Restoring the Buyer

I. Introduction: The Economic Void at the Heart of American Healthcare

The United States healthcare system, currently accounting for nearly 18% of the nation's Gross Domestic Product (GDP), operates in a state of profound economic dissonance. It is a sector defined by advanced technological capability and clinical excellence, yet it is simultaneously crippled by a pricing mechanism that defies the fundamental laws of supply and demand.

The central thesis of this report validates the premise that the root cause of this dysfunction is not merely the volume of funds flowing into the system, but the structural "insulation" of the consumer from the economic transaction. This separation—whereby the patient consumes care but a third party (an insurer or the government) adjudicates payment—has created a "Buyer's Void." In this void, price signals are obscured, competition is stifled by consolidation, and administrative friction consumes a disproportionate share of resources that should be dedicated to clinical outcomes.

This report offers a rigorous examination of the "Consumer-Anchored" model as a corrective framework. Grounded in empirical data from 2024 and 2025, peer-reviewed economic literature, and granular case studies of market-based reforms, we analyze the viability of shifting from a third-party payer architecture to one where the patient functions as a true economic agent—empowered by capital, information, and market discipline. The analysis confirms that while the transition is fraught with complexity, particularly regarding chronic disease management and equity, the prevailing "negative-sum game" of the status quo is unsustainable. With administrative costs now exceeding direct patient care expenditures by a ratio of nearly 2:1 in some hospital settings, the urgency for structural redesign has never been greater.[3]

We dissect the failures of previous consumer-driven attempts—specifically the blunt instrument of High-Deductible Health Plans (HDHPs)—and propose a "Next-Generation" model. This evolved framework integrates the liquidity of funded Health Savings Accounts (HSAs), the price discipline of Reference-Based Pricing (RBP), and the clinical intimacy of Direct Primary Care (DPC), underpinned by "Dynamic Safety Net" mechanisms inspired by international best practices and supply chain logic. By restoring the buyer, we argue, the system can pivot from value-blind inflation to value-based competition.

II. The Structural Pathology of the Third-Party Payer System

To understand the necessity of a consumer-anchored model, one must first diagnose the specific economic pathologies engendered by the third-party payer dominance. The current system is not a market in the traditional sense; it is a complex bureaucratic apparatus where revenue is derived from maximizing reimbursement codes rather than maximizing value for the patient. This structural flaw manifests in three critical domains: administrative waste, price distortion, and provider consolidation.

The Administrative Wedge: The High Cost of Intermediation

A defining characteristic of the U.S. healthcare system is the immense volume of resources diverted from clinical care to administrative processing. The current model forces providers to function as data-entry clerks, coding specialists, and financial clearinghouses rather than solely as healers. This is not a peripheral inefficiency; it is the central economic reality of American medical practice.

Recent analyses of hospital expenditures have quantified this burden with alarming clarity. One 2025 analysis reports administrative costs at roughly 66.5% of hospital operating expenditures versus 33.5% for direct patient care, using that study's definitions and methods.[3] Interpreted cautiously, this pattern suggests that billing, coding, and payer transaction overhead can consume a substantial share of resources that would otherwise support direct care.

This creates a massive "administrative wedge" that drives a wedge between the cost of producing care and the price paid for it. Research indicates that U.S. healthcare administrative spending totals approximately $1 trillion annually, with the "financial transactions ecosystem"—the cost of processing claims and payments—accounting for $200 billion alone. The friction of processing a single claim can range from $12 to $19, and complex claims involving prior authorization can cost up to $50 to adjudicate.[4]

The implications of this administrative wedge are profound and regressive. It acts as a tax on the system, eroding the purchasing power of premiums and tax dollars. In international comparisons, the U.S. spends five times more per capita on administrative costs than other wealthy nations. This disparity is not driven by superior management or better data but by the fragmented nature of payment, where every transaction is a contested negotiation between a provider seeking revenue maximization and an insurer seeking medical loss ratio containment.

The "Restoring the Buyer" framework posits that a significant portion of this waste is intrinsic to the insurance model itself. When a patient pays a provider directly—as seen in the Direct Primary Care (DPC) model—the transaction cost drops to near zero. There are no claims to file, no denials to appeal, and no prior authorizations to adjudicate. The physician's time is reclaimed for patient care. By keeping the vast majority of routine transactions (primary care, labs, imaging) outside the insurance system, a consumer-anchored model attacks the root cause of this administrative bloat, potentially liberating hundreds of billions of dollars annually for actual service delivery.

