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.

Subscribe now

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.

My phone goes off.

Subscribe now

I’m on call. A 29-year-old has been in a car accident. He has a devastating traumatic brain injury and a large clot compressing his brain.

I drive to the hospital. We get him to the operating room. I remove part of his skull and evacuate the clot. His brain is badly bruised and swelling, so I leave the bone flap off. That operation, called a decompressive hemicraniectomy, can save a life by giving the brain room to swell outward rather than being crushed inward by the skull.

Then I place monitors. I insert a catheter into the fluid-filled spaces of the brain so we can measure intracranial pressure in real time and drain cerebrospinal fluid if needed. I place another probe to monitor brain oxygenation. Those monitors are connected to specialized equipment, and the patient heads to the ICU.

By the time I’ve stabilized the pressure, reviewed the scans, spoken with the ICU team, and had the first of many difficult conversations with the family, it’s well past midnight.

The next morning I’m back early to check on him. Then I do it again the next day. And the next.

For nearly two weeks, I spend substantial time at the bedside. I review serial CT scans. I manage external ventricular drainage. I interpret intracranial pressure trends and brain oxygen data. I coordinate with intensivists and trauma surgeons. I talk to the family every day about prognosis, goals, and setbacks. I make repeated decisions that can determine whether this patient recovers, remains severely disabled, or dies.

This is not some exotic edge case. Patients with severe traumatic brain injury who undergo decompressive craniectomy often have prolonged ICU stays, and published cohorts report ICU lengths of stay in the low teens for these patients. One recent clinical profile of acute TBI patients reported a median ICU stay of 13 days for decompressive craniectomy patients.

Now for the crazy part.

Financially, it would make more sense for me to do the surgery for free.

Under Medicare, most major operations carry a 90-day “global period.” That means the surgeon’s postoperative care is considered bundled into the payment for the operation. The Centers for Medicare & Medicaid Services (CMS) gives one fee for the entire thing: surgery, ICU care, non-ICU hospital care, and clinic visits for 90 days. In plain English: the surgeon does the operation, helps manage the patient afterward, but usually cannot bill separately for that postoperative work.

Most insurance companies follow CMS’s rules. They also use a universal language of codes, called CPT, to bill procedures, and they pay by converting the Relative Value Units (RVUs) of those codes to dollars.

In 2026, a decompressive craniectomy billed as CPT 61322 generates 33.40 work RVUs and 68.97 total RVUs. The total RVUs are to cover the “overhead” of the physician’s office, such as staff, rent, utilities, etc. By contrast, CPT 99291, the first 30 to 74 minutes of critical care on a given day, generates 4.50 work RVUs and 5.96 total RVUs.

Do the math over a 13-day ICU stay.

So, if I could bill one unit of critical care each day that would total 58.50 work RVUs and 77.48 total RVUs. In other words, the ICU management would generate more value in Medicare’s arithmetic than the surgery itself. The work RVU breakeven happens after about eight ICU days. The total RVU breakeven happens after about twelve. By day thirteen, the ICU time has overtaken the surgery on both measures.

That does not mean I can simply skip billing the surgery and bill daily critical care instead. That is exactly the absurdity. The system has evolved to the point where it signals that the prolonged management around the surgery is worth more than the surgery, while simultaneously bundling that management into the operation so the surgeon usually cannot bill for it separately.

This is the downstream effect of years of federal tinkering with physician reimbursement.

Most recently, CMS finalized a 2026 “efficiency adjustment” that reduced work RVUs for many non-time-based services, such as surgeries. Time-based services, office visits, non-surgical inpatient care, and critical care, got a corresponding increase in reimbursement. CMS also changed the facility practice expense methodology, reducing the practice-expense component for many hospital-based services. So a hospital-based operation like decompressive craniectomy gets squeezed from two directions at once: on the procedural side and on the facility practice-expense side.

This did not come out of nowhere. It is the product of years of increasing valuation for time-based evaluation and management services combined with repeated downward pressure on many procedural codes. The 2026 rule simply made the distortion easier to see.

To be clear, this is not an argument that critical care physicians are overpaid. It is not. ICU care is hard, essential work, and my critical care colleagues absolutely deserve to be paid for what they do.

The point is that the whole structure is arbitrary.

Medicare does not discover prices. It sets them prospectively. Bureaucrats, committees, and formulas assign values to services in advance using estimates about time, effort, practice expense, and malpractice cost. The system tries to infer value from inputs.

That sounds technical and scientific. It is not.

It is a modern version of the old labor-centered idea, typically attributed to Karl Marx, that value can be derived from the amount of effort, time, and resources that go into producing something. Economists such as Mises and Hayek argued instead that value is subjective. Something has value because human beings value it, not because a planner has measured the inputs that went into it.

That matters here.

A bottle of water is worth very little to someone with potable water in their plumbing and a great deal to someone stranded in the desert. A guaranteed neurosurgeon available at 2 a.m. may look extravagantly expensive on a spreadsheet right up until it is your loved one lying unconscious after a car wreck. A community might balk at paying a neurosurgeon an enormous monthly standby fee for trauma call, but there is some number at which that community would absolutely decide the coverage is worth it. The value was always there. The question is how people choose to express it.

Medicine complicates this, of course. A patient with a life-threatening brain injury cannot bargain over a hemicraniectomy the way someone shops for a television. But subjective value does not disappear just because the situation is urgent. It moves upstream. People can still express preferences through the insurance they choose, the networks they are willing to pay for, the taxes a community is willing to support for trauma capacity, the hospitals employers want in a narrow network, and the many routine and semi-shoppable services that make up much of health care. Even in emergency care, the community’s willingness to support standby capacity reflects subjective value.

The problem with Medicare’s pricing system is not merely that it is government-run. The deeper problem is that it mistakes accounting for value. It assumes that if enough experts measure enough inputs, they can derive a correct price from above.

But they cannot.

The result is often incoherent. A payment system can end up signaling that thirteen days of ICU management are worth more than a life-saving middle-of-the-night decompressive craniectomy, while also refusing to pay the surgeon separately for that management because it is bundled into the global period.

Those payment rules shape behavior.

When postoperative ICU management is bundled into the surgeon’s fee but can be separately billable for another physician who did not perform the operation, the system nudges hospitals toward fragmentation. The surgeon may still round and oversee the broad surgical plan, but there is less financial reason to remain deeply involved in the granular ICU care. A separate neurocritical care team, appropriately or not, becomes the primary day-to-day manager and collects the billable critical care time.

This shows how Medicare helped create an entire new field of neuro critical care. There were other factors, but the payment structure clearly reinforces that division of labor. If you underpay surgeon involvement in the ICU and separately reward someone else’s time there, you should not be surprised when care becomes more fragmented.

That fragmentation may sometimes be appropriate. But it should not be dictated by a reimbursement quirk.

Payment systems are not neutral. They are signals. And the signal here is unmistakable: the operation, the technical skill, the call burden, the disruption of family life, the legal liability, and the responsibility of taking ownership of a crashing trauma patient are all worth less, in Medicare’s arithmetic, than the daily ICU time around the case. Then, in a final twist, the surgeon is told he cannot bill that ICU time anyway because it is already bundled into the operation.

That is central planning at its most revealing: a bureaucracy imposing values from above and then acting surprised when physicians and hospitals respond to the incentives it creates.

Over time, clinicians do what economics predicts they will do. They do less of what is undervalued and more of what is rewarded.

A system that makes it look financially rational for a neurosurgeon to do a middle-of-the-night hemicraniectomy “for free” is not measuring value. It’s dictating it.

A patient recently posted a bill showing a hospital charge of $17,813 for an MRI. Her insurance absorbed most of it, but she was still left owing about $2,600 herself. This is not some isolated curiosity. In the recent House Energy and Commerce hearing on health care affordability, Rick Pollack of the American Hospital Association defended hospital finances by arguing that “Medicare and Medicaid payments generally do not cover the full cost of providing care.”

