values, resources, and priorities.

The irony is that many of the same people demanding equality in healthcare are also demanding “personalized medicine.” But personalized medicine is, by definition, unequal. A truly personalized system allows different people to pursue different levels and styles of care based on their preferences and resources. It allows families to say, “We want more rehabilitation.” “We want more home nursing.” “We want direct physician access.” “We want a second opinion immediately.” “We are willing to spend our own money for these things.”

On the other hand, the bureaucratic state decides what level of care is “appropriate,” and everyone is expected to accept it regardless of personal priorities or willingness to spend more.

None of this means society should abandon vulnerable patients. A civilized society should guarantee a credible safety-net. But there is a profound difference between guaranteeing a floor and enforcing a ceiling.

None of this is emotionally satisfying. Watching money buy opportunity in moments of human vulnerability will always feel uncomfortable. But discomfort is not the same thing as evidence that freedom should be prohibited.

Modern healthcare policy increasingly attempts to enforce ceilings in the name of fairness. The logic is seductive: if some people can buy better care, and some people die because they can not, then the system must be unjust. But this assumes the only morally acceptable outcome is equal consumption. That is neither achievable nor desirable in a free society.

The wealthy will always find ways to improve their healthcare. They will travel. They will pay cash. They will hire private physicians. They will leverage personal networks. They will purchase additional nursing, rehabilitation, nutrition support, exercise facilities, and personalized recovery services. And because of these advantages, they will die at a lower rate than those who cannot afford these luxuries. The only real question is whether these activities happen openly within legal markets or quietly through informal privilege.

I would rather be honest about it and allow physicians and patients to contract freely. I would rather permit direct-pay arrangements, physician-owned facilities, concierge models, home-based recovery systems, and alternative care structures than trap everyone inside the same increasingly bureaucratic machine.

Because the real danger to healthcare is stagnation, not inequality.

It is a system so obsessed with equalizing access to mediocrity that it gradually destroys excellence, experimentation, physician autonomy, and innovation altogether. A system where no one is allowed to buy more care, but everyone waits longer. A system where independent practice disappears, bureaucracies grow endlessly, and physicians become employees executing protocols inside massive administrative systems.

Healthcare policy should begin with acknowledging tradeoffs. Freedom creates inequality because human beings are unequal in talent, priorities, risk tolerance, family structure, and resources. Attempts to erase those differences inevitably require coercion, bureaucracy, and centralized control.

Solzhenitsyn understood this because he lived under a regime that promised equality while crushing freedom.

A humane society should ensure that no one is abandoned. But it should also recognize that freedom means allowing people to pursue more, spend more, build more, and experiment more with their own resources.

Some inequity is the price of that freedom.

Lets look at the major stories for the week.

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Then, as always happens, someone on the internet announced with great confidence that this is what happens when healthcare is left to the free market.

As if the most regulated industry in America actually functions in a free market.

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American healthcare contains private actors, but private actors alone do not make a market. Doctors, nurses, hospital executives, private insurers, private equity firms, billing companies, pharmacy benefit managers, and nonprofit health systems all pursue revenue. Of course they do. That is not the interesting question. The interesting question is why the rules reward the behavior they reward. Why does hospital ownership make the same outpatient service more expensive? Why does a physician need a billing code before a service gets reimbursed? Why does a hospital hire armies of documentation specialists to extract the right words from a chart? Why can a patient with “coverage” still be unable to obtain care? Why does every reform seem to produce another layer of compliance staff?

Because we do not have a free market, or anything even close.

American healthcare is a government-built payment machine. Before Medicare became the dominant payer and pricing reference point, physicians and patients had more room to experiment with direct payment, prepaid arrangements, fraternal society models, early Blue Cross-style coverage, cash practice, and other local contracting forms. There was room for prices and contracts to emerge from relationships between patients, physicians, hospitals, employers, and communities.