The Distortion of Price Formation and the "List Price" Fiction

In a functional market, prices emerge from the interplay of supply and demand, signaling value and scarcity. In the U.S. healthcare market, prices are administratively constructed or negotiated in secret, bearing little relation to cost, quality, or consumer preference. This opacity creates an environment where extreme price variation is the norm, not the exception.

Data from 2025 highlights the absurdity of current pricing structures. The negotiated rate for a coronary bypass can range from $27,683 to $247,902, an absolute difference of over $220,000 for the same procedure code, often within the same geographic region.[6] Similarly, diagnostic imaging presents a stark arbitrage opportunity that remains invisible to the insulated consumer. Health Care Cost Institute analyses of site-neutral services, including transthoracic echocardiography categories, show materially higher allowed amounts in hospital outpatient departments than in physician-office settings.[2]

These disparities are not driven by clinical acuity or outcomes but by "site-of-service" payment differentials. Medicare and private insurers have historically reimbursed hospital outpatient departments (HOPDs) at significantly higher rates than independent physician offices for identical services. For instance, a chest X-ray may garner reimbursement 300% higher in a hospital than in a clinic. This policy failure creates a perverse incentive for consolidation: hospitals can acquire independent practices, rebrand them as outpatient departments, and immediately bill at the higher facility rate without changing the clinical service or location—a practice that arguably adds zero value while significantly increasing costs.

The consumer, shielded by copayments and deductibles that bear no relationship to the total cost, has no incentive (and often no ability) to discern these price differences. A patient paying a fixed $50 copay is indifferent to whether the underlying cost is $300 or $5,000. This indifference destroys the demand-side pressure that constrains prices in other sectors. Consequently, providers compete on prestige, technology arms races, and negotiating leverage with insurers, rather than on value to the patient.

The Consolidation Crisis: Monopolies and Rising Prices

The incentives created by opaque pricing and site-specific payment disparities have fueled a wave of vertical and horizontal consolidation that has fundamentally reshaped the U.S. healthcare landscape. Between 2012 and 2024, the percentage of physicians employed by or affiliated with hospital systems rose from under 30% to at least 47%.[9] This shift from independent practice to hospital employment is not merely a change in organizational chart; it is a driver of systemic inflation.

Empirical research from Yale University and other institutions demonstrates that when hospitals acquire physician practices, prices for services rise by an average of 14.1%.[10] These price hikes are attributed to increased market power and the exploitation of facility fees, rather than any measurable improvement in quality of care. In fact, studies analyzing childbirths—a common and standardized hospital event—found that two years after a hospital acquired an OB-GYN practice, prices for labor and delivery rose significantly, with physician prices jumping 15.1%.[10]

Consolidation also weakens the "countervailing power" of insurers. In highly concentrated provider markets, even large insurers struggle to negotiate favorable rates, as they cannot credibly threaten to exclude a dominant hospital system from their network without losing marketability to employers. This results in a "negative-sum game" where insurers pass higher costs onto employers and employees in the form of rising premiums and deductibles, while providers use their leverage to secure rate increases that outpace inflation.[11]

The economic consequences of this trend ripple beyond the healthcare sector. Rising healthcare prices act as a de facto payroll tax on the broader economy. Yale researchers estimate that a 1% increase in healthcare prices lowers payroll and employment at firms outside the health sector by approximately 0.4%.[11] This "spillover effect" depresses wages, reduces job growth, and strains the budgets of households and businesses alike. A consumer-anchored model, by exposing price variation and empowering patients to choose lower-cost independent providers, offers a mechanism to break this cycle of consolidation and restore competitive discipline.

