I. Executive Summary: The Structural Pathology of US Healthcare

The American healthcare financing system is characterized by a structural pathology stemming from the privatization and financialization of both health insurance and healthcare delivery. The origins of this structure are inextricably linked to federal policies designed to promote managed care, specifically the Health Maintenance Organization (HMO) Act of 1973 (Public Law 93-222). While initially conceived as a means to encourage cost-efficient, preventative, not-for-profit models, the subsequent liberalization of requirements and the infusion of capital from Wall Street fundamentally transformed the managed care landscape.   

The core economic dysfunction of the resulting system is a pervasive conflict of interest. For-profit health insurance companies, often publicly traded, operate under a legal and financial mandate of shareholder primacy—a fiduciary duty requiring the maximization of returns, dividends, and stock value. This duty directly opposes the social utility of health insurance, which is to pay claims fully and provide affordable access to necessary care. This conflict is systematically resolved in favor of the shareholder, driving costs to exorbitant levels.   

Empirical evidence substantiates this mechanism. Between 2001 and 2022, major US healthcare companies distributed a staggering $2.6 trillion in profits to shareholders through dividends and buybacks, representing 95% of their net income. This massive diversion of capital away from system investment or premium reduction stands as definitive proof of the system’s primary financial objective. Consequently, the United States spends nearly twice as much per capita on health care as comparable wealthy nations, with the spending differential overwhelmingly driven by inflated prices for services and excessive administrative overhead, structural hallmarks of a dual for-profit environment.   

II. The Genesis of Managed Care: The HMO Act of 1973 and Policy Deviation

A. Policy Context: The Need for Cost Containment in the Early 1970s

Prior to the passage of the HMO Act, the US healthcare system was experiencing accelerating inflationary pressure. The dominance of traditional indemnity insurance, coupled with fee-for-service (FFS) reimbursement methods that relied on compensating providers based on “usual, customary, and reasonable” charges, created powerful incentives for increased utilization and unchecked cost growth.   

The concept of managed care, inspired by models like Kaiser Permanente, was introduced as an alternative delivery and financing structure. Proponents viewed it as a non-profit solution designed to emphasize preventative care, integrate service delivery, and, most importantly, control costs by reducing unnecessary hospitalizations and procedures. This new model sought to overcome the incentive structures inherent in FFS, where the volume of services increased naturally when covered by insurance.   

B. Key Provisions of the HMO Act (P.L. 93-222)

Signed into law by President Richard Nixon on December 29, 1973, the HMO Act (Public Law 93-222, S. 14) was intended to encourage the establishment and expansion of Health Maintenance Organizations. The federal government provided substantial financial assistance to help these new organizations develop. From 1974 until the termination of federal assistance programs in 1981, approximately $200 million was invested in HMO development. By December 31, 1977, the Department of Health, Education, and Welfare (HEW) had awarded $131.3 million in grants and loans to 1972 organizations, resulting in 51 federally qualified HMOs.   

A critical element of the Act was the “Dual Choice” provision. This mandate required employers with 25 or more employees who offered traditional health insurance plans to also offer federally certified HMO options. This government-mandated market access provided vital legitimacy and ensured a rapid pathway for HMOs to reach the employer-based health benefits market, establishing the foundational role of managed care within private health insurance.   

Initial performance under the Act was challenging. A review of 14 HMOs receiving federal assistance through 1977 indicated that while most adhered to operational and service requirements, many faced significant financial hurdles. For instance, six of the 14 reviewed HMOs were assessed as having a poor chance of reaching their financial breakeven point within five years. Furthermore, there were documented exceptions in the area of enrolling high-risk populations, suggesting inherent difficulties in maintaining comprehensive community standards while achieving financial stability.   

C. The Critical Policy Pivot: Amendments and Financialization

The financial struggles of early HMOs, compounded by challenges HEW faced in effectively issuing and enforcing regulatory guidelines , set the stage for a critical deviation from the initial policy intent. The 1976 Amendments to the HMO Act significantly liberalized the federal qualification requirements.   

This legislative adjustment signaled a shift in priority. When faced with the difficulty of scaling the managed care model under strict, community-focused regulations, policymakers opted to prioritize market viability and rapid expansion by relaxing regulatory barriers. This approach reduced the commitment to the more restrictive, public health-oriented standards that were proving financially demanding.

The liberalization attracted the interest of the private capital market. By 1983, Wall Street began actively favoring the HMO industry. This infusion of private capital enabled rapid expansion and provided necessary liquidity, especially to meet increasing statutory net worth requirements mandated at the state level. Consequently, many not-for-profit HMOs underwent status conversions to become for-profit entities, fundamentally altering the philosophical basis of the managed care movement from a health paradigm focused on service integration to a financial asset driven by returns.   

The causal chain is clear: federal seed money and the mandated Dual Choice provision established the foundation for the industry; regulatory relaxation made it an attractive investment vehicle; and Wall Street capital facilitated the widespread scaling and ultimate financialization of the health maintenance model.

