In the United States, the bulk of health care spending is paid by health insurance companies.Such a system is also called a third-party payer system where consumers of health care pay a nominal fee and the rest are paid by the health insurance provider.Why might such a system lead to an inefficient outcome?

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When consumers pay prices well below the cost of providing health care services, they have little incentive to limit their consumption of these services. This can lead to over-consumption, which in turn drives up the cost of health care. Health insurance companies, in turn, have an incentive to control costs, which can lead to denial of certain treatments or tests. Physicians may also be influenced by the health insurance companies' payment approval process, which may discourage them from ordering expensive tests. Finally, some consumers may not use all of the health care services they need out of fear that they will be punished with higher premiums.

In the United States, the Bulk of Health Care Spending