Health Insurance is a Big Union - by Nicholas Decker

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Health Insurance is a Big Union<br>How bargaining happens

Nicholas Decker<br>Jul 27, 2026

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Health insurance often pays for things which are both predictable and certain. Isn’t that strange? The nominal purpose of insurance is to guard ourselves against risk — we want to be able to pay for unexpected large expenses without having to hold an enormous buffer stock of savings. There is no reason to first pool our money together if we are certain to pull it out again on a day of our choosing.<br>And why are health insurance companies so intimately involved in every aspect of our care? If health insurance worked like any other form of insurance, you would receive a lump sum of money upon the realization that you have a health condition, sufficient to pay for whatever care you need. And yet health insurance companies restrict the doctors you can choose from, choose what procedures you’re allowed to do, and negotiate the prices that will be paid. If life insurance worked this way, you would have in-network morticians, you’d have pine coffins fully covered but oak coffins have a co-pay, and the whole thing is settled two months after the funeral.<br>The answer to both of these is that health insurance is substantially not about pooling risk. It is about collective bargaining. By putting our money together, we can hold down the cost of medical care. Restricting what people can buy with insurance money allows them to implement something closer to an efficient transfer.

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To understand this function of health insurance markets, we must learn about the economics of bargaining. This is a new and exciting area of economics, and its applications in antitrust law has been one of the cleanest examples of new theoretical advances making their way into practical relevance. We will also learn everything we can about the provision of healthcare in America, and how well-intentioned laws have undermined the incentives for health insurance companies to fight.<br>Finally, we need to consider the effect on innovation. Medical innovation, largely pharmaceuticals, requires the outlay of an enormous fixed cost to discover new ideas. Pushing outcomes closer to what is efficient in the short run can be worse in the long run, as new ideas are left undiscovered.<br>This article is brought to you by Mechanize, Inc. They are hiring software engineers to train and test frontier coding agents. Apply here.<br>Health insurance is provided both privately and publicly, with the public insurance often being through the auspices of private companies, and with private insurance often being regulated so severely as to barely be a free market at all. The old, as well as people with disabilities and people on kidney dialysis (among others) are covered by Medicare; the poor are covered by Medicaid, often as a supplement to private insurance.<br>The rest buy privately, with over half of all people buying health insurance through their employer. Strikingly, for two thirds of these, the insurance is not actually financially liable for paying out claims or collecting premiums. This is handled by the employer. The employer contracts with the insurer in order to get access to the insurer’s network of hospitals and doctors, the set of negotiated rates for different procedures, and the administrative set-up for billing.<br>It used to be that insurance simply paid your bills, whatever they might happen to be, in a “fee-for-service” arrangement. We do this instead of paying out a lump sum because it is fundamentally infeasible to give people a sum of money, and only then have people search. This would be perfectly fine in perfectly competitive conditions, but is very different under imperfectly competitive ones. When one discovers that one has a condition, their elasticity of demand changes. Empirically, customers also do a terrible job shopping around – a few months ago I wrote an article on this, but basically requiring price transparency has an extremely limited effect on utilization and prices, and what effects there are come from the major companies learning about each other’s prices, not from the consumer choosing better options.<br>Paying people’s medical bills, regardless of what they were, was rather predictably disastrous. Prices exploded from the 60s to the 90s, going from 5% of GDP in 1960 to 13% by the beginning of the 1990s.

Doctors and hospitals were encouraged to hike their prices to match the generosity of insurance coverage. On the patient side, the marginal cost of getting more healthcare once you have the plan might be zero, thus leading to inefficiently high levels of healthcare. Even if the insurance company attempted to control things through cost sharing, where the patient must pay a portion of the costs of care, this would only cut out the most egregious waste.<br>Then, expenditures flatlined. For much of the 1990s, healthcare spending as a share of GDP was...