Medicare standardized and federalized that world. It took physician services and forced them into a strict fee-for-service architecture using CPT codes, RVUs, documentation rules, and federal conversion factors. It replaced hospital prices with DRGs, prospective payment formulas, outpatient payment classifications, and facility fees. It then made participation in that system nearly unavoidable through billing rules, coverage rules, Conditions of Participation, and regulatory control over hospitals. After that, government policy protected the incumbents through certificate-of-need laws, physician-owned hospital restrictions, Stark and Anti-Kickback complexity, site-of-service differentials, hospital subsidies, and tax preferences.

Private actors behave badly inside this system, but they are responding rationally to rules government created. Hospitals consolidate because payment rules reward consolidation. Physicians sell to hospitals because independent practice is punished. Insurers build administrative barriers because tax-favored and government-entrenched third-party payment removed price discipline. Patients receive absurd bills because nobody ever had to give them a real price.

The first distortion: insurance through your employer

The original sin of American healthcare financing is the employer-sponsored insurance tax exclusion. Employer-paid premiums for health insurance are excluded from federal income and payroll taxes, and the portion of premiums employees pay is typically excluded from taxable income as well. That exclusion lowers the after-tax cost of employer-sponsored coverage and helps explain why most American families with private insurance get coverage through work. The IRS is explicit that the value of the employer’s excludable contribution to health coverage remains excluded from an employee’s income and is not taxable.

That sounds technical, but the effect is enormous. The tax code makes health insurance purchased through an employer more favorable than cash wages. If your employer pays you an additional dollar in wages, that dollar is taxed. If your employer uses compensation dollars to buy health insurance, that benefit is tax advantaged. Over time, this pushed health insurance into the workplace and made the employer the central purchaser of coverage.

The distortion is subtle because workers often think their employer “gives” them health insurance. But employers do not create compensation out of charity. Health benefits are part of total compensation. Workers pay for employer-sponsored insurance through lower wages.

This matters because markets depend on visible tradeoffs. In ordinary life, a consumer can decide whether a more expensive product is worth the money. But in employer-sponsored insurance, the patient is not really the customer. The employer typically chooses the plans available to the employee. The employee often has only a few plans from which to choose. When the employee changes jobs, the insurance changes too. Patients lose continuity because coverage is tied to employment rather than to the person.

This also creates a massive hidden subsidy to the healthcare industry. Because employer-sponsored insurance is tax-favored, workers are nudged toward compensation in the form of health benefits rather than wages. That encourages more dollars to flow through insurance than would flow if patients were spending their own after-tax money. It also encourages overinsurance. Routine care, predictable care, and relatively inexpensive care get pushed through an insurance product that was originally supposed to protect against catastrophe.

Once that happens, the patient stops acting like a normal buyer. The patient does not ask, “What does this cost, and is it worth it?” The patient asks, “Is it covered?” The physician does not simply quote a price. The physician documents, codes, and submits a claim. The insurer does not merely insure against rare catastrophe. It becomes a payment intermediary for ordinary healthcare consumption. EThe patient is left with premiums, deductibles, copays, coinsurance, networks, and surprise bills.

Medicare did not just insure seniors. It built the pricing machine.

Medicare is usually discussed as an insurance program for older Americans and certain disabled patients. That is true, but incomplete. Medicare did not merely create a payer. It created the central pricing architecture of American healthcare.

Medicare entrenched fee-for-service as the dominant federal payment architecture. That did not merely determine how the government paid claims. It reshaped the entire market around claims submission, coding, documentation, coverage rules, and compliance. Creative contracting did not disappear entirely, but it was pushed to the margins. The default became simple: if a service is covered by Medicare, it must be translated into a billable code and paid according to the federal pricing machine.

For physicians, Medicare pays through the Physician Fee Schedule. CMS describes PFS payment rates as being based on relative value units for physician work, practice expense, and malpractice expense. Those RVUs are converted into payment rates through a fixed-dollar conversion factor and adjusted geographically.

