The Market That Isn't: Why Healthcare Breaks Every Rule of Economics

In every other industry, scarcity drives innovation. In medicine, it drives gamesmanship. And nobody is talking about why.

I want to talk about a word that gets thrown around constantly in healthcare debates but almost never applies: market.

People talk about the healthcare market, market-based solutions, market forces, letting the market work. I hear it from politicians, economists, consultants, and hospital administrators. And every time, I think: what market?

I’m a urologist. I also build healthcare AI applications. I run a practice. I live inside this system every day. And I’m telling you — the thing we call a healthcare market is not a market in any meaningful economic sense. It’s something else entirely. And until we’re honest about that, every policy solution we build on top of it — including the ones I agree with — will produce unintended consequences that nobody seems to anticipate.

What a Market Actually Requires

In a functioning market, supply and demand interact through price. When demand rises and supply is constrained, the price goes up. That rising price signals producers to enter the space, attracts capital, and incentivizes innovation. Eventually, supply catches up. The price stabilizes. The system self-corrects. Nobody has to plan it. The price signal does the coordinating.

This is why capitalism is extraordinarily good at producing shoes, smartphones, and software. Innovation flows toward solving real problems because solving real problems is where the money is.

Now forget everything I just said. None of it applies to healthcare.

I cannot set the price for my services. The price of a ureteroscopy, a prostate surgery, a clinic visit — these are determined by Medicare. It doesn’t matter if there’s a six-month waitlist for stone surgery in my region. The price is the price. It doesn’t move. And it doesn’t cover the cost of delivering the care — Medicare reimbursement for physicians has declined 29% since 2001 when adjusted for inflation. For hospitals, Medicare pays 83 cents for every dollar spent caring for Medicare patients. The government sets the price, and the price it sets loses money for nearly everyone delivering the care.

The supply pipeline can’t respond either. Residency positions are funded primarily by Medicare, and the funding cap hasn’t been meaningfully updated since 1997. We have double the applicants we have positions for in urology. The demand signal is screaming. The supply pipeline barely hears it. And on the demand side, the patient often isn’t the payer, has little visibility into price, and the “product” is frequently something you need to not die — which makes demand inelastic in a way that widgets are not.

Prices that don’t respond to scarcity. Supply that can’t expand to meet demand. Consumers who can’t meaningfully exercise choice. That’s not a market. That’s a bureaucracy with a copay.

I say this with some authority beyond my practice. I’m a fifth-generation physician. My parents were doctors in the Soviet Union — the actual socialist healthcare system, not the theoretical one politicians argue about. They emigrated and rebuilt their medical careers in America from scratch. I grew up watching both systems from the inside. The Soviet model had universal access but no incentive for productivity — you got in line and you waited, and nobody was working into the night to build a better pathway because there was no reason to. The American model was supposed to be the opposite: the freedom to innovate, to work harder, to build something. And for a while it was. But what we’ve built now isn’t the opposite of Soviet medicine. It’s something stranger — a system that has the price controls without the universal access, and the profit motive without the market correction. My parents left one broken system and watched another one break in slow motion.

The Cycle

Here’s what most economists and policymakers miss: when you remove the self-correcting mechanism of a market but leave human beings inside the system, they don’t just sit there. They adapt. They innovate. But they innovate around the constraints rather than toward the mission. In healthcare’s broken non-market, innovation means gamesmanship.

And the gamesmanship is a cycle — one giant unintended consequence masquerading as a system. Each player’s rational behavior provokes a counter-move from the next, and the system spirals. Every player can make a legitimate case that they’re the victim. Every player is also part of the problem. Not because everyone is gaming the system — most people in healthcare are trying to do the right thing. But every group has a minority that follows the money wherever the incentives point, and it’s that minority whose behavior triggers the next domino.

I’ll start with physicians, because I am one.

I do HoLEP — a complex prostate surgery that essentially cures the disease. It takes longer, it’s harder, and it pays roughly the same per case as a UroLift, which is quicker, easier, and often requires repeat procedures. I could do ten UroLifts in a day or three to four HoLEPs. I choose HoLEP because it’s the right thing for the patient. Most physicians I know make similar choices every day.

But the financial pressure is relentless. In a system where the price is fixed regardless of outcomes, the math overwhelmingly favors the inferior procedure. Throughput optimization, cherry-picking easy patients, avoiding complex cases that take longer and pay the same — these aren’t theoretical. They happen. And it only takes a minority following the money to poison the data that everyone else uses to judge all of us.