That is the standard hospital defense. Privately insured patients, they say, must make up the difference. They are the cross subsidy.

But the same MRI can often be purchased in a competitive cash market for a fraction of the hospital charge. That alone tells us the hospital bill is not simply the price of an MRI. It is an opaque financing mechanism for the hospital’s broader cost structure.

Hospital defenders insist they need this. They say they must absorb public payer shortfalls. They say they must maintain 24/7 readiness, expensive infrastructure, unprofitable service lines, trauma capacity, and teaching functions. Fine. But once they make that argument, they have already conceded the central point. The bill is not really a price. It is a hidden tax.

And here is the deeper problem: that patient is not subsidizing the hospital only once. She is subsidizing it over and over again.

She pays taxes for Medicare and Medicaid. Pollack’s testimony explicitly argues that those programs underpay hospitals and that this underpayment must be absorbed somewhere else.

She pays another way through the tax code. A 2024 JAMA study estimated that US nonprofit hospitals received $37.4 billion in total tax benefits in 2021, including $7.8 billion in property tax relief and $9.1 billion in sales tax relief. A KFF analysis estimated the value of nonprofit hospital tax exemption at about $28 billion in 2020, and found that this exceeded total charity care costs that year.

She pays through direct and indirect public supports such as disproportionate share hospital payments, graduate medical education, and research support. KFF notes that DSH payments alone were worth $31.9 billion in fiscal year 2020.

She pays through the 340B drug discount program, which functions as a major revenue stream for many hospital systems, while increasing the price of her private insurance. This program also drives hospital consolidation and increases the costs of drugs.

She pays again through higher private premiums driven by hospital market power. Recent price transparency research found that a hospital in a system with a 10 percentage point higher market share can command $880 to $1,180 more per admission in commercial rates. Another 2025 study found that hospital concentration is associated with up to 11 percent higher hospital prices, while insurer concentration is associated with lower prices.

So the obvious question is: after all of those subsidy streams, what exactly is still unfunded?

That is the question hospital executives never want to answer. They want the moral credit that comes from claiming to serve the poor and the economic freedom that comes from opaque extraction. They should not get both.

If hospitals truly need additional support to cover public obligations, then they owe the public a real accounting. Show us the net Medicaid shortfall after supplemental payments. Show us the value of the tax exemption. Show us where 340B revenue goes. Show us executive compensation, administrative headcount growth, capital expansion, reserves, acquisitions, lobbying, and political spending.

Show us the books.

Nobody is saying poor and sick patients should be abandoned. Hospitals do perform some genuine community functions. Trauma care, standby capacity, teaching, and care for vulnerable patients are real obligations. But if those functions require public support, then subsidize them directly, transparently, and in a form that can be audited. Do not launder those subsidies through routine MRI bills marked up to absurd levels and then pretend the public is confused for noticing.

These fake prices are not harmless abstractions. They shape negotiations, premiums, deductibles, coinsurance, and the broader cost shifting game that makes health coverage more expensive for everyone. Even when insurance pays most of the immediate charge, households still bear the burden through lower wages, higher premiums, and higher taxes.

Hospitals often speak as if this system was simply imposed on them. That is not true either. Hospital trade groups have long defended payment differentials and other policies that preserve incumbent advantage. In the same March 2026 testimony, Pollack argued that current Medicare reimbursements “appropriately recognize the differences between these sites of care,” which is another way of defending higher hospital outpatient payment rates relative to lower cost competitors.

Every year, millions of patients are told they need seemingly routine services. Then they get grotesque bills. Then they are told the bill is not really for the MRI and that they should feel virtuous for subsidizing the system.

No.

If the system needs subsidy, prove it. Quantify it. Audit it. Fund it honestly.

Until then, stop pretending that an outrageous hospital bill is just a misunderstanding.

Want to catch up?

Volume 1 is here, Volume 2, here, and Volume 3 here

Read more

Wouldn’t it be nice if surgeons had statistics like baseball players? Imagine pulling up a website and seeing batting averages, earned run averages, and on-base percentages for doctors. Pick the best one. Problem solved.

It is an admirable goal. In 2015, Congress mandated physician quality reporting under what became the Merit-based Incentive Payment System. Doctors report their statistics. Medicare penalizes those who score poorly.

Subscribe now

Except medicine is not baseball. In baseball, a neutral scorekeeper tracks every hit and every out. The game has discrete outcomes. A home run is always good for the batter and always bad for the pitcher. It is a zero-sum contest with standardized rules.

Yet, in healthcare, there is no neutral scorekeeper. Doctors are largely responsible for documenting and submitting their own metrics. The “opponent” is disease, which is not standardized. Patients are not interchangeable. One patient’s success may be another patient’s disappointment. A small reduction in pain may be life-changing for one person and meaningless for another.

Despite this complexity, Medicare has invested billions of dollars over the past few decades developing and refining quality metrics. The Centers for Medicare and Medicaid Services (CMS) must decide which outcomes matter, how to measure them, and how to adjust for how sick patients are at baseline. Universities and consulting firms have made billions off CMS to design and validate these formulas.

A recent example shows how messy this becomes in practice.

Medicare is rolling out a mandatory program called the Ambulatory Specialty Model for Low Back Pain. Under this model, anyone who treats back pain is graded on a series of quality metrics. If you’re a spine surgeon in one of the selected regions and you see enough Medicare patients with back pain, this is now mandatory or your entire Medicare paycheck gets docked up to 12%.

The program mandates depression screening using a specific instrument such as the PHQ-9. It requires documentation of body mass index and a follow-up plan if outside normal range. It forces clinics to track and report high-risk medication use. And, lastly, it requires the use of a licensed commercial outcomes platform called Focus on Therapeutic Outcomes, or FOTO.

Now imagine seeing a spine surgeon for a herniated disc in 2027. Before you even discuss your MRI, the clinic must screen you for depression with a specific nine-question form, document your BMI with an approved ‘follow-up plan’ if it’s off, flag any high-risk meds, and feed your answers into a licensed commercial database called FOTO—because Medicare grades the surgeon on all of it. Miss the boxes, and up to 12% of every Medicare dollar the surgeon earns (not just your visit) gets cut.

All of these may be reasonable clinical considerations. A competent surgeon should care about depression, obesity, medication safety, and outcomes. But caring about them is different from turning them into payment metrics. No patient chooses a spine surgeon based on how accurately that surgeon completes a PHQ-9 depression form. No one asks how their surgeon scores on BMI documentation compliance.

This is where Goodhart’s Law applies: when a measure becomes a target, it ceases to be a good measure. As economist Charles Goodhart first observed, any statistical regularity tends to collapse once you start using it for control.

Once reimbursement is tied to a depression screening rate, the incentive shifts. The goal is no longer thoughtful assessment of mental health. The goal is documented compliance. Once outcomes are tied to a specific platform, the incentive is no longer improving recovery. The incentive is ensuring the right boxes are checked in the right software.

Risk adjustment adds another layer of distortion. Programs attempt to adjust scores based on how sick patients are. In theory, this prevents doctors who treat complex patients from being penalized. In practice, however, it creates a powerful incentive to document patients as severely ill as possible. More coded diagnoses increase measured risk. Higher measured risk can make outcomes look better relative to expectations. One study showed that documentation intensity alone can increase margins by 40%. There’s a better return on investment for improving coding over improving care.

Meanwhile, the system-wide costs are real. Independent physician practices spend billions of dollars annually reporting quality measures. In an average outpatient clinic, physicians spend 2.6 hours per week on metric reporting, and nonphysician staff spend another 12.5 hours per doctor. Hospitals devote entire teams to quality reporting, with an average community hospital employs multiple full-time staff solely for compliance. Larger institutions have reported devoting more than 100,000 person-hours annually to metric reporting.