III. The Failed Experiment? Re-evaluating High Deductibles and the "Behavioral Hazard"

The concept of "consumerism" in healthcare is not new. For the past two decades, the primary vehicle for introducing market forces has been the High-Deductible Health Plan (HDHP). The theory was simple: give consumers "skin in the game" via a high deductible (often $3,000 or more per family), and they will become rational shoppers, reducing unnecessary utilization and driving prices down. By 2025, approximately 33% of covered workers were enrolled in an HDHP with a savings option.[12]

However, a candid assessment of the HDHP experiment reveals a mixed legacy that must be understood to design a better system. The "first-generation" consumer model failed to account for the complexity of medical decision-making and the financial fragility of low-income populations.

The Blunt Instrument Problem: Delayed Care and Adverse Outcomes

The evidence is overwhelming that HDHPs are effective at reducing healthcare spending. However, they often do so through a blunt mechanism: consumers reduce utilization of both low-value and high-value care.[13] Faced with the prospect of paying the full cost of a visit or prescription, many patients—lacking the clinical expertise to triage their own symptoms—simply avoided care altogether.

A longitudinal cohort study of 343,137 adults with chronic illness found that HDHP enrollment was associated with statistically significant reductions in the use of evidence-based care, including guideline-concordant clinic visits and prescription drugs.[15] For example, patients with diabetes or cardiovascular disease in HDHPs were found to delay filling prescriptions or skip doses to save money. This phenomenon is known as "behavioral hazard." Unlike "moral hazard" (where insurance encourages wasteful consumption), behavioral hazard occurs when patients under-consume necessary care because the immediate out-of-pocket cost looms larger than the long-term health benefit.

The consequences of this avoidance are severe. Research indicates that approximately 36% of U.S. adults reported skipping or postponing needed medical care due to cost in the past year.[17] For low-income populations, the deductible acts not as an incentive for efficiency, but as an insurmountable barrier to access. A 2025 study found that Medicare beneficiaries with "near-low" income (100-150% of the Federal Poverty Level) faced the highest rates of affordability challenges because they earned too much for full Medicaid subsidies but too little to absorb the cost-sharing of modern plans.[18]

Our policy response to this problem is not broad high-value carve-outs. It is a three-part discipline: mandatory annual physical compliance, patient-owned HSA liquidity for routine care, and targeted automatic replenishment for verified medical-necessity hardship cases.

The Limits of "Shoppability" in the Current Environment

The "consumer" model relies on the assumption that healthcare services are "shoppable"—that patients can compare prices and quality before making a decision. While this holds true for elective procedures and routine diagnostics, it fails in the context of emergency care and complex chronic management.

Emergency care, by definition, precludes comparison shopping. A patient suffering a heart attack or a trauma does not check prices on an app; they go to the nearest hospital. Studies of hospital pricing for emergency services show that self-pay prices (relevant to the uninsured or those in the deductible phase) rose significantly between 2021 and 2023, with patients having zero leverage to negotiate.[19]

Even for shoppable services, the current transparency landscape is inadequate. Although federal rules now require hospitals and insurers to post prices, the data is often buried in massive, complex machine-readable files that are inaccessible to the average patient. As a result, the cognitive load of navigating available price files remains high. A 2025 analysis suggests that transparency is a necessary foundation but is insufficient on its own to drive broad market correction without accompanying financial incentives and simplified plan designs.[22]

Correcting the Failure: Minimal First-Dollar Coverage

The failure of "first-generation" HDHPs does not invalidate the consumer model; it highlights the need for cleaner rules. The proposed "Next-Generation" model should avoid broad "high-value service" exemption categories, because those categories can expand over time and recreate opaque first-dollar spending.

Instead, first-dollar coverage should be narrow and explicit: annual preventive physicals only. Those physicals should be incentivized (for example, premium credits, HSA bonuses, or penalties for non-completion unless medically waived), while nearly all other routine spending flows through HSAs. This preserves strong price discipline, reduces category-gaming risk, and keeps the system aligned with the core purpose of patient-controlled accounts.

This design also directly counters a predictable line of attack: "just classify more services as high value." Once broad exception categories exist, stakeholders have an incentive to relabel services to regain first-dollar reimbursement, which expands mandatory coverage, weakens price sensitivity, and recreates the same inflationary dynamics reform is trying to solve. A narrow annual-physical rule is easier to audit, harder to game, and more durable over time.

