The United States has experienced a relentless rise in health care and insurance costs over the past several decades. One explanation is that two major policy changes, Medicare and the Health Maintenance Organization (HMO) system, are at the heart of the problem. Both programs fundamentally changed the structure of American medicine by inserting bureaucratic and corporate layers between patients and doctors. This eroded the direct relationship that once defined medical care and replaced it with a mess of third-party decision-making, administrative overhead, and distorted incentives.
Medicare was introduced in 1965 to open the doors of modern medicine to millions of older Americans who previously struggled to afford care. In reality it introduced a massive third-party payer into the system. Rather than patients paying their doctors directly, the federal government began reimbursing providers based on fee schedules and billing codes. This conditioned doctors to practice compliance in addition to medicine, ensuring that every service fit into a reimbursable category. Decisions increasingly depended on what Medicare would approve, not what a physician deemed necessary. This drove administrative costs upward and disconnected fee from service, creating an system where few people understood what care truly cost.
The rise of HMOs in the 1970s accelerated the trend. Designed to control costs through “managed care,” HMOs introduced networks, referral systems, and pre-authorization rules intended to eliminate unnecessary spending. In practice, these systems limited patient choice, constrained physician autonomy, and added layers of administration. Doctors who once made decisions in direct consultation with their patients were now subject to corporate oversight and guidelines. HMOs compensated physicians through salary models where they paid a fixed amount per patient rather than per service. This structure placed financial pressure on doctors to minimize care and turned their judgment into an exercise in cost containment.
Together, Medicare and HMOs broke the traditional relationship between doctor and patient. Medical decisions that once reflected individual judgment and trust became convoluted by billing codes, reimbursement policies, and network rules. Administrative work, claims processing, pre-authorization requests, and appeals became central to running a medical practice. According to the Heritage Foundation, this third-party system replaced the doctor-patient relationship with a bureaucratic provider-consumer relationship. Studies of direct primary care practices, which reject insurance billing altogether, suggest that eliminating intermediaries reduces overhead and restores more personalized care, implying that the very structure of third-party payment is a root driver of cost inflation.
The third-party fee-for-service payment system compensates physicians on a per-unit basis. Physicians billing for a small number of units at high prices (common in specialties that perform expensive procedures) may find that the overhead cost associated with processing each claim is acceptable. In an outpatient-focused practice where procedures are less frequent and/or less expensive, DPC physicians have found that the overhead associated with collecting fees on a per-unit basis is too high to be worth the effort. The administrative efficiencies gained by abandoning third-party fee-for-service overhead are often cited as one of the chief reasons that DPC is offered at minimal cost to the patient.
Study Published in the Journal of the American Board of Family Medicine
The consequences of these policies have become crystal clear. Doctors spend less time with patients and more time documenting visits for compliance. Patients are shuffled through networks that limit their choice of specialists and/or medications. Administrative overhead consumes a significant share of every healthcare dollar that could instead go to actual treatment. Cost shifting has become routine. Providers who face constrained reimbursement from Medicare and HMOs raise prices elsewhere. This pushes premiums higher for private insurance widening the affordability gap.
Medicare’s fee schedules and HMO cost controls may have been intended to contain spending. In practice they introduced inefficiency and bureaucracy. The result is a steady increase in costs combined with declining satisfaction among patients and doctors.
By removing the direct financial and personal relationship between patients and doctors, Medicare and HMOs undermined the market forces that once restrained costs. Restoring that relationship may be the only way to reverse decades of runaway spending and bring medicine back to what it was supposed to be.
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