The next domino: Insurers see the volume patterns and respond with prior authorization — a blunt instrument aimed at everyone because they can’t distinguish the physician doing ten UroLifts for profit from the one doing four HoLEPs for the right reason.

Now look at hospitals.

Most hospitals are trying to keep the doors open while losing money on 60% of their patients. But hospitals and private equity firms have discovered the same arbitrage: acquire a physician practice, change nothing about the care, and capture the billing differential. Medicare pays, on average, 60% more for the identical service in a hospital-owned clinic versus a physician’s office. An allergy skin test: $176 in a doctor’s office versus $719 in a hospital-owned off-campus clinic. Same test. 47% of physicians are now hospitalemployed, up from 30% a decade ago. Private equity roll-ups in urology, orthopedics, and gastroenterology apply the same logic with a three-to-seven-year return horizon and no obligation to keep a money-losing emergency department open. Consolidation isn’t always about better care. It’s often about better billing.

The next domino: CMS sees the facility fee arbitrage and pushes site-neutral payment. Insurers see the price increases from consolidation and respond by consolidating themselves. Physicians, squeezed from both sides, sell to hospitals or PE firms, or exit insurance entirely.

Now look at insurers.

Most insurers are running razor-thin margins — 0.8% in 2024, thinner than grocery stores. The ACA caps them at keeping 15-20 cents of every premium dollar. But the largest have found a workaround: if you can’t keep more of the premium, own the things you’re paying for. UnitedHealth employs over 90,000 physicians through Optum, runs one of the largest pharmacy benefit managers — the middlemen of prescription drugs — in the country, and pays its own providers significantly more than independent ones. On the Medicare Advantage side, plans inflate diagnosis codes to make patients appear sicker. MedPAC — the independent commission that advises Congress on Medicare — estimates this generates $83-84 billion in annual overpayments. Meanwhile, care denials have surged, though the majority get overturned on appeal — suggesting the denials are less about clinical appropriateness and more about cash flow. The profit cap was supposed to limit insurer earnings. Vertical integration made it decorative.

The next domino: Hospitals are forced to build massive bureaucracies just to fight for the money they’re owed, spending $10 billion annually on prior authorization and $20 billion appealing denials. That $30 billion doesn’t treat a single patient — it’s pure friction that wipes out already razor-thin operating margins. Meanwhile, Medicare Advantage overpayments drain the Trust Fund faster than it can be replenished. When the federal bank account runs dry, CMS constrains base payments to keep the program solvent. The insurers game the system, the Trust Fund bleeds, and the government tightens the screw on physicians and hospitals to make up the difference.

Now look at CMS.

CMS manages $1.5 trillion in annual payments with a staff smaller than many regional hospital systems. Think about that: the largest healthcare payer on Earth, processing over a billion claims a year, overseen by fewer people than work at a mid-size health system in Ohio. For every $1 spent catching fraud, Medicare saves $8.30 — but there aren’t enough dollars or people to catch it fast enough. As of 2023, CMS was still auditing Medicare Advantage data from 2014. The plans have a decade-long head start.

And CMS designed many of the structures being exploited. It built the facility fee differential that made practice acquisition so lucrative. It created the Medicare Advantage risk adjustment system that practically invited insurers to upcode. It applies a coding intensity adjustment of 5.9% when the actual inflation is closer to 20%. CMS knows it’s being gamed. It often can’t act because Congress won’t give it the authority, and every reform attempt gets litigated by the industry it regulates.

The next domino: CMS’s productivity adjustment cuts provider payment updates by 0.7% annually — a statutory requirement to slow the Trust Fund’s depletion. For providers, that’s a pay cut every year in real terms. It pushes physicians toward throughput, pushes hospitals toward consolidation, triggers more insurer gamesmanship, triggers more CMS rulemaking. The cycle tightens.

And above all of it: the federal budget.

Federal spending on Medicare, Medicaid, and ACA subsidies totaled $1.67 trillion in 2024 — more than the entire federal discretionary budget. Healthcare spending hit $5.3 trillion, or 18% of GDP, and is projected to reach one-fifth of the economy by 2033. Federal healthcare spending will exceed all other categories by 2028. The Medicare Trust Fund depletes in 2036. Ten thousand baby boomers age into Medicare every day. The gap could be closed by raising the Medicare payroll tax from 1.45% to about 1.65% — but nobody will touch it.

Healthcare is the single largest structural driver of the national debt.

