Why Medicine Is Expensive

Healthcare is expensive not because it is complex alone, but because its architecture suppresses the very forces that would normally discipline cost.

Photo by Towfiqu barbhuiya on Unsplash

We are told that rising healthcare costs are an act of God—an inevitable byproduct of aging populations, technological innovation, and the inherent complexity of medicine. The story is comforting, but superficial. It conflates the inherent demands of care with the incentives and structures that actually determine price.

The contrast becomes clear in elective, consumer-paid procedures such as LASIK or cosmetic surgery. Over the past decades, these services have become safer, more precise, and technologically advanced, yet real prices have remained remarkably stable—or even declined. These are not simple procedures. They require specialized skill, expensive equipment, and careful protocols. What they lack is insulation from market forces: patients pay directly, prices are transparent, and providers compete openly. Poor outcomes damage reputations quickly, while efficiency and innovation are rewarded. Markets function.

Now consider the broader healthcare system. Costs rise relentlessly. Prices for procedures, services, and drugs in the United States are dramatically higher than in peer nations, not because Americans consume vastly more care, but because the system’s architecture suppresses the mechanisms that would normally restrain cost.

Third-Party Payment and Moral Hazard

A defining feature of modern healthcare is that patients rarely face the true cost of care. Employer-sponsored insurance, tax incentives, Medicare, and Medicaid insulate consumers from the price of services, while providers negotiate with intermediaries rather than directly with those receiving care. Prices are opaque, comparison shopping is rare, and the friction that normally disciplines demand disappears.

This insulation generates classic moral hazard (the tendency to take risks or over-consume when someone else bears the cost). Patients, shielded from marginal costs, consume without restraint. Providers, shielded from consumer oversight, have little reason to economize. The system encourages volume over value, rewarding excess rather than efficiency.

Defensive Medicine

Litigation intensifies the problem. In an environment where omission can carry heavier consequences than excess, clinicians order additional tests, imaging, or referrals not strictly for clinical necessity but as protection. Individually rational, collectively costly. Across millions of encounters, protective decisions accumulate, structurally inflating expenditures without proportional gains in outcomes.

Insurance amplifies this effect. Patients have prepaid premiums. Clinicians gain legal insulation. Costs diffuse across the system. The baseline of overutilization becomes embedded in routine practice.

Supply Constraints and Regulatory Entrenchment

Markets respond to scarcity: rising demand draws new entrants, which moderates price. Medicine does not. Medical school seats, residency slots, and licensing requirements expand slowly, if at all. Specialist pipelines are rigid. Supply cannot adjust to rising demand.

In addition, regulatory barriers intensify scarcity. Certificate of Need (CON) laws, which require hospitals to prove “need” to acquire new beds or expensive equipment, allow competitors to block expansion, suppressing competition. Drug and device approvals demand enormous documentation, trials, and compliance infrastructure, effectively excluding smaller innovators. Regulatory processes here do not guarantee safety—they create barriers, entrench incumbents, and inflate prices.

Administrative Complexity

Administrative overhead is enormous. Billing codes, prior authorizations, reporting mandates, credentialing, and electronic health records create non-clinical layers of work that must be absorbed. In the U.S., there are more administrative staff in healthcare than there are physicians. Entire departments exist solely to navigate reimbursement. These transaction costs are embedded into every procedure, test, and consultation.

Market Concentration

Hospital consolidation has intensified. In many regions, one or two systems dominate, increasing negotiating leverage against insurers. Prices rise; consumers rarely see them. Specialist shortages further concentrate pricing power. Competition is muted. Where markets are insulated from discipline, pricing becomes durable, and inefficiency persists.

The Systemic Pattern

Across the healthcare system, a consistent architecture emerges:

• Patients are insulated from price signals.

• Providers face incentives that reward excess.

• Entry barriers restrict supply responsiveness.

• Regulatory and capital hurdles entrench incumbents.

• Administrative complexity inflates costs.

• Market concentration stabilizes pricing power.

None of this requires malevolence—only predictable behavior within distorted incentives. Where markets function, as in elective direct-pay care, costs are constrained. Where they do not, costs rise relentlessly.

While the mechanisms differ internationally, the pattern is universal: decoupling the consumer from the price consistently drives cost inflation, whether in the U.S., Europe, or elsewhere.

Design, Not Destiny

Healthcare is expensive not because it is complex alone, but because its architecture suppresses the very forces that would normally discipline cost. Rising expenditures are not the inevitable toll of progress—they are the predictable consequence of policy choices, institutional design, and misaligned incentives.

Fatalism mistakes design for destiny. Medicine’s trajectory is not preordained; it is engineered. Until the structures, barriers, and incentives that shape behavior are recognized and confronted, high costs will persist—not by accident, but by design.

Bryan Theunissen is a South African doctor with a stubborn streak of optimism.