I thought it would be a good time to review the distortion in the health marketplace that third parties represent.  First we’ll start with price distortions then we’ll review the effect of third parties on quality of delivered care.


Whenever third parties are inserted into the mix, the price of any service will rise.  We have discussed before that the price of a roof repair or hail damage to your car are higher if insurance is involved.  The presence of third parties distorts the price by removing some (most) of the accountability that is normally present in free exchange, as the constant evaluation of a deal of any kind to obey the “win, win” rule is largely eliminated.

This is particularly true for health care.  The government, as a third party payor, is the most distorting influence of all.  The price rises because “someone else’s money” is being spent.  Remember Bastiat’s definition of government as that great fiction whereby everyone attempts to live at the expense of everyone else.  Government as a third party also increases the likelihood that a service will be demanded or purchased as the perceived price for the purchaser approaches zero.  This is akin to a teenager with his/her parent’s credit card or an unhinged travelling executive on an expense account.

Third party organizations such as HMO’s wouldn’t even exist were it not for the government.  Employer purchase of health insurance is the only reason HMO’s exist, as no individual would subject their family to any product like this voluntarily, where their doctor actually makes more money, to the extent that he denies care to you, your spouse or child.  Many believe that this top down control is necessary to curb the excesses of the “zero out of pocket” influence, while the real issue is the existence of an arrangement like this in the first place, one most certainly not characterized as “win, win.”

Third party presence enables fraud like no other influence and contributes therefore to a higher price for everyone as a result.


Third parties allow awful physicians to maintain busy, lucrative practices, as an HMO, for instance, can fill the waiting room of a surgeon-butcher that otherwise would be bankrupt from a well-deserved and empty waiting room.  

The physician’s payment when third parties are present, is guaranteed regardless of the patient’s satisfaction with their treatment.  Much of the accountability of the physician to their patient is absent with intervening third parties.  What other industry can provide horrible service and treatment with no worries about payment?  

Hospitals and insurance companies have created and benefit from “network” arrangements that guarantee patient “funneling” regardless of the ability to provide good outcomes at reasonable prices.  One variation of this is the hospital-employee physician model where hospitals through coercive networking arrangements attract patients then “assign” them to the doctors who work for them, because they work for them, not because they are any good.  Physicians in this arrangement are relieved of the pressure to build a practice through quality service and reputation.   

The tax deductibility of insurance purchases by employers but not by employees allows for the existence of otherwise market-unworthy insurance arrangements (like HMO’s) that invariably attract the most incompetent and despicable actors, as those physicians and caregivers with healthy practices tend not to enter in to these arrangements.  

I marvel at organizations whose aim is to evaluate or put their stamp of approval on quality parameters.  No more cruel quality taskmaster exists than the free market.  In the market, if you are awful, you disappear, go bankrupt.  No quality control is necessary as long as the market is allowed to work.  Third party involvement in payment  for medical services, that of the federal government in particular, has interfered with the normal market-cleansing effect in medical practice that plagues the incompetent and unethical in every other industry.  

The emphasis on “insurance coverage for everyone” is exactly the wrong solution to the high price and sporadic quality of health care in the U.S.  Adherence to the principles of the free market will lower the price and raise the quality of care for all.  

G. Keith Smith, M.D.