IV. The "Funded" Consumer: Transforming Subsidies into Assets

The central pillar of the proposed reform is the shift from "defined benefit" insurance to "defined contribution" asset building. For a consumer market to function, the consumer must have capital. Currently, public subsidies (like ACA tax credits) and private subsidies (employer contributions) flow directly to insurance carriers. The patient never touches this money; they only experience the coverage it buys.

The "Funded Health Savings Account (HSA)" concept fundamentally restructures this flow. Instead of paying premiums to insurers to cover "first-dollar" risk, funds are deposited directly into patient-owned accounts. This liquidity empowers the patient to act as a buyer.

The "HSA Option": Democratizing Capital

The "HSA Option" proposed by the Paragon Health Institute provides a concrete policy mechanism for this shift. The proposal suggests allowing low-income exchange enrollees (those between 100% and 250% of the Federal Poverty Level) to choose a deposit into an HSA instead of the traditional Cost-Sharing Reduction (CSR) subsidy that lowers deductibles.[27]

Currently, CSRs are paid to insurers to artificially lower the deductible of a silver plan. The patient may not even realize the subsidy exists. Under the HSA Option, the value of that subsidy—estimated at $1,500 to $2,000 annually for many enrollees—would be deposited directly into the patient's HSA.[27] This transforms the subsidy from a passive benefit into an active asset.

The Economic Impact:

1. Flexibility: Unlike insurance benefits, which are restricted to covered services and networks, HSA funds can be used for a broader array of health needs, including dental, vision, and over-the-counter medications.[27]
2. Accumulation: Insurance benefits are "use it or lose it"—they expire at the end of the plan year. HSA funds roll over indefinitely. This introduces a powerful accumulation dynamic: healthy behaviors and prudent shopping in one year build a capital reserve for future years. This aligns the patient's long-term financial interest with their health interest.[27]
3. Portability: The asset belongs to the individual, not the job or the insurer. This decouples health security from employment status, reducing "job lock" and providing stability during labor market transitions.

The ICHRA Revolution: Decoupling from Employment

For the employer market, the "Individual Coverage Health Reimbursement Arrangement" (ICHRA) serves as the vehicle for this transformation. ICHRAs allow employers to contribute tax-free dollars that employees use to buy their own individual market coverage, rather than enrolling in a group plan selected by the employer.[28]

Interest in ICHRAs appears to be growing among employers experimenting with defined-contribution approaches. Employer and industry reports describe potential gains in plan flexibility and budget predictability, though outcomes vary by labor market, benefit design, and implementation quality.

By moving employees into the individual market, ICHRAs create a massive, diversified risk pool that is not tied to any single employer. This stabilizes premiums and encourages insurers to compete for individual customers on price and quality, rather than competing for employer contracts based on network discounts.

V. Restoring the Market: Direct Primary Care and the Decoupling of Routine Care

If the HSA provides the capital, Direct Primary Care (DPC) provides the venue for a functional market. DPC represents the most successful example of "de-financializing" routine healthcare. In this model, patients or employers pay a flat monthly membership fee directly to a physician practice for comprehensive primary care, bypassing insurance entirely for routine services.

The Economics of DPC

DPC can alter the cost structure of primary care. By reducing insurance-mediated billing, some DPC practices report lower administrative overhead, smaller patient panels, and longer visit times compared with many fee-for-service settings.[33]

Employer interest in DPC has grown in recent years according to industry tracking, suggesting that purchasers are actively testing alternative primary-care financing models.[30]

Case Studies in Success

• Union County, North Carolina: Facing rising costs, Union County offered a DPC option to employees. Public descriptions of the program report lower spending and strong chronic-care engagement among participating members, though results should be interpreted in light of local plan design and population mix.
• Rosen Hotels & Resorts: Operating in Orlando, Florida, Rosen Hotels created a self-funded healthcare model centered on an onsite medical facility that functions like a large-scale DPC. The program emphasizes access, with low or zero copays for primary care and drugs. The result: Rosen Hotels spends approximately 50% less per capita on healthcare than the average employer, saving an estimated $400 million over the life of the program.[35] This capital savings has been reinvested into employee scholarships and community development, demonstrating the broader economic potential of healthcare efficiency.
• State of Nebraska Pilot: A pilot program for state employees demonstrated the viability of DPC even within a bureaucratic government framework. While initially small, the pilot showed high satisfaction and provided a template for integrating DPC into state benefit plans without legislative overhaul.[36]

These examples are directionally encouraging but not definitive on their own. They suggest that when patients or employers contract more directly with primary-care providers, administrative friction can decline and access can improve.