Pause on that.

A physician does not simply tell a patient, “Here is what my judgment, skill, time, and availability cost.” The physician submits a code. That code has assigned RVUs. Those RVUs are set by CMS, adjusted by geographic factors, and converted into dollars by a federal conversion factor. The economic reality of the clinical encounter depends on whether the work fits the code, whether the diagnosis supports medical necessity, whether the documentation satisfies the rules, and whether the claim survives the payment process.

In normal professional markets, a lawyer, accountant, architect, or consultant can define a service, quote a fee, and contract directly with a client. In Medicare medicine, clinical work must first be translated into billing language, and the price is set by the government. The code becomes the economic product.

A new procedure may be clinically useful, but if there is no clean CPT code, the payment pathway is uncertain. The physician may use an unlisted code, which invites manual review, denial, inconsistent payment, and administrative friction. A service may have a code but still be denied because the diagnosis code does not justify it. A physician may perform valuable cognitive work that is hard to map onto a billable category and therefore becomes economically invisible. Documentation grows not because the patient needs a longer note, but because the billing machine needs proof.

Medicare did not create a marketplace for physician services. It created a translation system in which clinical work must be converted into codes before it can become money.

RVUs are price-setting with a medical vocabulary

The RVU system is often discussed as if it were technical, neutral, and somehow natural. It is not. It is price-setting.

CMS assigns relative values to services. Those values attempt to reflect physician work, practice expense, and malpractice expense. The RVUs are then converted into dollars. This is not a market discovering prices through exchange. It is an administrative process estimating value from inputs.

There is something almost comical about the philosophical structure of it. The system tries to measure the “value” of physician work by estimating labor time, intensity, overhead, and relative resources. We have a healthcare payment system that, at least in spirit, often resembles an administered labor theory of value. If the service takes more physician time, it may be worth more. If the estimated time falls, the service may be worth less. If a procedure becomes faster because physicians improve their technique, the bureaucratic instinct is to revalue the code downward.

A real market rewards efficiency. If a surgeon develops a better way to do something, and patients value that surgeon’s skill, the surgeon may benefit. In an administered pricing system, improved efficiency can become evidence that the service should be paid less.

It also changes the politics of medicine. Physicians and specialties end up fighting over relative valuation. The question becomes not, “What do patients value?” but, “What does the fee schedule recognize?” The unit of concern is no longer the patient’s willingness to pay for skill, access, trust, speed, or outcome. It is the code, the RVU, and the conversion factor.

Once Medicare built this skeleton, commercial insurers did not create a parallel free market. They used Medicare as a reference point, sometimes paying a percentage of Medicare, sometimes using similar coding logic, sometimes layering their own rules on top.

Hospital inpatient payment: the diagnosis becomes the product

Hospitals have their own version of administered pricing. Medicare’s Inpatient Prospective Payment System pays hospitals using diagnosis-related groups, or DRGs. CMS explains that each DRG has a payment weight based on the average resources used to treat Medicare patients in that DRG. Under IPPS, Medicare pays for inpatient hospital services on a rate-per-discharge basis that varies according to the DRG assigned to the beneficiary’s stay.

Again, that is price-setting.

A hospital admission does not have a market price in the ordinary sense. The patient does not shop for a DRG. The doctor does not negotiate a DRG with the family. The hospital documents and codes the admission into a federal classification system. Payment depends on the principal diagnosis, additional diagnoses, procedures, and other factors. CMS states that the MS-DRG classification is based on the information reported by the hospital, including the principal diagnosis, additional diagnoses, and procedures performed during the stay.

In an ordinary clinical world, the chart should communicate what happened to the patient, what the physician thought, what the plan is, and what needs to happen next. Under DRGs, the chart also becomes a revenue instrument. The words selected in the note matter financially. “Pneumonia” may pay differently than “pneumonia with acute hypoxic respiratory failure.” “Confusion” may pay differently than “encephalopathy.” “Poor intake” may pay differently than “severe malnutrition.” “Kidney numbers bumped” may pay differently than “acute kidney injury.”