Despite this investment, the evidence that these programs meaningfully improve outcomes is poor. Government Accountability Office reports have questioned whether current metrics meet strategic objectives. Less than half of endorsed measures demonstrate clear clinical validity. Physician performance scores under these programs are inconsistently correlated with actual patient outcomes. Some high-profile programs, such as the Hospital Readmissions Reduction Program, have even been associated with unintended increases in mortality for certain conditions. Even patient satisfaction scores, widely embraced as a measure of quality, have been associated in some studies with higher costs and worse mortality.

This metric obsession also accelerates consolidation. Large hospital systems can spread compliance costs across thousands of physicians. Independent practices cannot. When reporting requirements become too burdensome, small practices sell to larger systems. Patients do not see a line item labeled “quality compliance” on their bill, but they do see higher facility fees after consolidation.

Ironically, Medicare’s founding statute includes language stating that “nothing in the program authorizes federal officers to exercise supervision or control over the practice of medicine or the manner in which medical services are provided.” Yet increasingly, clinical workflows are shaped not by medical judgment alone, but by compliance with centrally designed metrics.

Doctors are not baseball players. Patients are not box scores. A home run is universally good for a hitter. In medicine, success is individualized. One patient may want maximal pain relief. Another may prioritize avoiding surgery. Another simply wants to be heard.

Reducing these human encounters to a series of standardized forms risks confusing documentation with care. Yes, quality and accountability matter, but when measurement becomes an end in itself, it can crowd out the very professionalism it seeks to improve.

As Mark Twain said, “Not everything that counts can be counted. And not everything that can be counted counts.”

This isn’t reality, though. As an example, take this fictionalized case of Ms. Hess. She’s recovering well from her ruptured intracranial aneurysm six months ago, nearly back to normal, just occasional headaches and some “brain fog.” Considering how catastrophic a ruptured aneurysm can be, she’s fortunate and knows it.

She pulls up her chart on the patient portal and asks why she’s listed as having both a traumatic intracranial hemorrhage and a non-traumatic one. It makes no sense. I agree, rolling my eyes. I explain how diagnoses get layered onto charts and how we doctors have almost no ability to clean them up. Ms. Hess now carries 28 separate diagnoses. Her story is classic: she was walking down the dairy aisle when she collapsed. Some assumed she slipped. EMS found her conscious but delirious. In the ER, the doctor, rushing to order a CT, entered “fall” as the required diagnosis code to get the scan approved.

When the scan showed blood in her brain, he coded traumatic intracranial hemorrhage. She had fallen; the blood must have come from trauma. But when neurosurgery was consulted, the pattern was unmistakable: aneurysmal subarachnoid hemorrhage. The vessel burst first, causing her to fall. Aneurysmal bleeds have a distinct CT appearance that is different from traumatic ones. An ER doctor isn’t expected to spot that. So, I admitted her under the correct code: non-traumatic intracranial hemorrhage (I60.9, nontraumatic subarachnoid hemorrhage, unspecified). Yet all three codes (fall, traumatic bleed, non-traumatic bleed) remain in her record forever. She also picked up a hospital-acquired urinary tract infection, protein-calorie malnutrition, and delirium. Those live there too.

Now, in clinic, she mentions low back pain shooting down her right leg. I also have expertise there, so I know it’s lumbar foraminal stenosis at L4-5 from facet arthropathy causing radiculopathy. But because she’s complained of this to primary care, the ER, and pain management, her chart also lists lumbar stenosis, lumbar herniated disc, sciatica, lumbar degenerative disc disease with claudication, and plain “lumbago.” Which is it? Nobody knows. The chart is a patchwork of whatever code got the MRI approved, the injection authorized, or the surgery paid for.

The same stacking happens everywhere. COPD: one note says J44.9 (unspecified), the ER adds J44.1 (with acute exacerbation) for a flare, and the pulmonologist throws in J44.0 (with acute lower respiratory infection) because the patient had bronchitis. Diabetes? The primary care doctor codes E11.9 (type 2 without complications). The endocrinologist adds E11.40 (with diabetic neuropathy). The podiatrist codes E11.621 (with foot ulcer) for the wound clinic referral. These aren’t lies but rather compliance in a system that demands a code for everything.

Yes, the doctors could go back through and clean her diagnosis list up, but nobody wants to take responsibility for that. The primary care doctor isn’t qualified to determine which lumbar spine code is the right one to keep in the chart. Plus, as many doctors routinely point out, they have become data entry clerks. Data already show that doctors spend 2 hours on the computer for every hour of patient care time. No patient wants their doctor spending even more time cleaning up messy data when they could be having more face to face time. There’s no incentive for doctors to clean up the diagnosis list.

CMS requires diagnosis codes for every order, every billable visit, every procedure. The current version is ICD-10-CM, maintained by the WHO but expanded in the United States to more than 74,000 diagnosis codes.

These codes mandate a granular, but ultimately useless level of detail. You can’t just write “heart failure.” You need systolic or diastolic, acute or chronic, left ventricular or combined: I50.23 (acute on chronic systolic), I50.33 (acute on chronic diastolic), I50.43 (acute on chronic combined). A neurosurgeon or orthopedic surgeon isn’t expected to know the precise diabetes subtype, yet the system demands it. That’s why the same degenerative-disc patient ends up with four near-identical low-back-pain codes: one for the MRI referral, one for the pain injection, one for the ER visit, and one for the surgeon’s pre-op note.

The incentives go beyond insurance approval. During the COVID pandemic, the CARES Act added a 20% boost to the hospital’s DRG payment for any discharge that included the COVID diagnosis code U07.1. Now, when a code is that heavily incentivized, rational actors will respond. Hospitals tested everyone, trauma patients, car-accident victims, elective admissions. A positive PCR (which often picked up minute levels of virus in non-infected people), even asymptomatic or incidental, triggered the bonus. The public debate was brutal: patients were counted as “COVID hospitalizations” whether the virus caused the admission or not. Studies during the Omicron wave found 10–25% (and in some hospitals higher) of COVID-positive inpatients were incidental, admitted for something else entirely. Yet, because of the incentives, no hospital would dare exclude a COVID diagnosis if they had the opportunity to get the payment boost.

At least COVID had a lab test. Plenty of diagnoses do not. Concussion is clinical, with no reliable biomarker, and no imaging requirement for mild cases. Autism spectrum disorder rests on behavioral observation and developmental history; no blood test or scan confirms it. Chronic fatigue syndrome (ME/CFS) is symptom-based and exclusionary. Fibromyalgia relies on widespread pain and tender points. Irritable bowel syndrome follows Rome criteria after ruling out other causes. Major depression, anxiety disorders, and ADHD are all syndromic. That does not mean these conditions are imaginary. It means they lack the kind of objective boundary that makes them resistant to incentive distortion.

Even when objective tests exist, they are often ignored. A large UK study of more than 14,000 primary care patients coded with COPD found that only 52% had consistent airflow obstruction on repeated spirometry confirming the diagnosis. Another 11.5% had no obstruction at all on multiple tests, yet many continued receiving inhalers.

To see how the incentives play out, look at what an Autism diagnosis can generate. When a diagnosis unlocks hundreds of thousands of dollars in services, the diagnosis will proliferate. In Minnesota, the Medicaid autism program (Early Intensive Developmental and Behavioral Intervention, or EIDBI), saw providers balloon from 41 in 2018 to 328 in 2024, a 700% jump. Payments exploded from roughly $6 million to nearly $192 million, a 3,000% increase. Federal investigators found fake diagnoses, billing for services never delivered, and kickbacks to parents. One provider alone extracted $14 million. Audits flagged 90% of recent claims as non-compliant in some reviews. Across related Minnesota human-services programs, prosecutors estimate half or more of the $18 billion spent since 2018 may have been fraudulent. Are there children for whom these services are needed? Of course. But this is a clear example of the rich incentives that come with an arbitrary “autism” diagnosis.

Ultimately, this system is used by CMS to control what doctors can do. Try ordering an MRI on a patient whose chart has the “wrong” code and the EHR blocks it. The software helpfully lists “approved” diagnoses, forcing the physician to comb through and find the closest one to reality to get the test approved. Multiply that by 20–50 patients a day and you’re burning hours on documentation instead of thinking about the human in front of you.

