19 Mar 2026 10 min read

How American Healthcare Got Here, part 2

We have managed care, 'Obamacare,' and Medicare, but most Americans still lack affordable care

When I worked for a health newsletter publisher in the late 1990s, the prevailing wisdom was that American healthcare costs were high because Americans were 'over-utilizing' the healthcare system.

The outdated fee-for-service (FFS) payment model – in which insurance companies reimbursed their members or paid doctors directly for each treatment or service - created incentives for unnecessary care. Doctors ordered more tests, prescribed more medications and saw their patients frequently because that was how they made money. But all this 'excess' (scare quotes intentional) utilization was driving up costs.

An example I heard cited over and over were the high number of patients seen in hospital emergency rooms for what should be basic primary care office visits. ERs have to remain open around the clock and be ready to treat any number of complex medical emergencies. Their overhead is naturally higher than what it cost to run your local internal medicine practice. So, patients using the ER as their primary method of accessing care were inefficient and costing hospitals and the health system as a whole too much money.

The move to managed care - conventional wisdom held - would solve this core problem. People would enroll in health maintenance organizations (HMOs) run by insurance plans. The HMOs would assign each member a primary care provider (PCP), a doctor working in general or internal medicine, who would oversee their patients' healthcare and guide them to the level of care.

In return for 'managing the care' of their patient population, PCPs would be given a flat fee instead of billing for each visit and service. This was known as "capitation." In theory, this encourage health care providers to put more emphasis on preventive health care and avoiding patients getting sick and needing more complex care provided by specialists and hospitals.

But the result, of course, is that this shift created a perverse incentive of its own. Doctors were no longer incentivized to order more tests or treatments - they were rewarded for holding costs down. So, the fewer tests and treatments, the more of that capitated payment they got to keep.

Were you an internist with a bunch of young people you only saw once in a blue moon? You still got that payment every billing cycle. Are your patients older and sicker? Well, their care might cost more than the capitated payment you receive, meaning you lose money by treating them.

You can see where this is going.

As several of the physicians who worked with me as editorial advisors often remarked: Managed care was not ever about managing patients' care, it was about managing costs.

We get alphabet soup

By the mid-1990s, managed care had become the dominant health insurance model in the United States. More than 75 percent of employer-sponsored health coverage and almost 80 percent of Medicaid plans were either HMOs, PPOs (Preferred Provider Organizations) or POS (this stands for Point of Service plans, not that other thing ...).

But managed healthcare has not reduced healthcare expenses or spending, which has continued to rise at a rate higher than the rate of inflation.

Over time, many more layers of health care management - designed not so much to improve patient care as to limit or shift costs - have been added to the system. This increases medical spending and utilization as a whole.

Pharmacy benefit managers, for example, negotiate with phamraceutical companies for price reductions, but also help determine which drugs are covered by a particular health plan and for what conditions. Third-party coding and billing companies often handle the complicated process of submitting insurance claims for medical practices.

Those added layers of administration add additional costs to the system that are passed to the consumer - patients - in the form of higher charges for treatments and services and higher premiums to maintain health insurance.

Should health be a commodity?

The core issue with the current American health system is that it was designed with the idea that simple reliance on free-market economic principles would produce better health outcomes at a lower cost.

In 1971, physicial Paul M. Ellwood, Jr., who has been called the "father of managed care," helped the Nixon administration design the Health Maintenance Organization Act - which required employers who offered traditional health insurance coverage as a benefit to also offer an HMO plan as an alternative.

Ellwood believed that a market of many different HMOs, using evidence-based medical protocols and competing with each other on price and quality, would ensure a system in which that doctors were properly incentivized to "keep patients healthy" by offering early diagnostic and preventive care.

Instead, it converted what had been a largely non-profit insurance sector into a profit-driven industry loaded with competing incentives, lack of transparency, poor accessibility, and generally poorer health outcomes.

What it seemed no one accounted for – or maybe they just didn't care – is that insurers would naturally want to have patient populations of mostly young healthy people and not those with disabilities or chronic illnesses that would need more intensive care.

So health plans "competed" to get lower cost patient populations while limiting their exposure to those with serious illnesses or conditions. Insurers created coverage exceptions that let them deny coverage of pre-existing conditions or certain types of health care.

And, because health coverage in the United States is largely employer-based, consumers can't just freely choose select from any health plan, but only the plans offered by their company.