Some of this is legitimate severity capture. Hospitals treating sicker patients should not be paid as if they treated healthier ones. But the incentive is obvious. Once diagnosis codes change payment, diagnosis coding becomes a business function. Hospitals hire clinical documentation improvement teams. Physicians receive queries. Administrators worry about CCs and MCCs. The chart becomes a battleground between clinical reality, billing specificity, compliance risk, and revenue optimization.

The patient did not become sicker because a new word appeared in the note. The payment formula changed because the documentation became more favorable.

This is one of the most important distortions in modern hospital medicine. It gives enormous power to administrative systems that sit between the bedside and the bill. It also pollutes medical records. Patients accumulate diagnoses that may have been entered to satisfy a payment or documentation rule. Future doctors inherit charts full of billing artifacts. The clinical record becomes longer, less readable, and less trustworthy.

Then we wonder why doctors spend so much time staring at screens.

Outpatient hospital payment: ownership becomes destiny

If you thought the inpatient side was bad, look at how outpatient care distorts the market.

CMS pays hospital outpatient departments under the Outpatient Prospective Payment System. Under OPPS, items and services are assigned to Ambulatory Payment Classifications, which group services that are similar clinically and in resource use. OPPS payments are made for items and services furnished by hospital outpatient departments.

This creates a separate payment pathway for hospital outpatient care. That pathway often pays differently than care delivered in an independent physician office or ambulatory surgical center.

Yet outpatient hospital care and independent physician care are often indistinguishable. Suppose you go in for a regular clinic visit in an independent doctor’s office. It gets paid under the physician fee schedule. If a hospital buys that office and nothing else changes, it can become a hospital outpatient department using a different payment system.

Same doctor. Same patient. Same exam room. Same echocardiogram, infusion, clinic visit, or minor procedure. But after the hospital buys the practice or facility, the service may be billed as hospital outpatient care. A facility fee appears, and the cost rises.

That rewards hospitals for acquiring outpatient care. It punishes independent practices that deliver the same services without the hospital billing apparatus.

MedPAC has repeatedly discussed site-neutral payment because Medicare itself pays differently across ambulatory settings for similar services. In its March 2026 report, MedPAC wrote that there remain opportunities to expand site-neutral policies to align Medicare payment rates for similar services across ambulatory settings. It estimated that applying site-neutral payments to 15.6 million elective clinic visits in on-campus hospital outpatient departments would have decreased fee-for-service Medicare payments by about $1.1 billion in 2024.

If the price difference were simply a market price reflecting better care, why would site-neutral payment be an issue at all? The very existence of the site-neutral debate is an admission that Medicare’s payment rules pay different amounts based on where and how a service is billed, not merely what was done for the patient.

Hospitals understand this. That is why they are growing like insatiable beasts, devouring independent practices. They are not irrational. They are following the rules. If government pays more when the hospital owns the outpatient setting, hospitals will buy outpatient settings.

Medicare made escape difficult

At this point, someone might say: fine, Medicare is administered pricing. But why not let doctors and patients contract around it? Why not let hospitals and patients build alternative arrangements? Why not let people choose direct payment, transparent bundles, subscription models, physician-led facilities, or cash prices?

Because Medicare does not merely choose one payment method among many. It made its chosen method the default operating language of American medicine.

Medicare participation is a legal status. CMS states that Medicare participation means a physician or supplier agrees to accept assignment on all claims for Medicare-covered services, accept Medicare-allowed amounts as payment in full, and not collect more from the patient than the deductible, coinsurance, or copayment.

Once a service is covered by Medicare, the physician and patient are no longer simply free to create their own arrangement. The service must fit Medicare’s rules. The physician must either participate, accept assignment, submit claims, obey coverage and documentation requirements, and accept Medicare’s allowed amount, or formally opt out of Medicare altogether. A physician can opt out, but opting out is a formal legal pathway with private contracting requirements and major practice implications. It means opting out of Medicare payments, severely limiting the ability of that doctor to care for patients in many settings outside a highly selective elective practice.