There are even absurd diagnosis codes that reveal how ridiculous the system has become:

• Z63.1 – Problems in relationship with in-laws

• W56.21XA – Bitten by orca, initial encounter

• V97.33XA – Sucked into jet engine, initial encounter

• Y92.253 – Opera house as the place of occurrence of the external cause

These aren’t jokes. They’re real, billable codes. They reflect a system that is cumbersome, needlessly granular, and ridiculous. The system demands extraordinary specificity for common conditions and devotes the same infrastructure to orca bites and jet engines. We covered this in volume 1 of Claim Denied.

One argument for all this granularity is “data tracking.” Yet, because of all the misaligned incentives above, the data are often worthless. When diagnoses are shaped by billing incentives rather than biological reality, the dataset ceases to reflect disease prevalence. It reflects reimbursement rules. In one large analysis of patients like Ms. Hess, 40% carried both traumatic and non-traumatic intracranial hemorrhage codes despite a clear etiology. Any study trying to investigate outcomes or clinical course around either head trauma versus aneurysm rupture is contaminated by a large cohort of patients with both diagnosis. The truth is buried under contradictory codes.

This is gatekeeping by diagnosis code. Central planners decided that every clinical thought must be translated into their language, then used that language to ration, reward, and punish. The result is a chart full of contradictions, care distorted by incentives, and physicians turned into data-entry clerks. The patient gets lost in the codes. And the system keeps demanding more specificity because in a centrally planned healthcare economy, the planner’s need for control always outweighs the clinician’s need for clarity.

Subscribe now

Modern healthcare policy has produced a strange equilibrium, one that increasingly reflects our broader regulatory culture. It combines dense rulemaking with means-tested exceptions, discretionary enforcement, and leniency for hardship. Each of those elements is defensible on its own. We want standardized payments so hospitals cannot charge wildly different amounts for similar care. We want adjustments for sicker patients so institutions are not penalized for taking on complex cases. We want compassion in enforcement because real lives are affected. Yet when these components are layered together, they create a predictable outcome: the honest actor is penalized relative to the strategic actor.

Consider a standard hospital admission under Medicare’s prospective payment system. A pneumonia admission is paid a fixed amount under a Diagnosis Related Group, or DRG. The purpose is straightforward: limit variation in pricing and prevent hospitals from billing whatever they choose. But not all pneumonias are alike. An 87-year-old with dementia and heart failure is categorically different from a healthy 34-year-old athlete. To account for this, payment increases when patients appear sicker on paper. Additional diagnoses raise the DRG weight.

Once payment depends on documented severity, documentation becomes economically valuable. Hospitals hire coding teams to comb through charts for additional diagnoses. Physicians receive requests to clarify whether a condition was acute on chronic, whether kidney injury met formal criteria, whether an infection was confirmed, or whether something was present on admission. Insurers respond by hiring audit teams to challenge those classifications. No one in this exchange believes they are committing fraud. Each side insists it is simply applying the rules accurately and protecting its financial position. Yet the economic focus subtly shifts away from clinical care and toward classification strategy.

Insurance companies operate under the same incentive structure. In Medicare Advantage, plans receive a fixed payment per enrollee, adjusted for risk. The sicker the patient appears, the higher the payment. Insurers therefore invest heavily in identifying additional diagnoses through home visits, chart reviews, and increasingly sophisticated software. This activity is described as improving risk adjustment accuracy, and much of it falls within regulatory boundaries. Still, payment flows not only from improving health but from maximizing diagnostic classification within complex rules.

None of these examples necessarily constitute fraud. They are instances of actors operating near the edge of what the rules permit, stretching documentation and interpretation to capture legitimate but aggressively defined reimbursement. Economically, this behavior makes sense. Regulation increases the payoff to classification. Leniency reduces the perceived risk of punishment. Information asymmetry makes perfect verification impossible; an auditor cannot easily determine whether a borderline case truly met every definitional nuance. Policymakers are reluctant to penalize hospitals caring for sicker patients or insurers covering complex beneficiaries, so enforcement tends to be selective and politically constrained. Meanwhile, auditing every case would be logistically infeasible, even with modern AI.

In such an environment, competitive pressures do the rest. If one hospital aggressively optimizes documentation and another does not, the optimizing hospital will generate higher margins. If one insurer captures every possible risk-adjustment code and another leaves money on the table, the latter will underperform financially. Over time, the actor who declines to play the classification game bears opportunity cost. Honesty does not generate a bonus; it generates a disadvantage. The equilibrium stabilizes not around overt fraud, but around aggressive compliance optimization.

This dynamic is not unique to healthcare. Any system that relies on intricate rules, targeted benefits, and discretionary enforcement will tend to reward those who master classification. Tax codes, defense contracts, agricultural subsidies, and other regulatory frameworks generate similar incentives. Economic value increasingly accrues not solely to those who produce goods and services, but to those who navigate complexity most effectively. Industries arise around rule interpretation. Compliance becomes a competitive strategy.

We did not set out to build dishonest institutions. The intent was to design systems that were fair, standardized, and resistant to abuse. Yet when payment depends on ever more granular distinctions, and when enforcement can never be perfect, behavior adapts. The issue is not that people are uniquely unethical. It is that we have constructed institutions in which honesty is not the dominant strategy. Once that equilibrium takes hold, trust erodes quietly. Participants begin to assume that everyone else is optimizing aggressively, and they respond in kind. Rebuilding trust in such a system is far more difficult than drafting another regulation.

Volume 1 is here and Volume 2, here.

Subscribe now

Read more

Consider a patient with neck pain and a herniated disc. The clinical nuance is immense. There are nonoperative options: physical therapy, medications, steroid injections. There are surgical options ranging from limited decompressions to artificial disc replacement to multilevel fusion with rods and screws. Each choice involves tradeoffs that depend on anatomy, symptoms, risk tolerance, lifestyle, and values.

Then there is execution. Was the surgery performed efficiently and precisely, or slowly and sloppily?

Subscribe now

A patient may undergo a fusion performed flawlessly from a technical standpoint and still endure a prolonged recovery or postoperative infection. Another patient may choose nonoperative care and continue to suffer, or experience spontaneous improvement. Outcomes vary even when decisions are reasonable.

Which raises the question patients and policymakers keep asking:

Who was the better doctor?

For decades, an entire quality metric industrial complex has tried to answer this question. It relies on what is easiest to measure: readmission rates, length of stay, complication codes. These metrics are “risk-adjusted” using administrative data, but only by adjusting for variables that themselves are easily measured.

We are obsessed with finding a “ground truth” for physician quality.

But how would one actually recognize a good doctor?

Ask patients, and the answer is inherently subjective. Different patients want different things at different times. Most want evidence-based recommendations, but many do not. (As proof, the healing crystal industry in the U.S. is worth over $1 billion annually.)

Ask bureaucrats, and “good” is defined by costs, compliance, and checkboxes.

Our current system relies on absolute judgment. We take a single physician and grade them against a fixed rubric devised by private contractors working for governments and insurers. Unsurprisingly, this results in measuring what is easy to measure rather than what matters. Clinical judgment, technical finesse, and empathy remain largely invisible.

It also turns out humans are terrible at absolute judgment.

This is well illustrated in an EconTalk discussion featuring Daisy Christodoulou. She uses soccer as an analogy. Was a particular tackle “too rough” and deserving of a yellow card? Even with slow-motion replay, experts frequently disagree when evaluating a single event in isolation.

A better approach is comparative judgment. Instead of asking whether a tackle crosses some abstract threshold, ask a simpler question: Which of these two tackles was rougher? Humans are remarkably good at that and the same principle can apply to medicine.

Rather than grading a surgeon’s care of cervical spine disease as an “A–” or “B+,” we can compare two cases and ask: Who managed this case better? Repeat this process thousands of times, and a statistical pattern emerges. This approach respects the inherent nuance of medicine. It allows for stylistic differences while still punishing objectively bad care, which reliably appears as an outlier that loses nearly every comparison.

