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Healthcare is not a typical market
Harvard economist N. Gregory Mankiw explained in July 2017 that "the magic of the free market sometimes fails us when it comes to healthcare." 
This is due to:
Important positive externalities or situations where the actions of one person or company positively impact the health of others, such as vaccinations and medical research. The free market will result in too little of both (i.e., the benefit is under-estimated by individuals), so government intervention such as subsidies is required to optimize the market outcome.
Consumers don't know what to buy, as the technical nature of the product requires expert physician advice. The inability to monitor product quality leads to regulation (e.g., licensing of medical professionals and the safety of pharmaceutical products).
Healthcare spending is unpredictable and expensive. This results in insurance to pool risks and reduce uncertainty. However, this creates a side-effect, the decreased visibility of spending and a tendency to over-consume medical care.
Adverse selection, where insurers can choose to avoid sick patients. This can lead to a "death spiral" in which the healthiest people drop out of insurance coverage perceiving it too expensive, leading to higher prices for the remainder, repeating the cycle. The conservative Heritage Foundation advocated individual mandates in the late 1980's to overcome adverse selection by requiring all persons to obtain insurance or pay penalties, an idea included in the Affordable Care Act.

Medicare and Medicaid

Medicare was established in 1965 under President Lyndon Johnson, as a form of medical insurance for the elderly (age 65 and above) and the disabled. Medicaid was established at the same time to provide medical insurance primarily to children, pregnant women, and certain other medically needy groups.

The Congressional Budget Office (CBO) reported in October 2017 that adjusted for timing differences, Medicare spending rose by $22 billion (4%) in fiscal year 2017, reflecting growth in both the number of beneficiaries and in the average benefit payment. Medicaid spending rose by $7 billion (2%) in part because of more persons enrolled due to the Affordable Care Act. Unadjusted for timing shifts, in 2017 Medicare spending was $595 billion and Medicaid spending was $375 billion. Medicare covered 57 million people as of September 2016. While on the other hand, Medicaid covered 68.4 million people as of July 2017, 74.3 million including the Children's Health Insurance Program (CHIP).

Medicare and Medicaid are managed at the Federal level by the Centers for Medicare and Medicaid Services (CMS). CMS sets fee schedules for medical services through Prospective Payment Systems (PPS) for inpatient care, outpatient care, and other services. As the largest single purchaser of medical services in the U.S., Medicare's fixed pricing schedules have a significant impact on the market. These prices are set based on CMS' analysis of labor and resource input costs for different medical services based on recommendations by the American Medical Association.

As part of Medicare's pricing system, relative value units (RVUs) are assigned to every medical procedure. One RVU translates into a dollar value that varies by region and by year; in 2005 the base (not location adjusted) RVU equaled roughly $37.90. Major insurers use Medicare's RVU calculations when negotiating payment schedules with providers, and many insurers simply adopt Medicare's payment schedule. The AMA-sponsored committee in charge of determining RVUs of medical procedures that inform Medicare's payment to physicians has been shown to grossly inflate their figures.

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