Why Health Care Doesn’t Behave Like a Market (and Why That Matters Now)

As of January 2026, the expanded Affordable Care Act (ACA) premium tax credits — the subsidies that kept health insurance affordable for millions during the post-pandemic years — have officially expired. For the average family on the exchange, this isn't just a small policy change; it's a significant price increase. Premiums that averaged $888 a year are now expected to more than double, reaching nearly $2,000.

For a traditional economist, this is a "natural experiment" in how prices are discovered. In a typical market, when the price of a good jumps sharply, demand should decrease, and the market should establish a new, more efficient equilibrium. But health care is not a standard market. As millions of Americans face the "ACA cliff," it’s clear that health care doesn't fail as a market because of government intervention; it fails because it violates every fundamental assumption that makes markets function in the first place. The expiration of these subsidies doesn't cause a market failure — it simply removes the mask that was hiding one.

Why Health Care Does Not Self-Correct

In the world of consumer electronics or fast fashion, markets are largely self-correcting. If the price of an iPhone suddenly triples, some consumers will switch to Android, others will delay upgrading, and the marginal buyer will simply walk away. This is the price mechanism doing what it is supposed to do: allocating scarce resources to those who value them most, while signaling producers to adjust supply. 

Health care disrupts this mechanism right from the start. Illness is not a discretionary choice, and medical decisions are rarely made under calm, rational conditions. You do not comparison-shop for a cardiologist while having a heart attack, nor do you postpone insulin consumption because the price of a vial rose by 20%. Decisions in health care are often made under pain, fear, or urgency, which means demand does not respond to price signals as standard economic models assume. 

This breakdown is worsened by significant information asymmetry. Physicians and providers hold vastly more knowledge than patients, making it nearly impossible for consumers to evaluate price relative to quality in real time. Even highly educated patients cannot meaningfully “shop for value” when the diagnosis itself is uncertain, and the risks of delay are severe. As a result, consumer choice — the driver of market discipline — fails to operate. 

As millions of Americans face the "ACA cliff," it’s clear that health care doesn't fail as a market because of government intervention; it fails because it violates every fundamental assumption that makes markets function in the first place.

Price transparency, another essential feature of competitive markets, is also largely absent. In most health care transactions, costs remain unknown until after treatment is completed, often arriving weeks later in the form of complex bills. Without upfront price information, meaningful price competition, informed substitution, and efficient allocation driven by consumer choice cannot occur. 

Finally, health care lacks substitutability in critical situations where prices matter most. There is no generic version of an emergency, no alternative provider when the nearest hospital is the only option within 50 miles, and no realistic way to exit the market entirely. Under these circumstances, providers often wield localized monopolistic pricing power — not out of malice, but because the market structure permits it. 

Combined, these features mean health care cannot self-correct through prices. When prices rise, the market doesn't become more efficient; it becomes more exclusionary. Demand doesn't vanish because needs disappear. It vanishes because people cannot afford care. This is not a functioning market equilibrium; it is a failure of the mechanism itself.

Core Economics Issues

There are three core issues: inelasticity of demand, prices that do not signal, and a market that provides too little care at the equilibrium. 

For many goods, a 10% increase in price might lead to a significant drop in quantity demanded. In health care, the overall elasticity is estimated at roughly -0.12 to -0.17. For emergency services, it is nearly zero, around -0.04. Preventive care, while slightly more elastic, still shows very low responsiveness to price changes. 

When the ACA credits expire and premiums soar, the insurance market price shock does not translate into a more efficient health care market. Instead, we see a massive welfare loss. People don't suddenly become healthier because insurance is more expensive. Instead, they delay preventive care, skip chronic disease management, and accumulate health risks that eventually explode into expensive emergency room visits. In this scenario, higher prices don't reduce "wasteful" consumption; they reduce access to essential services, creating a deadweight loss that the entire society eventually pays for through lower productivity and higher public health costs.

In a functional market, prices are signals. They tell producers what to make and consumers what to buy. In health care, the signal is jammed. Between third-party payers (insurance companies), negotiated "chargemaster" rates, and the sheer opacity of medical billing, the price a patient sees rarely reflects the actual cost of production or the value of the service. The failure of the insurance market to transmit prices cleanly compounds an already broken pricing system in health care delivery.

As coverage drops and individuals face higher costs, they are forced to reduce their utilization of care, often falling below what is socially optimal. This isn't just an individual hardship; it represents a significant deadweight loss in health outcomes for society as a whole. 