VI. Disciplining the System: Reference-Based Pricing (RBP)

For services that cannot be handled within a DPC arrangement—such as surgeries, advanced imaging, and specialist procedures—Reference-Based Pricing (RBP) serves as the market disciplinarian. Under RBP, the plan sponsor sets a maximum reimbursement limit (the "reference price") for a specific service, often pegged to a multiple of Medicare rates (e.g., 140% or 200% of Medicare).[37] If a patient chooses a provider charging above this limit, they are responsible for the difference (balance billing), though in practice, many plans negotiate settlements or steer patients to providers who accept the reference price.

The Montana Miracle and Beyond

The most prominent validation of RBP comes from the State of Montana Employee Health Plan. Facing insolvency risk, the plan moved to an RBP model pegged to a multiple of Medicare rates. Public analyses report substantial savings over the first several years and stronger pricing discipline in negotiations.[40] Crucially, the state published what it would pay, and hospitals, faced with the loss of the state's large employee block, adapted to the benchmarked structure.

Similar success was seen with CalPERS (California Public Employees' Retirement System). By implementing reference pricing for hip and knee replacements, setting a threshold of $30,000, CalPERS motivated patients to choose lower-priced, high-quality hospitals. This resulted in a 19% shift in market share to value-based facilities and saved the system millions without any measurable decline in outcomes.[41]

The Mechanism of Action

RBP transforms the "open-ended" insurance checkbook into a "defined contribution" for specific procedures. It leverages the fact that commercial prices are often 250% to 300% of Medicare rates—a disparity that is difficult to justify by cost differences alone.[38] By anchoring payment to a stable, albeit governmental, benchmark, RBP reintroduces a price ceiling that the opaque commercial market fails to provide. It forces providers to compete against a transparent standard rather than negotiating secret discounts off inflated "chargemaster" rates.

VII. The Dynamic Safety Net: Engineering Automatic Replenishment

A purely consumer-driven system faces a critical vulnerability: the "running out of money" problem. High-risk patients or those with low incomes may deplete their HSAs, leading to the abandonment of care. To address this, the proposed framework borrows from supply chain management ("Periodic Automatic Replenishment" or PAR levels) and international safety net models to create a "Dynamic Safety Net."

International Lessons: The Singapore Model

Singapore operates a consumer-anchored system grounded in "MediSave" (mandatory health savings accounts). However, it recognizes that savings are not always sufficient. The "MediFund" acts as a government endowment that serves as a safety net of last resort. When a patient's MediSave and insurance (MediShield) are exhausted, MediFund provides top-ups to ensure that no citizen is denied care due to inability to pay.[42] This "bottom-up" funding mechanism is distinct from the U.S. "top-down" insurance subsidy; it funds the patient at the point of failure, rather than funding the insurer preemptively.

The "Reverse Deductible" and Automatic Replenishment

Adapting this to the U.S. context involves a mechanism of "Automatic Replenishment." In this model, if a low-income patient's HSA balance falls below a critical threshold (PAR level) due to medically necessary spending (e.g., insulin, dialysis, verified chronic care), a subsidy trigger is activated to refill the account.

This creates a "Reverse Deductible." Instead of broad pre-deductible carve-outs for routine services, the system uses targeted top-ups when clinically necessary spending depletes an HSA below a defined threshold. If the patient manages their health well, funds accumulate; if they face high-cost verified need, the replenishment mechanism restores liquidity without abandoning the HSA-first structure.[44]

This dynamic approach aligns with supply chain logic used in hospitals to manage inventory.[45] Just as a hospital automatically reorders supplies when stock hits a minimum level to prevent stockouts, the health financing system would "reorder" capital for a patient when their health funds hit a minimum, preventing "care stockouts." This ensures continuity of care for the vulnerable without negating the market discipline for the broader population.

VIII. Economic Impact Analysis: Labor Markets and Deficits

The transition to this model has profound macroeconomic implications. The Yale study on hospital pricing provides a critical data point: a 1% increase in healthcare prices lowers payroll and employment at non-health firms by 0.4%.[11] Conversely, restraining price growth through consumer discipline would act as a stimulus for wages and employment.