The deeper problem is not that we have chosen the wrong metrics. It is that absolute physician quality does not exist as a stable quantity to be measured.

Absolute judgment requires a fixed standard: the same patient preferences, the same constraints, the same tradeoffs, and the same definition of success. Medicine offers none of these. Outcomes depend on anatomy, comorbidities, risk tolerance, timing, social support, and values, many of which are unobservable and irreducible to data.

Without a fixed reference frame, there is no such thing as an “A-level doctor” in the abstract. There are only doctors performing better or worse relative to other doctors facing similar problems. Any attempt to assign an absolute score is therefore not merely imprecise, it is conceptually incoherent.

This is not merely intuitive. It rests on nearly a century of statistical theory.

In 1927, psychologist Louis Thurstone proposed the Law of Comparative Judgment. He observed that human evaluation of a single object is noisy and unstable, influenced by mood, context, and bias. But when forced to choose between two objects, those errors tend to cancel out, producing far more reliable judgments.

These binary comparisons can then be analyzed using the Bradley–Terry model, which takes win–loss data and infers a latent “strength” or “quality” parameter for each participant. This is the same mathematics underlying Elo ratings in chess and modern matchmaking systems. We do not need a checklist to know Magnus Carlsen is good at chess. We know because he consistently beats nearly everyone he faces. The math simply formalizes that reality.

Applied to medicine, this framework would not require us to define “quality” in the abstract. Quality would be the latent variable that best explains why one physician’s decisions and outcomes are consistently preferred over another’s by their peers.

This approach is not easy. Comparative judgment does not scale cleanly, and it cannot be administered by bureaucrats. That is precisely why the establishment will resist it. Perhaps one day AI will assist in this process, but that day has not yet arrived.

Good medicine is not a checklist. Quality is not a variable sitting in the electronic health record waiting to be mined. It is a consensus. We cannot measure doctors against a divine standard. We can only measure them against each other.

And that may be the closest thing to ground truth we will ever get.

Lawmakers keep using a band-aid to cover a gaping wound. Discussions of tax credits and shifting funding is just covering up the real cost of healthcare to the American people.

The popular narrative targets health insurance companies as the villain in this story. These faceless, profit-seeking, bloated companies make for easy criticism. Between 1999 and 2024, the cost of employer-sponsored family health insurance premiums rose by a staggering 342%. During this same period, the average worker’s contribution to those premiums increased by 308%. In stark contrast, average worker earnings increased by only 119%, and overall inflation (CPI-U) rose by 64%.

However, it’s not insurance company greed driving these prices. A rigorous decomposition of the Consumer Price Index (CPI) and employer benefit data reveals that the true driver of affordability erosion lies deeper in the supply chain: the hospital systems themselves. By 2024, the cumulative price index for hospital services had nearly doubled relative to 2006, whereas insurance administrative costs remained comparatively flatter. This suggests that premiums are acting largely as a pass-through mechanism, reflecting the soaring unit prices demanded by consolidated hospital systems rather than merely insurer profit expansion.

The Consolidation Problem

What was once a decentralized market of independent community hospitals, physician-owned private practices, and standalone diagnostic facilities has coalesced into a rigid landscape of massive, vertically integrated regional health systems.

By 2026, virtually all markets are considered “highly concentrated” by Federal Trade Commission Standards. Of the 389 metropolitan areas in the country, only 5 markets are not highly concentrated. In a competitive market, an insurer can exclude a high-priced hospital from its network, steering patients to a lower-cost, high-quality competitor. In a concentrated market, however, an insurer cannot sell a viable policy to employers if the only hospital in town is out of that insurance network. Consequently, the hospital holds the leverage to dictate prices irrespective of their underlying costs.

This works across markets as well. Imagine two cities, 100 miles away. Traditionally, if Hospital System X in City #1 bought a hospital in City #2, that merger wouldn’t be scrutinized as anti-competitive, because patients don’t travel that far for care. Yet, the conventional anti-trust wisdom has been challenged by research showing that these mergers still raise prices by up to 10%. This is because the customer is employer, not the patient. Since large employers often cover employees across multiple cities, a hospital which is dominant in both City #1 and City #2 can bundle negotiations. They demand rate hikes in both cities, threatening to exclude insurance plans from both hospitals, even if one city is actually competitive.

Hospitals argue that by consolidating they can form integrated systems which can invest in better technology, standardize practices, and improve outcomes. Yet, contrary to the industry’s efficiency narratives, studies have found that patient outcomes are worse in concentrated markets. Other research has found worse satisfaction scores for patients without any improvement in readmission rates or mortality. Patients are captured, so the system has no incentive to improve the patient experience. Why would hospitals invest in “soft” aspects of patient care if there’s no competition.

The Policy Engines Behind Consolidation

Financial Arbitrage

The extinction of independent clinical practice is not the natural evolution of the market. Federal and state policies have driven this, not the invisible hand.

One of the biggest policies is the site of service differential. This refers to the disparity in reimbursement rates based on where a medical procedure is performed. An independent physician gets paid out of the physician fee schedule. Their global fee covers the professional work, the equipment, the office space, and the staff. If a hospital then buys that practice, suddenly, without anything else changing, that practice becomes a hospital outpatient department, and payment comes from the hospital fee schedule. The physician, now an employee, still bills a fee for the professional work, but the hospital drops a separate facility fee.

The facility fee charged by the hospital is often two or three times the global fee of the independent doctor. This financial arbitrage allows hospitals to buy a practice and instantly increase revenue by double or triple without changing anything.

The magnitude of this arbitrage is enormous. For procedures, the US healthcare system pays an extra $38B a year on these hospital-based facility fees. The hospital industry generates $6 billion a year on facility fees from standard office visits in Medicare patients alone. Because seniors pay a 20% coinsurance, this is also a huge tax on the patients themselves.

Another revenue stream is a little known drug discount program called 340B. It allows large hospital systems to purchase pharmaceuticals at a 50% discount. Then when those drugs are given to patients, either in clinic or through the pharmacy, the hospital can charge full price and pocket the difference.

This program has exploded in recent years, growing from $6 billion in 2010 to over $80 billion by 2025. This money isn’t going to charity care, as 85% of hospitals spent less on caring for the poor than they received in 340B revenue.

This drives consolidation because 340B discounts aren’t available to independent doctors. For example, consider that an independent oncologist, who gives expensive chemotherapy treatments to patients, must pay full price for those infusions. If the hospital buys the practice, suddenly the medications are 50% cheaper. That spread alone can exceed the professional fees generated by the physician and has decimated independent practices which give infusions, such as oncology, rheumatology, and neurology.

Hospitals also receive several other revenue streams unavailable to independent physician practices. These include supplemental money from both state and federal government for treating poor patients and federal money for training resident physicians.

Frozen Physician Payments

Medicare pays physicians based on a dollar per relative-value unit (RVU). Each procedure has an RVU value assigned to it, and that is multiplied by the conversion factor to determine the payment. In 1992, when the system was implemented, Medicare paid $31.00 per RVU. In 2024, Medicare pays $32.74 per RVU. In real terms, that’s a 50% cut.

Since the costs of clinic space, utilities, staff, supplies and technology are increasing, physicians see smaller margins for Medicare patients. Meanwhile, hospitals receive annual inflation increases for their facility fees, along with the added revenues described above. This makes independent physician practice financially unsustainable, leaving them ripe for acquisition by the cash-flush hospital systems.

Regulatory Burdens

Finally, there are several regulatory requirements that both increase the cost of providing healthcare and impede new entrants.

The most glaring are Certificate of Need (CON) laws. In 35 states, new healthcare facilities, such as imaging centers or surgery centers, require a CON. The state boards which control these certificates are lobbied by large hospital systems. A large body of research shows that these always are associated with higher costs and lower quality.