III. The Economics of Entrenchment: The Dual For-Profit Healthcare Structure

The contemporary US system is defined by its dual for-profit structure, where both the financing mechanisms (insurers/payors) and the delivery system (hospitals/providers) are increasingly controlled by investor-owned corporations. This structure creates mutual inflationary pressure, where costs are driven upward by providers seeking maximum reimbursement and preserved by payors seeking maximum profit margins.

A. Defining the Dual Structure: Payor and Provider Consolidation

The healthcare market has undergone massive consolidation, both horizontally (mergers between similar entities) and vertically (integration across the care continuum). Leading insurance companies—such as UnitedHealthcare, Cigna, and Humana—have vertically integrated by acquiring provider networks and critical intermediaries like Pharmacy Benefit Managers (PBMs). This convergence creates monolithic entities that exercise unprecedented control over pricing, utilization, and service distribution, often impacting the more than 55% of US physicians who are now hospital-employed, or the 23% who work for other corporate owners.   

B. Consequences of For-Profit Healthcare Delivery (The Provider Side)

The financial mandate of for-profit ownership demonstrably impacts both cost and quality in the provider sector.

1. Higher Payments and Failed Efficiency Claims

The conventional argument that the profit motive optimizes care and minimizes costs is contradicted by extensive research into for-profit healthcare delivery. A rigorous meta-analysis showed that investor-owned acute care hospitals generate higher payments for care—an excess of approximately 19%—compared with private not-for-profit hospitals. This 19% excess implies that the fiduciary duty to generate profits for shareholders necessitates higher prices, rather than improved operational efficiency. The structural requirement to produce returns actively drives up national health expenditures. In 2001 alone, this excess cost was estimated to represent $6 billion in waste, illustrating the systemic nature of price inflation driven by corporate mandate.   

2. Diminished Quality Through Cost Cutting

The pressure to maximize profits also results in operational changes that compromise patient care. Studies demonstrate that for-profit hospitals are associated with diminished nursing and patient outcomes, largely because they invest less in essential services such as nurse staffing. Patients in for-profit settings receive less nursing care, resulting in worse patient-to-nurse staffing ratios compared to their counterparts in not-for-profit hospitals. This behavior confirms a pattern where the profit motive encourages cost reduction through quality degradation (fewer nurses) while simultaneously maximizing revenue through inflated prices, constituting a dual financial strategy that benefits investors but harms consumers.   

3. The Exacerbating Role of Private Equity

The involvement of Private Equity (PE) firms, which typically invest for short durations (four to seven years) and rely heavily on pooled external capital, amplifies the focus on accelerated profit extraction. The PE business model, which involves high-risk strategies and short-term horizons, has rapidly expanded into diverse sectors like home care, dental care, and physician practices. Research confirms that this short-term profit seeking translates directly into higher prices for consumers and insurers. Hospitals acquired by PE firms increase prices by 7-16% and boost profits by 27%; similarly, PE-acquired physicians’ practices increase prices by 4-20%. This targeted strategy ensures immediate financial gains for investors, further contributing to the overall inflationary environment in healthcare.   

C. Consequences of For-Profit Health Insurance (The Payer Side)

The consolidation in the insurance sector further entrenches high costs by reducing competition and retaining cost savings.

1. Insurer Market Power and Premium Inflation

Insurer consolidation reduces the number of available payors, granting the remaining large entities substantial market power to negotiate lower reimbursement rates from healthcare providers. While insurers often argue that such growth allows them to pass savings onto consumers, evidence consistently fails to support this assertion. Analyses of insurer mergers demonstrate that while consolidated insurers may achieve lower provider prices, these savings are generally not translated into lower premiums or reduced out-of-pocket costs for members. In fact, studies show that premiums often increase following insurer mergers. This occurs because reduced competition lessens the pressure on insurers to keep premiums low, allowing them to capture the savings and inflate their profit margins instead.   

2. The Lack of PBM Transparency

The market for Pharmacy Benefit Managers (PBMs)—the entities managing prescription drug benefits—is highly consolidated, with the top three PBMs (all vertically merged with large insurers) controlling nearly 80% of dispensed prescriptions. This vertical integration creates a systemic lack of transparency regarding drug prices and rebates. This opacity makes it extremely difficult to determine how PBMs leverage their dominant market position to increase profits, potentially driving up costs for both health plans and consumers.   

IV. The Fiduciary Conflict: Shareholder Value vs. Social Utility

The fundamental economic mechanism driving unaffordability in the US system is the conflict arising from the mandate of shareholder primacy for investor-owned health insurance corporations.

A. The Economic Mandate of Shareholder Primacy

For publicly traded insurers, the legal and operational imperative is simple: maximize shareholder wealth. This fiduciary duty requires corporate leaders to prioritize profit generation and stock value over minimizing patient costs or maximizing claim payment reliability. Health care, within this context, is treated as a highly valuable “economic good” whose value is measured financially, rather than a “social good” guaranteed by non-profit or public systems. The structure of the market dictates that the pursuit of financial returns supersedes the ideal of providing comprehensive, accessible care.   

B. Mechanisms of Profit Extraction: Quantifying Capital Reallocation

The ultimate quantifiable proof of the conflict of interest lies in how net income is allocated. Researchers analyzing 92 large US healthcare companies on the S&P 500 between 2001 and 2022 found a profound imbalance in capital distribution.