When physicians and hospitals say Medicare doesn’t pay enough, they’re right. When CMS says it can’t pay more, it’s also right. CMS isn’t suppressing prices out of malice. It’s doing it because the alternative is the program running out of money in a decade.

Each layer constrains the one below it. The budget constrains CMS. CMS constrains hospitals and physicians. Hospitals and insurers constrain each other. Physicians and patients absorb the consequences. The cycle has no starting point and no natural exit.

What the Cycle Costs Us

The physician shortage is where the broken cycle becomes most dangerous — because it’s the one problem that can’t be gamed around.

Urology is one of the top three most in-demand specialties in the country. It gets worse before it gets better, maybe leveling off around 2040. My clinic day went from 20 patients to 36. In a real market, this would trigger a massive response. In healthcare, almost none of that happens. So what do smart, driven people do? They exit. Concierge medicine. Direct primary care. Cash-pay clinics. The physicians who leave are disproportionately the ones the system can least afford to lose.

And patients game the system too — not out of greed but out of the same survival logic. Employers, squeezed by premiums rising 7% annually, respond by shifting costs to workers through higher deductibles and narrower networks. Faced with a $5,000 deductible and no price transparency, the rational move is to delay care until it becomes catastrophic, then show up at the emergency department — the most expensive setting in the system and the one place that can’t turn them away. Preventive care that would have cost hundreds now costs tens of thousands.

Everything flows downhill to the hospital. The patients who can’t afford care, the physicians who won’t accept insurance, the costs that nobody else will absorb — all of it lands on the one institution that has no choice but to say yes. Federal law requires hospitals to stabilize everyone who walks through the emergency department, regardless of ability to pay. They can’t go cash-pay. They can’t refuse government patients. They can’t shut down. They’re the floor of the healthcare system. And the floor is cracking — more than 700 rural hospitals at risk of closure.

Technology won’t save us in time. I’m a surgeon who uses robots and lasers every day and builds AI tools for healthcare. We are nowhere near autonomous surgery — 50 to 100 years. AI will help at the margins. But you need hands, judgment, and someone at the bedside. The system that’s supposed to produce and retain those people is driving them away.

I Don’t Have a Solution. I Have Three Levers.

I want to be honest: I don’t have a clean answer. Anyone offering one is selling something. The libertarian approach — remove the price controls, let the market work — would solve the supply problem and create an access catastrophe. The progressive approach — fund the pipeline, invest in workforce — runs straight into the budget wall. The Trust Fund depletes in a decade. My parents left a system that chose access over incentive. I practice in one that chose incentive over access. Neither works. And what we’ve built now doesn’t even deliver on the one thing it chose.

But I think the levers are identifiable, even if pulling them is politically brutal.

Reconnect payment to outcomes. Reduce the arbitrage that rewards billing games over better care. Push site-neutral payment so that the same test costs the same regardless of who owns the building. Stop paying roughly the same for a procedure that cures the disease and one that manages it temporarily. Make durability worth more than throughput.

Expand and retain the workforce. The training pipeline matters — residency funding caps haven’t moved since 1997 and that’s indefensible. But the fastest “new supply” is keeping the experienced clinicians we already have from leaving. That means lowering administrative burden, simplifying authorization, and making clinical work feel like medicine again instead of a billing exercise. Every physician who exits to concierge or cash-pay is a loss the system can’t replace for a decade.

Shrink the gaming surface. Faster auditing where dollars are being distorted. Enforcement that can keep pace with behavior. Antitrust posture that treats excessive consolidation — whether by hospitals or private equity or insurers — as a public health issue, not just an economic one. And profit cap rules that actually cap profit, instead of incentivizing companies to buy their way around the cap.

Every one of those levers costs someone something. That’s the problem. Every stakeholder benefits from at least some piece of the dysfunction — which means we get reform theater: proposals that sound good in a debate but don’t change the incentive gradients that actually drive behavior.

The price signal is the nervous system of any market. Ours is severed. The question isn’t whether healthcare should be “more market” or “more government” — that framing is too crude for what we’ve built. The question is whether we have the honesty to name what the system actually is and the will to reconnect it — knowing that every fix will cost someone something, including us.

Ilya Sobol, MD is a urologist and Assistant Professor at Old Dominion University who practices with Urology of Virginia. He is the founder of Synaptic Health and SynapticIQ, building AI tools for healthcare. He uses robots and lasers daily and has strong opinions about both.