Opportunities and Limitations of a Free Market in Healthcare


Some argue that to improve the cost and quality of healthcare, the government should get out of the way and let the free market reign. Yet healthcare is different from other consumer products and services in ways that can make such an approach challenging.

Below are resources that touch on the many ways in which free market economics work—and don’t work—to drive value in healthcare.

Free Markets & Healthcare: Definitions, Pros, Cons

Challenges and Opportunities Facing the Healthcare Market

Three tenets of free market (consumerism, competition and less government regulation) don’t work as well for healthcare as in other markets, such as consumer electronics or cars.

Consumerism: There is no evidence that giving consumers “skin in the game" prompts them to become more astute healthcare consumers. Because of the structure of our healthcare system, consumers are, for the most part, unable to make informed decisions that in other markets can lead to increased competition for consumers’ spending. There are many reasons for this, including information asymmetry, healthcare not viewed as a commodity and the need for third-party payers.

Competition: One essential condition of a properly functioning free market is that there is adequate competition among businesses. This rarely exists in today’s consolidated hospital and insurance markets. Prices are often result of market power, with minimal input from consumer buying power.

Governmental Regulation: Competition without meaningful regulations can lead to higher prices and other negative outcomes, e.g., incentivizing insurance companies to only offer insurance to the healthiest Americans. Moreover, the most regulated health systems in our country are the most cost effective. See: “American Healthcare Can be Free Market or Cheap. It Can’t be Both,” Ezra Klein, Vox.

Are there healthcare areas where competition could help?

  1. Insurance Markets: In theory, insurance exchanges reduce entry barriers by reducing the fixed costs of getting an insurer’s products in front of potential customers, potentially resulting in more competition. The exchange rules can also govern how health plans compete, potentially forcing them to compete on more consumer-friendly attributes. Analyses of the ACA exchanges find the approach increased competition in selected states (CA and NY).

  2. Provider Markets: Fostering competition in provider markets involves strong anti-trust enforcement and other policies to foster market forces. See, Healthcare Market Consolidations: Impacts on Costs, Quality and Access, Paul Ginsburg, Brookings. Also, Addressing Pricing Power in Health Care Markets: Principles and Policy Options to Strengthen and Shape Markets, Urban Institute.

  3. Fostering Provider-Insurer Balance of Power: Several studies have shown that the balance between hospital and insurer market forces also influences prices. States can seek in ensure that markets are not dominated by either provider or insurer.