Prior to the implementation of the provisions of the Affordable Care Act (ACA) in 2014, purchasing individual health coverage on the open market was exhorbitantly expensive – ask any self-employed person – and came with qualifying health exams. You could be denied coverage as an individual if the health plan determined you were too high a risk. ^[1]

Hurdles to payment, barriers to care

Incentivized to pay out as little as possible, insurers have developed their own networks of preferred pharmacies, doctors, clinics and hospitals. These "in-network" providers agree to provide services to the plan's members at a reduced cost to the insurer.

Policy provisions often require a plan's members to only use providers in that payer's network in order for the service to be covered or the member has to pay out-of-pocket.

Some plans allow members to choose the option to also use out-of-network providers, provided the member pays a higher premium for the privilege.
Health insurers also employ teams of medical professionals to provide "medical review" of the medications, procedures and treatment plans provided to their members.

For example, in order for a particular surgery to be covered by a member's insurance, the physician must get prior authorization from the insurance company that deems the procedure medically necessary.
Ditto for prescription medications.

Health plans maintain complex formularies governing what medications are covered and for what diagnoses. If there is a mismatch between drug and diagnosis code, payment is often denied.

In many situations, the medical professionals performing the medical review of a provider's treatment plan have no training in the area of medicine that is under consideration.

For example, a dermatologist may provide medical review of treatment plans for someone with complicated diabetes or cancer.
When challenged, representatives for health insurance companies will often push back, noting that prior authorizations and other gatekeeping policies only related to payment for the care, they are not authorizing or preventing the care itself.

In theory, doctors can order any medicine or procedure they want - just the patient may get left with the bill.**

Truly managed care

Now, contrast this fragmented, opaque and inefficient system with the health systems of other countries that were designed the the goal of ensuring that everyone could afford and access basic medical care.

The key features of these systems are: First, that they group large numbers of people together in shared risk pools; and, second, a centralized non-profit entity decides across the board what services, treatments, and medications must be covered and what the costs of medications will be.

To use our experience in Germany as an example: We are insured by the public insurance plan, though we could choose to purchase private insurance that would offer additional benefits, if we wanted to.

Everyone is required to purchase and maintain health insurance, public or private, and the government covers the cost of premiums for the public option for people whose income is too low to afford the normal payments.

Statutory insurance has to enroll everyone without regard to age or past medical history. This means that a broad range of people of different ages and medical needs are paying into the system.

I wrote more about our experience here.** But to use one small example, I take a daily medication to manage a chronic medical condition. I can go to any pharmacy in Germany and scan my health care and they fill my prescription.

I don't know how much it costs, because I have never been asked to pay for it. Someone else, prescribed the same medication, will also not pay - if they have health insurance. Or, if they are uninsured - like a tourist without international health insurance - they would pay an amount set by the fee schedule.

In the States, the cost to me would depend on what pharmacy I went to - whether it was in my plan's network or not - and how much they charged or had contracted with my health plan to charge me. Someone with different insurance or no insurance could pay a very different amount.

This is true for any office visit, procedure or prescription medication. The charge will vary dramatically based on coverage and provider contracts.
Now, which of these situations, really sounds like managed health care.

The real perverse incentives

A 2025 study by the Peterson Center on Health Care/KFF, found that Americans actually go to the doctor or hospital fewer than residents in peer nations, but that the prices they pay for healthcare are much higher.

"According to the most updated internationally comparable data available, the U.S. has higher prices—particularly among private health plans—for many healthcare services. Meanwhile, utilization of many services, including doctor’s visits, number and length of hospital stays, and a variety of inpatient surgeries, is lower than in many comparable countries. As a result, the evidence continues to support the finding that higher prices – as opposed to higher utilization – explain the United States’ high health spending relative to other high-income countries."

So much for "excess utilitation" being the culprit behind higher healthcare costs.

The real answer might be that the incentives of the free market encourage rising prices, not the opposite.

The health care industry is a huge segment of the U.S. economy, accounting for 18 percent of GDP, and employing just over 18 million people, around 10 percent of the total population. Of that 18 million, almost 700,000 people are employed directly by health insurance plans, and another 200,000 are employed by medical coding and billing companies to process insurance claims and medical bills.

Its place as a cornerstone of the economy, makes any plans to overhaul or significantly change it a complicated proposition.

Coming Up!

Part 3 (the last one, I promise!): Can this health system be saved?

This is core issue that the Affordable Care Act was designed to address, providing a subsidized marketplace that allowed people unable to obtain health insurance to purchase health coverage independently. ↩︎

Take a deep dive

This series would not exist without the dedication of the work done by researchers at the nonprofit KFF/Peterson Center, the People's Policy Project and from investigative journalists at ProPublica and The Conversation. While I have tried to provide somewhat of an overview, you can get a clearer picture at the complex challenges facing the U.S. health system by reading the articles, below.