It is not the same as a normal professional saying, “Here is my fee.”

For hospitals, escape is even less realistic. A hospital that wants to serve older patients, disabled patients, Medicaid patients, commercially insured patients whose plans expect Medicare participation, or communities that view Medicare access as essential cannot simply opt out of the Medicare operating system. Medicare is too large, too embedded, and too central to the hospital business model.

CMS says Conditions of Participation and Conditions for Coverage are the requirements healthcare organizations must meet to begin and continue participating in Medicare and Medicaid. For hospitals specifically, CMS states that 42 CFR Part 482 contains the health and safety requirements hospitals must meet to participate in the Medicare and Medicaid programs.

Some of these rules are necessary. No serious person wants hospitals without basic safety standards. But the larger point is that Medicare participation becomes operational control. Medicare does not merely say, “Here is what we will pay.” It says, “If you want access to the dominant public payer, your hospital must operate under our conditions.”

Those conditions touch medical staff structure, nursing services, patient rights, quality assessment, infection control, discharge planning, records, emergency preparedness, and hospital governance. Over time, hospitals build entire administrative infrastructures around compliance. Accreditation readiness, policy management, documentation protocols, quality committees, survey preparation, regulatory affairs, and internal auditing become part of the cost structure of care.

This is the missing point in most debates about healthcare markets. Medicare is not just a payer. It is a licensing-adjacent governing structure. A hospital that wants to participate in Medicare and Medicaid must organize itself around Medicare’s rules. Those rules become hospital policy with all the required compliance infrastructure and cost. Then, when patients complain that healthcare is expensive, policymakers blame the market.

This is why “just pay cash” is not a serious answer at scale. Cash-pay primary care, direct specialty care, transparent surgical bundles, and employer direct contracting can work around the edges, and I strongly support them. But Medicare’s architecture makes large-scale escape difficult. For covered services involving Medicare beneficiaries, the doctor-patient transaction is constrained. For hospitals, participation brings conditions that shape the entire institution. For new facilities, ownership and entry rules often block competition before it starts.

Medicare did not just create public insurance. It extinguished many of the pathways by which alternative markets might have emerged. Doctors used to enter into creative financing arrangements. Not just cash pay, but prepaid care, monthly memberships, capitation-like arrangements, fraternal society contracts, and other local agreements. Many of the arrangements we might have seen never had a chance to mature because federal healthcare policy chose a different path: fee-for-service claims processed through a federal pricing machine.

The state protected the incumbents

Once government replaced prices with formulas and made escape difficult, the next layer was incumbent protection.

Certificate-of-need laws are the clearest example. In many states, new facilities or services require government approval before they can be built or expanded. Existing hospitals can object to new competitors. The language is always about planning, avoiding duplication, preserving access, and protecting community resources. The economic effect is often incumbent protection.

Imagine needing Ford’s permission to open a Toyota dealership. Imagine Starbucks being allowed to object before an independent coffee shop opens across the street. We would immediately recognize this as anticompetitive.

Certificate-of-need laws give existing institutions a political tool to fight competitors without having to compete on price, access, efficiency, or patient experience.

Then there are physician-owned hospital restrictions.

CMS explains that Section 6001 of the Affordable Care Act amended the rural provider and whole hospital exceptions so that a hospital with physician ownership or investment may not increase the number of operating rooms, procedure rooms, and beds beyond its baseline capacity.

Hospitals can own physicians. Physicians are restricted from owning hospitals.

This is one of the most revealing features of American healthcare policy. We are told physician ownership is dangerous because doctors might profit from the facilities to which they refer. That concern is not imaginary. Incentives matter. But then we allow hospitals to employ physicians, buy practices, capture referrals, bill facility fees, steer patients internally, and use their market power to negotiate higher rates.