Even in states without CON laws, physicians are banned form owning hospitals. Section 6001 of the Affordable Care Act (ACA) prohibited the construction or expansion of new physician-owned hospitals participating in Medicare. This removed a key competitor for large hospital systems.

Other self-referral bans under Stark Law restrict the ability of physicians to own their own downstream services, such as imaging or physical therapy. A physician clinic that owns an MRI scanner cannot send its own Medicare patients to that scanner unless strict conditions are met. However, large hospital systems may internally refer to their own services without restriction.

Other regulatory burdens, such as purchasing Medicare-compliant electronic health record systems, data collection, and reporting quality metrics favor large hospital systems. These systems have capital reserves and economies of scale to meet the federal requirements while many smaller independent practices cannot. For example, quality metric reporting alone requires 15 hours of labor per doctor per week.

Conclusion

These policies have crafted a healthcare system where rent extraction is rewarded instead of true patient care. With 99% of markets highly concentrated, insurers lack the leverage to negotiate. The premium increases felt by American workers are the direct result of monopoly pricing power form large health systems. Unless federal policies address the drivers of consolidation, this wealth extraction will continue to devour any wage growth of the American workforce.

Wait too long, and the patient risks a complication from a blood clot. They were on anticoagulation for a reason. A stroke or pulmonary embolism can be catastrophic or fatal. Restart it too soon, and the brain hemorrhage may expand, also potentially fatal.

Often, a neurosurgeon is consulted simply to answer the question of “is it safe to restart a blood thinner?”

Which is why this tweet resonates so strongly.

There is no magic point at which restarting anticoagulation is “safe.” There is no duration for which holding it is “safe” either. What exists instead is a tradeoff between two serious risks, neither of which is well quantified.

There is remarkably little high-quality scientific evidence guiding the optimal timing of anticoagulation restart after intracranial hemorrhage. The injuries themselves are heterogeneous: from tiny specks of blood outside the brain, to contusions, to large hemorrhages within the brain tissue. Meanwhile, the indications for anticoagulation are equally varied: atrial fibrillation, mechanical heart valves, prior strokes, prior pulmonary emboli.

So the decision requires balancing two unknowns: the risk of hemorrhage expansion and the risk of a thrombotic event.

Modern medicine is uncomfortable with this level of uncertainty, so it reaches for algorithms. Risk scores, decision trees, and guideline tables offer the appearance of precision. Tools like CHADS-VASc can give a very rough estimate of stroke risk in one specific pathology. There is no comparable, validated tool that tells us the probability that this specific hemorrhage, in this specific patient, will expand if anticoagulation is restarted on day three instead of day seven.

Many large hospital systems and public health advocates want to rely on algorithms for medical care. Yet these algorithms are based on imperfect data, often imperfectly applied. They often fall short in real world situations. These patients do not resemble one another. Their injuries do not behave predictably. Their competing risks are asymmetric and individualized. Forcing this problem into an algorithm does not resolve uncertainty.

The consult to the neurosurgeon often functions less as a data-driven exercise and more as a risk transfer. Neurosurgeons do not have privileged access to hidden evidence. They are asked to opine not only on brain injury risk, but on vascular risk, cardiology risk, and implicitly, on how much risk a patient should be willing to tolerate. What is really being requested is not certainty, but ownership of uncertainty.

Which is why the most important skill in these situations is not plugging numbers into an actuarial table, but communicating what is known and what is not. The physician’s role is to synthesize the limited data, clinical experience, standards of care, and patient-specific factors, then convey that uncertainty honestly. That includes acknowledging tradeoffs, eliciting patient values, and arriving at a shared decision.

Patients generally understand and appreciate this. Most do not expect perfection. What they want is transparency. They want to know why a recommendation is being made, what the risks are on both sides, and where judgment fills in the gaps left by evidence.

This is a reminder that medicine is not algorithmic at its core. Clinical care cannot always be reduced to a yes-or-no answer, a flowchart, or a guideline checkbox. In the highest-stakes decisions, uncertainty is irreducible. Pretending otherwise may be comforting to clinicians and institutions, but it is dishonest to patients.

The most responsible thing a physician can do in these moments is not to manufacture certainty, but to explain its absence and still help the patient choose.

Health systems wine and dine you. They smile. They tell you how valued you are. Most importantly, they put salary numbers on paper that, compared to a resident’s paycheck, feel like winning the lottery. Then they sweeten the deal: student loan forgiveness, generous benefits, and at some large academic centers, even a special low-interest mortgage for your first home.

After a decade of delayed gratification, it finally feels like the payoff has arrived.

Subscribe now

Meanwhile, you interview at a private practice. They can’t match the salary. They certainly can’t offer loan forgiveness. Instead, they talk about building equity, running a business, and slowly developing a patient base.

That’s not what you signed up for. So you take the employed job.

For a few years, it works. You don’t have to build a practice from scratch. Referral streams already exist thanks to the vertically integrated system. The hospital puts you on committees so you feel like part of the team. You’re salaried, insulated, and reassured that you made the “smart” choice.

Then the protected salary period ends.

Your compensation flips to productivity-based pay. Suddenly your income depends on chasing RVUs at a pace that would be aggressive even in a perfectly functioning system. You start learning every CPT loophole. You optimize documentation. You sacrifice weekends and evenings not to care for patients better, but to squeeze out marginal RVUs.

There’s no time for committees anymore. There’s barely time for a home life. Nights are spent finishing notes. If you’re surgeon, you stay late to cram in one more case.

And then comes the pay cut. It’s framed as “efficiency.” Or “underperformance.” The implication is clear: you’re the problem.

By now, the hospital knows they have you.

You bought a home. You structured your life around the salary they dangled. Maybe you counted on loan forgiveness. There might be a non-compete at play. Maybe your spouse’s career is tied to the area. Leaving suddenly isn’t easy.

At the same time, the system begins placing obstacles directly in the path of your productivity.

You’re forced to use an inefficient EHR that doubles documentation time. Clinic support is thin. If you’re a surgeon, the frustration is even worse. You know you could double your output but the operating room can’t turn over in less than three hours. Cases start late. Staff disappears. You operate into the night, not because the work is complex, but because the system is dysfunctional.

None of this counts when RVUs are tallied.

You are, after all, just an employee.

You haven’t built a brand. Patients come to the logo on the building, not the name on your white coat. If you leave, the hospital keeps the referrals, the goodwill, and the market share.

Every year brings more initiatives. More mandatory trainings. More metrics. More performance expectations designed by people who have never taken call, never sat with a dying patient, and never borne the consequences of a medical decision.

And at the bottom of that cliff sits the physician who thought they were choosing safety, not realizing they were signing up for a career where nurse managers, quality officers, and compliance committees dictate the conditions of their professional life.

Meanwhile, training is getting longer. Gap years are now routine. Extended fellowships are common. Many specialists don’t start their first real job until their late 30s. That delay massively increases employer leverage.

Hospitals understand this perfectly. They need a steady pipeline of new doctors willing to trade autonomy for short-term security.

Physicians used to own their profession. They built practices, equity, and reputations. They set schedules, standards, and tone of care. They built wealth not by gaming RVUs, but by serving patients and running businesses that made sense. That ownership mattered for both doctors and patients, containing bureaucracy and forcing administrators to justify themselves.

In the long run, that private practice job would have been more lucrative, too. The established private practice doctor has equity in a business. They may own part of a surgery center or imaging center. Their personal brand has value.

Employment is not always bad. Someone who wants to work at an inner city trauma center benefits from the structure of employment. Yet, all doctors, employed or not, need a thriving private practice ecosystem with solo practices, group practices, specialty-specific models, ASCs, hybrid structures, and cash-friendly care. The persistence of that ecosystem forces hospitals to treat physicians as partners rather than disposable RVU generators. Market forces reassert themselves. Physician labor regains bargaining power.

This is why policies that protect private practice matter for all physicians even those who never plan to leave employment. Things like site of service differential, 340B distortions, certificate of need laws, Stark Law, and tax advantages put independent private practice at a disadvantage over large consolidated systems. They make private practice harder to sustain and by doing so, they make life worse for doctors and patients alike.

