Why is the US health care market referred to as "imperfect?"
The US healthcare market is imperfect because it does not meet the classical criteria of a free market.
(a) The health plans acting as intermediaries for the patients typically function as buyers of healthcare services.
(b) Patients lack the information necessary to make prudent decisions. Patients generally do not know which new diagnostic methods, intervention techniques, and drugs are available. Information on price and quality is also extremely difficult to obtain.
(c) Prices are often set by the health plans. They are not determined by the interaction of the forces of supply and demand.
(d) The consolidation of buying power into the hands of private health plans is forcing providers to form alliances and integrated delivery systems on the supply side, thus restricting competition at the individual level.
(e) Health insurance shields patients against the cost of health care. Health insurance does not always serve the purpose of true insurance, which is to protect against catastrophic risks. For basic and routine care, health insurance acts as prepayment for health services. There is a moral hazard that once enrollees have purchased health insurance, they will utilize healthcare services.
(f) The utilization of health care is generally determined by need rather than price-based demand. Providers can often induce demand for their own financial benefit.