If the goal were truly neutral competition, the law would care about transparency, conflicts of interest, outcomes, and patient choice regardless of who owns the facility. Instead, the rules suppress physician-led competition while allowing hospital-led consolidation.

Stark Law and the Anti-Kickback Statute add another layer. The anti-corruption rationale is real. Nobody wants sham referrals, kickbacks, or abusive self-dealing. But complexity has consequences. The more complicated the rules, the more the system favors institutions large enough to hire lawyers, compliance officers, consultants, and administrators to navigate them. Large hospital systems can structure arrangements, absorb legal costs, and manage regulatory risk. Large hospital systems are exempt from self-referral restrictions. Independent physicians are not.

That is how consolidation happens in practice. Not because hospitals are always more efficient. Not because patients demanded hospital ownership of everything. But because the regulatory environment favors scale. The hospital can afford the compliance department. The independent practice cannot. The hospital can survive payment delays and denials. The independent practice cannot. The hospital can monetize facility fees and outpatient payment differentials. The independent practice cannot. The hospital can capture subsidies. The independent practice cannot.

Then, when independent doctors sell, policymakers call it integration.

Subsidies turned hospitals into payment-channel machines

Hospitals are not normal firms selling a service to customers at visible prices. They are institutions embedded in a dense web of public payment streams and policy subsidies.

Some of these subsidies have defensible goals. Graduate medical education payments support teaching hospitals. DSH and uncompensated care payments support hospitals caring for low-income patients. Medicaid supplemental payments and state directed payments may help safety-net institutions survive. The 340B drug program was designed to help covered entities stretch scarce resources.

Once hospitals receive large streams of revenue through public formulas, discounts, supplemental payments, and designations, financial survival becomes partly clinical and partly political. Hospitals learn to master payment channels. They hire consultants to optimize revenue. They lobby over formulas. They acquire service lines that create favorable reimbursement. They build finance teams around DSH, GME, 340B, provider taxes, directed payments, and outpatient facility billing.

In a normal market, a firm survives by offering a product customers value at a price they are willing to pay. In hospital healthcare, survival often depends on mastering a maze of public payment programs. The patient may still matter morally and clinically, but financially the patient is often the vessel through which codes and governmental revenue flows.

The 340B drug discount program is a particularly clear example. Under 340B, covered entities can purchase outpatient drugs at discounted prices. HRSA describes the program as allowing covered entities to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services. The stated purpose sounds noble. But discounted drug acquisition combined with reimbursement based on payer arrangements can create powerful spread opportunities. Hospitals that qualify for 340B have incentives to acquire physician practices, move drug administration into hospital outpatient departments, and capture both drug economics and facility payments.

If we pay hospitals more when they own outpatient care, hospitals will own outpatient care. If we give hospitals access to drug spreads when they acquire infusion volume, hospitals will acquire infusion volume. If we restrict physician-owned competitors, hospitals will face fewer physician-led alternatives. If we route supplemental dollars through complex public formulas, hospitals will invest in mastering those formulas.

In the end, many hospitals learn that the highest-margin activity is not simply providing better care. It is mastering arbitrage: site-of-service arbitrage, drug-spread arbitrage, subsidy capture, documentation capture, and regulatory positioning. Patient care remains the moral reason the institution exists, but the financial machinery increasingly rewards everything around the care rather than the care itself.

Value-based care did not restore the market

At some point, policymakers recognized that fee-for-service has obvious problems. Paying for units of activity can reward volume. It may not reward outcomes. It can encourage overuse. These are real concerns.

But the policy response was not to restore prices, competition, consumer choice, and direct accountability. The response was to create another layer of government-designed metrics.

Value-based care sounds market-like because it uses words such as value, quality, accountability, and outcomes. In practice, it often just makes more formulas for hospitals to game and more regulatory burdens for doctors to endure.

