In a typical market, supply and demand work together to determine price and quantity. More supply brings prices down. More demand raises prices. Consumers weigh costs against utility and make rational choices accordingly.
In healthcare, these normal rules break down.
The textbook model of perfect competition — the kind students see in Economics 101 — rarely applies to medicine. And the consequences are more than academic.
In healthcare, people do not shop for services the way they do for shoes or smartphones. They don’t ask for the price of a CT scan or compare physicians by cost per unit of treatment. They don’t usually plan their purchases in advance, and they often can’t delay them. They act under distress, fear, urgency, or incomplete information. They’re not consumers. They’re patients. And that distinction changes everything.
The Problem of Imperfect Information
A foundational principle of efficient markets is that buyers and sellers have access to perfect information. In healthcare, this ideal is nearly impossible. Most patients don’t know what procedures they need, what each test costs, or what alternative treatments exist. Even doctors don’t always have clear answers. Decision-making in medicine is clouded by uncertainty, and patients must trust professionals who may themselves lack full clarity.
In no other market do you undergo a five-hour, $60,000 procedure without knowing what, exactly, you’re buying. And even after it’s over, you may still not know the actual cost until weeks later, if ever.
Efforts like hospital price transparency rules, online review platforms, and physician rating systems help, but they do little to resolve the asymmetry. Unlike checking airline ticket prices, a hospital’s published charge rarely reflects what your insurance will pay, what you will owe, or what the service ‘should’ cost.
Elasticity That Isn’t
In most industries, when prices rise, demand falls. But in healthcare, demand tends to stay stubbornly inelastic. People can’t simply defer care when they get sick or injured. Insurance coverage further obscures true costs, weakening the consumer’s sensitivity to price. As a result, the standard logic of “price goes up, demand goes down” does not really hold.
Low elasticity allows healthcare providers, especially those with market power, to increase prices without losing patients. In competitive terms, the firm-level elasticity of demand is often close to zero. That’s not a failure of patient judgment. It’s a feature of the system.
In some corners of the industry, however, things are shifting. For elective procedures, urgent care, and retail clinics, patients are beginning to behave more like consumers. Price transparency tools are improving. But for high-cost, complex care — cancer, cardiovascular, or trauma services — the standard rules of elasticity still don’t apply.
The Hidden Cost of Time
Healthcare doesn’t just cost money. It costs time — often a lot of it. For hourly workers, taking time off to visit a doctor or recover from a procedure means lost wages. This disincentive can discourage even free or low-cost preventive care.
When flu shots were made available at Yale for free, only a fraction of staff took advantage of them. Not because they didn’t care about their health — but because even a 30-minute detour during a busy day can be a burden.
This hidden time cost distorts our understanding of access and demand. A health service may be free at the point of use, but if it requires transportation, childcare, or lost work hours, its real cost may be prohibitively high. For many people, ‘free’ healthcare is simply unaffordable and out of reach.
Barriers to Entry and Exit
In a functioning competitive market, firms can enter or exit easily based on profitability. In healthcare, barriers are everywhere. Opening a new hospital or clinic requires enormous capital, regulatory approval, staffing, and time. Even hiring a specialist like a neurosurgeon can take months due to certification, credentialing, and licensing.
On the exit side, financial failure doesn’t always mean a clean break. When hospitals close, it creates a crisis in care delivery — not just a market correction. The loss of a provider can destabilize an entire region’s access to services. As a result, governments often step in to keep struggling facilities afloat, distorting the market even further.
Monopoly and Monopsony in Action
Many healthcare markets lack sufficient competition. Rural areas often have only one hospital, whereas urban areas may have a handful of powerful players that dominate. When providers consolidate, they gain pricing power, driving costs higher for insurers and, ultimately, for patients.
But healthcare also features monopsony power — when a single buyer dominates the market. This happens when one hospital system or insurance company controls hiring in a region. Nurses, for example, may have no alternative employer within a 50-mile radius. That employer can suppress wages or limit job mobility. Even physicians feel these constraints, particularly when forced into exclusivity contracts or non-compete clauses.
Bounded Rationality and Behavioral Distortions
Health economists know that patients don’t always make decisions based on logic or cost-benefit analysis. This is not irrationality. It’s bounded rationality — people making the best decisions they can under constraints of time, stress, and limited knowledge.
Fear of rare but catastrophic events often drives demand. Patients may opt for tests or treatments ‘just in case’, even when the probability of benefit is low. Similarly, too many plan choices can lead to decision paralysis or suboptimal selections.
When Supply Creates Demand
A peculiar trait of healthcare is that increased supply can lead to increased use. If a hospital installs more MRI machines, imaging rates often rise — regardless of clinical need. This is known as ‘induced demand‘. Unlike buying groceries, where more supply simply meets existing demand, in healthcare, availability shapes consumption.
This phenomenon challenges the idea that increasing provider supply alone will lower costs. Without controls or incentives to prevent unnecessary care, supply-side expansion may simply drive up spending.
The bottom line
Healthcare doesn’t behave like a normal market because it isn’t one. The forces of supply and demand are warped by uncertainty, urgency, limited choice, and asymmetric information. Time, geography, insurance coverage, and behavioral biases all distort the relationship between cost and consumption.
Traditional economic tools still matter — but they must be adapted to fit healthcare’s realities. Understanding where classical models fall short is the first step in designing smarter policies that can expand access, manage costs, and improve outcomes in a system where patients are more than just consumers.
Letting the market ‘work itself out’ simply doesn’t apply here. Because in healthcare, the stakes are higher, the information is scarcer, and the demand is rarely optional.
Casey Ma is an MBA and MPH student at Yale University, specializing in Healthcare Management. With a background in strategy consulting, marketing, and project management, her passion lies at the intersection of healthcare transformation and strategic problem-solving. She is an advocate for collaborative innovation and enjoys engaging with professionals who share her enthusiasm for the healthcare and marketing sectors.
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