By shifting from the ACA's current premium subsidy structure to an "HSA Option" with fixed patient-directed deposits, some analysts project deficit reduction under specific design assumptions.[27] Likewise, reducing administrative overhead could free resources for clinical staffing, wage support, or direct price relief for patients.

IX. Implementation Roadmap and Conclusion

The path to "Restoring the Buyer" requires a coordinated sequence of policy and market actions. The expiration of enhanced ACA subsidies at the end of 2025 creates a "fiscal cliff" that serves as a forcing function for reform.[48]

Strategic Roadmap

To move from theory to practice, we propose a phased policy agenda:

1. Enact the "HSA Option": Congress should transform ACA CSR subsidies into refundable tax credits deposited into HSAs for low-income exchange enrollees. This creates a class of well-funded patients in the individual market who literally hold the money in their hands. (This idea has gained bipartisan attention: recent tax law changes now allow ACA bronze/catastrophic plans to be HSA-eligible but we need to be more aggressive where only high deductible plans are offered to folks availing subsidies and a HSA type account is opened.)
2. Mandate Site-Neutral Payment: CMS should finalize and expand site-neutral rules. All payors (Medicare, Medicaid, ACA plans and major commercial plans) must reimburse outpatient services at the same rate regardless of setting. This aligns with MedPAC and BPC recommendations and would quickly eliminate the hospital "facility fee" arbitrage. Congressional action may be needed to fully level the field for all existing hospital clinics.
3. Promote HSAs and ICHRAs: Encourage employers to adopt HSA-eligible plans and Individual Coverage HRAs. Tax incentives or matching contributions can accelerate employee HSA funding. This helps shift employer coverage from open-ended insurance to defined contributions plus high-deductible coverage. Employers should also incentivize enrollment in DPC or telemedicine for primary care (for example, by covering monthly membership fees).
4. Lock in Narrow First-Dollar Coverage: Statutorily limit pre-deductible routine coverage to annual preventive physicals (with medical-waiver exceptions), and prohibit open-ended "high-value service" carve-out categories. This prevents benefit-creep and reduces opportunities for coding and lobbying arbitrage.
5. Transparency and Reference Pricing: Federal and state regulators should require public reporting of negotiated prices by procedure and provider (building on CMS transparency rules). States could pilot reference pricing for state employees or Medicaid (e.g. paying only up to a benchmark rate). These steps give patients and purchasers the information needed to steer business to lower-cost providers.
6. Strengthen Safety Nets: Use Section 1332 waivers or legislation to create "auto-funding" for sicker patients. For example, a Virginia pilot spontaneously enrolled Medicaid-eligible people in an HSA paired with premium assistance; similar dynamic subsidies could be tested. The goal is to ensure that as people spend down their accounts, they get government top-ups or catastrophic coverage seamlessly, preserving both market discipline and universal protection.

Each step is independently valuable but more powerful in combination. By 2027, penalties on excessive spending (like California's affordability caps) will start taking effect; our reforms would help hospitals and insurers meet those caps by cutting waste. Likewise, proposed IRS rules in 2026 make more health plans HSA-compatible, signaling federal momentum for patient-directed accounts. This is a pivotal moment: with careful legislation and regulation, we can leverage existing policy shifts (ACA rule changes, DPC laws, tax code tweaks) to transform incentives.

Conclusion

The United States does not have a healthcare funding problem; it has a market design problem.

The current architecture, by insulating the buyer from the transaction, has weakened feedback loops necessary for price discipline and quality improvement. Evidence from recent years suggests that administrative burden remains high, consolidation can raise prices without commensurate quality gains, and traditional cost-containment approaches have had limited success in bending the curve.

"Restoring the Buyer" is not an ideological abstraction but a pragmatic economic necessity. By anchoring the system in the consumer—armed with capital (HSAs), information (Transparency), and fair market rules (Site Neutrality)—we can reverse the consolidation trends, strip out administrative waste, and align the financial health of the system with the physical health of the patient. The "Next-Generation" model, with its integrated safety nets and value-based design, offers a credible, evidence-based path out of the current crisis.