And until physicians recognize this trap for what it is, and insist on alternatives, the system will keep doing exactly what it was designed to do.

For decades, progressive politics has followed the same playbook: overregulate a market, create artificial scarcity, then claim the free market doesn’t work, which justifies more regulation, which further strangles supply. Housing, healthcare, energy, childcare, education: the mechanism is always the same. Central planners insist that supply is dangerous, competition is wasteful, and new capacity only benefits the rich.

Adam Gaffney’s anti–supply-side piece is a pure modern expression of this worldview. He leans heavily on Roemer’s Law, the idea that more hospital beds automatically induce more healthcare use, and concludes that supply creates its own demand. He argues that new hospitals only open in profitable suburbs, that productivity gains in healthcare are impossible, and that these constraints justify more centralized planning and public ownership.

The problem is that none of this holds up.

Roemer’s “Law” was based on a single hospital in 1960s New York, not a universal economic principle. Modern evidence is far less convincing: many regions with surplus beds have low utilization, and capacity expansions often shift care to lower-cost settings rather than increasing total use. If Roemer’s Law actually governed healthcare, rural hospitals with empty beds wouldn’t be going bankrupt.

Meanwhile, states that limit supply through Certificate of Need (CON) laws consistently have higher prices and fewer competing facilities. The Department of Justice recognized that these laws raise costs and reduce access to care. Montana repealed its CON law in 2021, and within 18 months saw rapid growth of outpatient surgery capacity and falling commercial prices in competitive markets. That is exactly the opposite of what Gaffney predicts.

The claim that new hospitals only open in wealthy areas is simply the healthcare version of “new housing only benefits the rich.” It ignores purchasing power. Grocery stores follow SNAP dollars. Childcare centers follow voucher dollars. Hospitals would follow patients too if underserved communities carried real, portable purchasing power rather than being trapped in a centrally planned reimbursement structure. A new specialty hospital in a wealthy suburb doesn’t hurt the safety-net hospital downtown. It offloads cases and frees capacity.

Progressives made the same wrong arguments about airlines, telecommunications, and energy in the 1970s. They insisted markets couldn’t possibly work in sectors with high fixed costs and essential services. Deregulation proved them wrong every time. Prices fell, innovation accelerated, and access expanded.

Healthcare is no different. Artificial scarcity through CON laws, bans on physician-owned hospitals, facility-fee distortions, and centrally administered prices creates high costs and long waits. Scarcity is not a natural state of American healthcare. It is designed. It is legislated. Incumbents weaponize bureaucracy to protect their turf, just as homeowners weaponize zoning.

To their credit, a new movement on the left sees this clearly. Well, they see it clearly at least outside healthcare. The Abundance crowd (Ezra Klein, Matt Yglesias, Armand Domalewski) is pushing back against scarcity politics in housing, transit, energy, and permitting. They’ve begun rediscovering what classical liberals have known all along: when you stop blocking supply, people’s lives get better.

Unfortunately, the Abundance Left stops short when it comes to healthcare. They’ve dismantled the intellectual foundations of Gaffney’s worldview and they just haven’t realized it yet.

So let’s apply their housing logic to healthcare.

If you want to eliminate zoning barriers, you should want to eliminate Certificate of Need laws.
If you want to speed up housing permits, you should want to allow physicians to build hospitals without begging a competitor for permission.
If you want abundant apartments, you should want abundant ambulatory surgery centers.
If you want cheap housing, you should want cheap MRI centers.
If you want to break NIMBY power, you should want to break hospital monopolies.

Gaffney’s argument is structurally identical to the NIMBY argument against building new apartments. It assumes scarcity is inevitable, distrusts markets, and disguises incumbent protection behind the language of equity.

We don’t need more artificial scarcity in healthcare any more than we need it in housing. We need more ASCs offering cheaper surgical procedures with shorter wait times. We need more cash-based imaging centers offering MRIs at a 95% discount to hospitals. We need fewer bureaucratic choke points and more innovation. And yes, we need targeted demand-side subsidies that give underserved patients real purchasing power instead of hoping that planners will guess where supply should go.

If the Abundance movement wants to be intellectually consistent, it should embrace abundance in healthcare too.

Real insurance protects people from rare, high-cost events, like if your house burns down, your car gets totaled, or you’re diagnosed with cancer. Yet American health “insurance” is designed to cover routine, predictable, low-cost events: primary care visits, basic labs, x-rays, generic medications. If car insurance paid for oil changes and wiper fluid, GEICO would require prior authorization for an oil change and send you to a narrow network of approved Jiffy Lubes.

That’s exactly what has happened in U.S. healthcare. We’ve medicalized the equivalent of wiper fluid, and then wondered why the system collapsed under its own administrative weight.

Meanwhile, the more government intervenes, the worse it gets. Medicaid traps poor people, giving them “coverage” without access. Medicare rewards coding over care and enriches hospital/insurance conglomerates instead of patients and physicians. The ACA added subsidies on top of a structurally broken model, which accelerated consolidation, drove out competition, and inflated prices for everyone.

Healthcare Isn’t Actually Expensive.

The median healthcare spend for an individual is about $500 in a year.

The median, not the mean, is what most people actually consume. 80% of people never reach their deductible each year. Most transactions are predictable. It doesn’t need “insurance” in the traditional sense of the word.

Meanwhile, the 5% catastrophic tail, such as major trauma, organ failure, cancer, NICU stays, accounts for nearly half of all spending. That’s the real financial threat. And instead of designing a system that handles catastrophic risk cleanly, we jam everything through third-party payment systems that distort prices, reward intermediaries, and create political pressure for more central control.

A Better Architecture: Three Clean Layers

This proposal keeps core first principles, centered about individual liberty with a robust safety net, with features of successful market-first systems like Singapore & Switzerland, to create a better healthcare system for all Americans. It centers around three key pillars:

1. Routine & predicable care is paid for with tax-advantaged money in an account earmarked for healthcare and retirement.

2. True catastrophic risk is covered by privately underwritten insurance with guaranteed issue and modified community rating.

3. Ultra-high cost tails and the safety net are covered by federally funded reinsurance and targeted subsidies.

The Core Building Block: The Freedom Fund

The median American worker has over $10,000 removed from their paycheck every year for healthcare, including employer sponsored insurance and Medicare.

So here’s my radical plan: give Americans their own money.

Every American gets a Freedom Fund, a portable account earmarked for healthcare and retirement. This is funded by redirecting the employer healthcare tax exclusion, Medicare payroll tax, and ACA subsidy dollars.

People can use their Fund for purchasing insurance, joining direct primary care, paying for routine care, or saving for the future. It’s more than an HSA. It’s a full replacement for employer coverage, ACA subsidies, Medicare, and Medicaid.

Participation in the Fund is contingent on maintaining insurance coverage. This solves the risk pool problem. If continuous coverage lapses, you’re automatically enrolled in the default catastrophic plan and the premiums are deducted from the Freedom Fund. Coverage stays universal without micromanagement. Employers can still offer insurance as a benefit, reducing their Fund contribution by the value of the benefit.

Importantly, with a Freedom Fund, patients are using a cash equivalent for routine care. This will revolutionize primary care, routine labs, outpatient imaging, and generic medications. This will make transparent pricing routine and administrative bloat will collapse. This returns control to patients over large corporations.

The Freedom Fund will grow year-over-year. The Freedom Fund receives an annual flat deposit of roughly $9,000 per adult and $4,000 per child (2025 dollars, wage-indexed), funded by mandatory employee and employer contributions, along with fully taxing employer-sponsored insurance premiums above that amount and redirecting the existing Medicare payroll tax and ACA subsidy dollars. For low-income individuals, the government deposits money directly into the Fund. Deposits are the same for every citizen regardless of income so high earners have no incentive to exit the system.

If a person stays healthy, they could have $1.5-3 million in the account by retirement age (real dollars, inflation adjusted).