CMS describes hospital value-based programs as linking payment to quality and value, including programs such as Hospital Value-Based Purchasing, the Hospital Readmissions Reduction Program, and the Hospital-Acquired Condition Reduction Program. Physician programs such as MIPS, accountable care organizations, bundled payments, episode-based measures, risk adjustment, and quality reporting all operate through definitions set by government or payer administrators.

Of course, quality matters enormously. The problem is that measured metrics are not the same as quality. Once payment depends on metrics, institutions manage metrics.

Readmission penalties can punish hospitals caring for poorer and sicker patients. Fall metrics can lead to bed alarms, immobility, and risk aversion. Infection metrics can create documentation battles. Bundled payments can penalize surgeons who take care of complex patients. ACOs can reward benchmark strategy, coding intensity, attribution management, and patient selection. MIPS can force physicians to report measures that have little to do with what patients actually value.

Value-based care replaces price signals with federal metrics. It asks CMS to define value from the top down, then acts surprised when hospitals and physicians learn to optimize the definitions.

Hayek would not be surprised. Central planners always lack the dispersed knowledge embedded in real transactions. They cannot know every patient’s preferences, every physician’s judgment, every local constraint, every family’s tradeoff, every hospital’s operational reality, every difference between a straightforward case and a disaster waiting to happen. So they create measures, which, tied to payment, dictate behavior.

The absurdity of calling this capitalism

At this point, look at the machinery we have described.

The tax code pushes insurance through employers. Medicare sets physician prices through CPT codes, RVUs, and conversion factors. Medicare sets inpatient hospital prices through DRGs and prospective payment. Medicare sets outpatient hospital prices through OPPS, APCs, and facility fees. Medicare participation constrains direct contracting. Conditions of Participation turn payment into operational control. Certificate-of-need laws protect incumbent hospitals. Physician-owned hospital restrictions suppress physician-led competition. Stark and Anti-Kickback complexity favor large compliance-heavy systems. Hospital subsidies reward mastery of public payment channels. Value-based care adds metrics, reporting, attribution, risk adjustment, and administrative overhead.

Then a patient gets a ridiculous bill and someone says, “This is the free market.”

A market is not defined by the mere presence of private organizations. If private firms operate inside a government-designed price system, respond to government-created subsidies, comply with government participation rules, and exploit government-protected barriers to entry, then what you have is not a free market. It is a regulated cartel with private revenue-maximizing behavior inside it.

If you think American healthcare is expensive because the market is too free, your solution will be more central control: more price-setting, more metrics, more reporting, more subsidies, more rules, more federal demonstration projects, more committees, more compliance. But much of the current mess was created by exactly those tools.

Medicare price-setting did not eliminate the need for prices. It replaced real prices with formulas. Value-based care created new games. Facility payment rules rewarded hospital acquisition. Subsidies made hospitals dependent on political finance.

The more government suppresses real market signals, the more administrators must invent substitutes. That is the system we have built.

What a real market reform would require

A serious market-oriented healthcare reform would not pretend that healthcare is identical to buying coffee. But it does not require the centrally planned system we have now.

Real reform would start by restoring the basic conditions of a market wherever they can exist. There billions of elective, low-cost clinical transactions each year, from outpatient clinic visits, labs, x-rays, and minor procedures.

Patients should know prices before care whenever possible. Independent physicians, ASCs, and physician-owned hospitals should be allowed to compete on even footing. Medicare beneficiaries should have more freedom to use their own money for care without forcing physicians into all-or-nothing participation choices. Safety-net support should fund patients more directly instead of feeding the incumbent hospital system.

The point is not that markets solve every problem. The point is that we have spent decades suppressing market signals and then blaming markets for the consequences.

There are patients, doctors, hospitals, insurers, and employers trapped inside a government-designed payment machine.

The $9,000 surprise bill is not what happens when the free market runs wild.

It is what happens when the market has been regulated, coded, subsidized, consolidated, and administered out of existence.