The ACA subsidies were not distorting a functional health care market; they were partially correcting the failure of the insurance market to provide affordable access to care. Removing them does not "restore market discipline." It is like removing a prosthetic limb and expecting the patient to start running; it doesn't fix the underlying disability, it just makes the struggle visible.

Beyond the problem of prices failing to signal efficiently, there is a more insidious market failure in health care: the equilibrium quantity of care is often inefficiently low. Even if prices were perfectly transparent and responsive, a purely market-driven system would still underprovide essential health services. This is because the benefits of many healthcare interventions extend far beyond the individual consumer.

Consider the examples: preventive services like vaccinations or regular check-ups are often skipped when out-of-pocket costs rise, leading to more severe and expensive illnesses down the line. Mental health services remain significantly underutilized, despite their profound impact on individual well-being and societal productivity. Rural and primary care shortages persist, leaving entire communities underserved. In a market where individuals only consider their private costs and benefits, the broader societal gains from widespread health are ignored.

The expiration of the ACA subsidies exacerbates this particular market failure. As coverage drops and individuals face higher costs, they are forced to reduce their utilization of care, often falling below what is socially optimal. This isn't just an individual hardship; it represents a significant deadweight loss in health outcomes for society as a whole. When people forgo necessary care, the ripple effects — lost productivity, increased public health risks, and a greater burden on emergency services — are borne by everyone, not just the uninsured.

What the Health Care Market Is and What It Isn’t

Critics often argue that if we just made health care more like the market for iPhones, competition would drive down costs. But this comparison is fundamentally flawed. An iPhone is a discretionary luxury; health care is a foundational necessity.  When the price of a smartphone rises, the "harm" is that someone has an older camera. When the price of health care rises, the "harm" is a skipped cancer screening or a bankrupt family. Similar elasticity values in a spreadsheet do not imply similar welfare outcomes in the real world. We must stop treating the "consumption" of health care as if it were a lifestyle choice.

If health care does not behave like a market for consumer gadgets, what does it behave like? The most accurate economic analogy is a public utility, such as water or electricity. Like these services, health care is foundational to individual well-being and economic participation, and its value extends far beyond the person consuming it at any given moment.

One reason health care resembles a utility is the presence of strong positive externalities. When your neighbor is vaccinated or treated for a communicable disease, you benefit directly through reduced transmission risk. More broadly, a healthier population supports a more productive workforce, lower absenteeism, and greater economic stability. These spillover benefits are not captured by individual consumers making private decisions, which means a purely market-driven system will systematically underprovide care relative to what is socially optimal.

The debate we should be having is not "government vs. market." That is a false dichotomy. The real question is: What institutional structure delivers the most efficient and equitable outcomes?

Health care is also essential for meaningful participation in modern economic life. Just as reliable access to electricity is a prerequisite for employment, education, and basic functioning in a contemporary economy, a baseline level of health is necessary for individuals to work, learn, and contribute productively. Treating health care as a discretionary consumer good ignores this foundational role and misrepresents its economic function.

Finally, health care delivery often exhibits characteristics of natural monopoly. In many regions — particularly rural or underserved areas — there may be only one hospital, one emergency room, or a single specialist within a reasonable distance. In such settings, the notion of competitive market discipline is largely illusory. Patients cannot switch providers in emergencies, and geographic constraints grant providers substantial pricing power regardless of intent.

We regulate utilities because experience has taught us that leaving essential services to unfettered market forces leads to under-provision, exclusion, and price gouging. The ACA premium tax credits functioned in a similar way — not as a distortion of a healthy market, but as a form of affordability regulation. They helped ensure that access to the “utility” of health remained connected to the population, rather than priced beyond the reach of those who need it most.

Final Thoughts

The expiration of the ACA credits is a moment of clarity. It reveals that the U.S. health care system is built on a structural market failure that we have spent decades trying to patch with subsidies and mandates. If the removal of a tax credit causes the entire system of access to destabilize, it is proof that the market was never stable to begin with. The debate we should be having is not "government vs. market." That is a false dichotomy. The real question is: What institutional structure delivers the most efficient and equitable outcomes?

Markets are incredible tools for innovation and efficiency in many sectors. But tools have limits. You don't use a hammer to perform surgery, and you shouldn't use pure market logic to manage human life. The ACA cliff didn't break the health care market; it simply reminded us that it was never functioning like one.