¶ … Americans healthcare delivery in the United States has been via a market driven system, 1 usually through purchase of health insurance, participation in HMOs or other types of collective agencies. For those who qualify enrollment in Medicare and Medicaid programs will cover or defray costs of healthcare.2 For a growing number of people in the U.S. medical care costs are not covered by insurance or government programs, for them out of pocket and indigent services are their only options.3 This paper will look at the how financing healthcare affects both costs and use of healthcare services. Private Health insurance.

Private health insurance in the United States developed around the 1930's during the Depression4 and grew during the economic expansion of the post-WWII years. "Under most private insurance and Blue Cross -- Blue Shield plans, fee-for-service, with physicians determining the economic value of their own services, became the established method of reimbursement for physician services covered under the benefit structure of most insurance policies."5 Payment for healthcare services through private insurance arrangements removes the cost knowledge for the consumer of what the physician / hospital is actually charging of delivery of the services. In economic terms this indifference by the consumer to the costs of service removed the "market discipline."6 Healthcare providers have little reason to contain costs. To offset the removal of market discipline insurance companies initially developed two approaches, either insurance companies will pay up to a predetermined specified amount on or will pay based on a predetermined schedule of allowances, regardless of the charges.

Fee-schedule approaches require the patient to pay the difference between what the insurance company will pay for a particular service and what the healthcare provider is charging. When the difference between what the insurance company will pay and what the patient ends up paying out of pocket becomes too great, a dampening effect may occur where the healthcare provider is less likely to raise his rates do to economic pressures.7

8 This plan allows physicians to receive a reliably high percentage of their charges and face no real impediment to raising fees. This method of payment also became the technique adopted by Medicare for compensating physicians in 1965.9 While the UCR method flourished in for over two decades it's inherently inflationary incentives have come under attack.
With UCR type plans testing, hospital visits and procedures are covered but patient visits to doctors offices for routine issues are not. Consequently physicians are free to increase the fees for these covered services as a way to "cross-subsidize"10 within a practice pushing an inherent bias toward unnecessary testing and procedures to subsidize the costs of non-covered patient / physician consultations.

HMO's

Market forces driving healthcare cost have made HMOs the preferred healthcare provider organization by employers in the U.S.11

Health maintenance organizations subscribers pay a set annual fee, either via payroll deduction or direct payment to the organization. "Subscribers to HMOs pay a given amount per month, determined a year ahead, for medical care. The amount is determined per capita, not per service. The physician may be paid a salary, usually with a bonus. The lower the costs of tests, x-rays, hospital days, and physician visits charged to the primary care physician's patients, the higher the bonus."12 This incentive to keep costs down to increase compensation encourages physicians to not order tests, x-rays, procedures etc. that are not necessary or may be too costly. As result these negative incentives regularly ordered testing to rule out serious and often life-threatening conditions, have often been brushed aside as too costly or unnecessary resulting in conditions that were routinely regarded as not worth the biopsy. In a few notorious incidents, overlooking a serious sign or symptom meant that treatment was started very late following the correct diagnosis made-often…