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Distortion of the Health Care Market by Third-Party Payment

Distortion of the Health Care Market by Third-Party Payment


The healthcare market is a complex and complicated system involving various stakeholders such as patients, providers, insurers, and government bodies. Third-party payment, in which insurance companies or government programs pay for a considerable amount of health care expenditures on behalf of patients, is a fundamental component that significantly impacts this industry. While third-party payment aims to increase access to care and alleviate financial constraints on individuals, it also introduces various market inefficiencies in the healthcare sector. This article investigates how third-party payment distorts the healthcare market, focusing on the consequences of costs, demand, and quality of care.

Price Disturbance

Third-party payment schemes can contribute to distorted pricing dynamics in the healthcare sector. Intermediaries, such as insurance companies, put a barrier between the consumer and the treatment provider. Because patients are insulated from the actual cost of the treatments they get, they have a lower price sensitivity. As a result of the need for obvious price signals, the typical market forces of supply and demand are diminished, resulting in inflated pricing for healthcare services (Feldstein, 2019).

Furthermore, price discrimination and disparities might arise by negotiating reimbursement rates between insurers and providers. Providers with greater market power can negotiate higher reimbursement rates, thus distorting pricing and potentially incentivizing providers to raise their fees. As a result, pricing distortion in the healthcare market can be exacerbated by a lack of price transparency and a complex web of negotiations (Feldstein, 2019).

Demand Distortion

Third-party payment methods skew demand for health care services as well. Patient’s willingness to consume health care increases when they are shielded from direct care expenses. This issue, known as moral hazard, emerges from a lack of personal financial responsibility and an over-insurance mindset. As a result, people may seek needless or low-value services, increasing the total demand for health care (Pauly, 2021).

Demand distortion can result in the overutilization of services, which has several negative consequences. First, it contributes to growing healthcare costs by putting more burden on scarce resources. Second, it may result in longer wait times and reduced access to care for people who genuinely need it. Finally, overuse of healthcare services can expose patients to unwarranted risks and interventions, potentially jeopardizing their health (Pauly, 2021).

Quality Violation

Third-party payment schemes can also influence healthcare quality. Because there is no direct financial relationship between patients and physicians, typical market pressures that promote quality improvement are diminished. Patients are less likely to compare and switch providers based on cost and quality measures. Therefore, providers may have less financial motivation to compete based on the quality of treatment they provide.

Furthermore, the emphasis on third-party payment systems on reimbursement structures and bureaucratic requirements may shift physicians’ attention away from patient-centred care and toward meeting documentation and regulatory expectations. This shift in focus can inhibit delivering high-quality care and innovation within the healthcare system (Feldstein, 2019).


Third-party payment arrangements in the healthcare industry cause many price, demand, and quality of treatment distortions. Patients’ price sensitivity is reduced when separated from the entire cost of care, resulting in inflated prices and price discrimination. Financial insecurity alters demand, resulting in overutilization and even jeopardizing access to care. Furthermore, lacking obvious financial incentives may stymie efforts to improve quality and patient-centred care. Politicians and stakeholders must address these biases as they approach healthcare reform to foster a more efficient and effective healthcare system.



P. J. Feldstein (2019). 8th edition of Health Care Economics. Cengage Learning is a learning company.

M. V. Pauly (2021). The Moral Hazard of Health Care. 449–494 in Handbook of Health Economics, Vol. 2. Elsevier.

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How does third-party payment distort the market for health care?

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