That’s enough money to cover the lifetime healthcare costs for 95%-99% of Americans.

And because the Freedom Fund is transferable upon death, families have incentives to have serious end-of-life conversations instead of defaulting to wasteful care.

Once Medicare disappears, so do Medicare’s distortions, like site-neutrality battles, RUC manipulation, and facility-fee games.

To make it work, insurance reforms are needed. The mandates on essential covered benefits must go. There’s no need if everyone has a Freedom Fund to pay for those services. It just creates distortions. The medical loss ratio, a huge driver of vertical consolidation in insurance companies, must also be eliminated. Let the free market truly reign and see what innovative insurance products emerge.

The government also needs a transition plan to spread the cost over decades. Younger Americans get switched to this model immediately. Older Americans, based on the age of the beneficiary, the government could offer voluntary opt-ins with actuarially fair buy-in credits based on future Medicare benefits, or just stay in traditional Medicare.

Lastly, some supply side regulation reforms are still needed, even if Medicare’s hospital consolidating policies are gone. Certificate of need laws and 340B would still need reform under this model, along with a hard look at large hospital tax exemptions, DSH payments, and GME. A competitive marketplace for care is needed for this to work.

Government’s New Role

Even with cash-based routine care and private catastrophic plans, insurers still worry about the rare, ruinious claims. This is where government can actually help stabilize the markets: provide reinsurance.

Insurers pay claims normally up to a threshold. Above that level, the federal government reimburses the insurance company. The patient is taken out of the equation. There’s no coding games or risk scores. Reinsurance reimburses insurers for the claims they actually pay, not for diagnoses or predicted risk. With transparent pricing, there’s less potential for artificial markups and fraud. Still, aggressive federal anti-fraud units and whistleblower bounties need to keep providers from gaming the threshold.

This keeps the markets with low premiums, eliminates insurer dumping, and prevents risk pool “death spirals” as healthy people exit the market. Crucially, patients still face their deductible and cost-sharing from their Freedom Fund, and insurers still negotiate prices up to the threshold. You preserve incentives while protecting the system from tail risk. The government finally does what it’s good at: insuring the statistically predictable catastrophic edge and nothing more.

Government will also be needed to keep the safety net functioning, as this is what makes this system work for ALL Americans.

The working poor, those who need not a safety “net” but rather a safety “trampoline” to get out of hard times, their Freedom Fund is subsidized, so they’re building the same nest egg that everyone else is.

For the truly destitute, the homeless, the mentally ill, those with substance abuse disorders, otherwise high utilizers of healthcare, even a government sponsored Freedom Fund will be quickly depleted. This should have a special carve-out for federally funded wrap-around coverage. An ER bed becomes a de facto hotel if a Freedom Fund covers it. For these individuals, who have depleted their Freedom Fund for a set amount of time, their subsidy is instead shifted to a program which provides flat safety-net bundled payments for ER stabilization and short stays, with catastrophic plans for the rest. Safety-net bundles are intentionally low, fixed payments to prevent hospitals from gaming admissions to reach the reinsurance threshold. Regardless of the carve-out method, the US needs to re-evaluate ways to treat mental illness, including compulsory institutionalization.

For those with lifelong disability, they still get recurring Freedom Fund deposits and the same catastrophic plan for medical expenses. This population is overwhelmingly supported by Medicaid today, so we shift that program into a separate non-medical long-term care fund that supports the disabled and their caregivers. This would need a new, separately funded program (replacing Medicaid LTSS) with its own dedicated revenue stream.

Why This Works

This is a universal healthcare plan that provides high access to routine care, protection against catastrophic costs, disability support, and a robust safety-net. It does this without centralized price setting, coding games, rationing, and administrative complexity. While there is still some central planning, it reduces the direct government expense by at least 15% by replacing Medicare/Medicaid acute spending with predictable, capped reinsurance costs and eliminating most administrative overhead.

For patients, they wake up with a Freedom Fund debit card they can use for qualified expenses. They choose their own doctor and see transparent prices. They see their fund grow as they stay healthy, with the knowledge that they’re covered in the case of a catastrophic event. Their catastrophic coverage is affordable because the government is providing a reinsurance plan. If they are poor or disabled, the system supports you without segregating you. Just like food stamps can be used at grocery stores that cater to the upper class, a poor person could use their Freedom Fund to enroll in a direct primary care provider used by anyone else.

This should appeal across the political spectrum. It guarantees universal coverage while embracing free markets. It’s similar, structurally, to Singapore, so there’s a real model for success. Physicians would welcome the reduction in administrative bloat. Hospitals should like the predictable catastrophic coverage. Insurance companies should like the government backstop without needing to play coding games. States should like the Medicaid relief.

America shouldn’t be turning to outdated models of universal healthcare. European countries rely on Bismarkian structures used to calm the proletariat in the age of revolutions. America is better. We can embrace a system that rewards innovation, fosters competition, and empowers individuals, instead of one that grows government control and expands sclerotic bureaucracy.

It’s universal healthcare, the American Way.

Let’s take a look at how hospitals get paid…

Subscribe now

Read more

“How do you come up with things to write about?” a young George Will once asked William F. Buckley Jr.
“That’s easy,” said the National Review founder, “the world irritates me three times a week.”

Matthew Hennessey leads off a brilliant piece in The Wall Street Journal with this line.

Maybe that’s why healthcare is so fun to write about. It irritates doctors three times an hour. That’s why this comic book exists, and why Hennessey’s piece shows how the lunacy of CMS’s central planning plays out in real life.

As he writes:

“I’m a free-market guy. You can look it up. But my increasing irritation with the American healthcare system could make me grab a pitchfork before too long.”

Now, I’m hoping Mr. Hennessey says that because he wants less central planning in healthcare, not more. The reason he’s so upset isn’t because of a “free market.”

It’s because of CMS’s central planning.

Read more

Look at our beleaguered patient. Instead of being the centerpiece of our doctor’s visit, he’s faded into the background. The doctor now spends more time battling CPT rules, NCCI edits, Medicare audits, and RVUs than caring for him.

We haven’t even touched on the shortages created by central planning: the endless lines, the appointment delays, the frustration when doctors leave the system after yet another payment cut.

The government promised “free” care. Most people are getting what they paid for.

Today, many Medicare beneficiaries find themselves paying out of pocket for “free” care, concierge primary care, direct pay specialists, or cash clinics, because the official system can’t deliver timely or personalized service.

Read more

“Doctors in other countries can just do what they want because they have single payer.”

An attending physician colleague once said that to me.

It perfectly captures a common American misunderstanding about how other countries actually ration care

and about what “single payer” even means.

Almost no country truly has a single-payer system. And in no country can doctors “do whatever they want” without regard to cost. Every nation faces the same basic constraint: scarcity. As Thomas Sowell reminds us, “The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it.”

So the question isn’t whether care is rationed. It’s how it’s rationed — and by whom. Every system uses some form of central planning, its own version of our villain: CMS. The difference lies in where the planning happens, how rationing occurs, and who bears the transaction costs.

Read more

First: the money. The Physician Fee Schedule (PFS) is budget-neutral by statute. When code revaluations or new codes would increase total Part B spending by more than a small threshold, CMS must lower the conversion factor (CF) so overall spending stays flat. (More patients alone doesn’t trigger this; it’s the RVU/code changes that do.)

When the PFS launched in 1992, the CF was about $31 per RVU. Today it’s about $32, essentially flat in nominal dollars and far lower in real terms (roughly one-third below 2001 after inflation). Meanwhile hospitals are paid under their own fee schedules with annual “market basket” inflation updates (minus a productivity adjustment), so their base rates track inflation better than the PFS.

Read more

It’s the same flawed thesis Karl Marx once promoted: that value comes from labor. And just like every other experiment in central planning, it created distortions, inefficiencies, and politics. It’s the direct offshoot of making every doctor a government contractor, the original sin that still haunts American healthcare today.

Read more