In Stage I in the evolution of a cost-plus system, the quality of medicine delivered may be very high. This is because medical care is administered in an environment in which cost is no object, and physicians are trained to do everything possible to alleviate any and all illnesses, whether real or imagined.
Once the cost-plus system enters a cost-control phase, however, the quality of patient care can deteriorate rapidly. This is because, in the cost-control phase, competing institutions begin a monumental struggle over resources. In this environment, the patient is no longer seen as a consumer or buyer of medical care. Indeed, individual patients become largely unimportant exceptinsofar as their formal consent is needed in order to legitimize a continuation of bureaucratic warfare over vast sums of money.
The Role of Insurance. Outside of the health care sector, there are well-developed markets for insurance for a wide variety of unforeseen, risky events: life insurance (for an unforeseen death), auto liability insurance (for an unforeseen automobile accident), fire and casualty insurance (for unforeseen damage to property), disability insurance (for unforeseen physical injuries). Indeed, there is hardly any risk that is not in principle insurable. Lloyd's of London will even insure against the failure of a communications satellite to achieve orbit.
All of these markets have certain common characteristics.  The amount to be reimbursed is based on a risky event. Once the event has occurred and the damage has been assessed, the insurer writes a check to the policyholder for the agreed-upon amount. Policyholders are free to do whatever they prefer with the money they receive.
In the market for health insurance, however, things are very different. Often, there does not need to be any risky event in order to trigger insurance payments (e.g., coverage for preexisting illnesses). Once it is determined that a health insurer owes something, the amount to be paid is not a predetermined sum but is determined by the consumption decisions of the policyholder (e.g., the choice to have surgery in a hospital rather than as an outpatient, or the choice to undergo a battery of tests). Payment is made not to the policyholder but to medical providers, based on the consumption decisions that are made. 
These differences make a major impact on the way that the health insurance market functions. In fact, in many respects health insurance is not insurance at all. It is instead prepayment for the consumption of medical care.
Because health insurance is the primary vehicle by which people consume medical services, in a very real sense it is the insurer, not the patient, who is the customer of medical providers. Thus, people insured by Blue Cross are not the principal buyers of the medical care they receive. Blue Cross is. Similarly, Medicare beneficiaries are not the the principal buyers of their medical care. Medicare is.
The result is a medical marketplace in which the principal role of the patient is to give consent to medical procedures. Once patient consent has been secured, the real forces in the medical marketplace emerge: third-party payers buy, and medical providers sell.
The Relationship Between Buyer and Seller. In a normal marketplace, buyers and sellers haggle over price, quantity, quality and other terms, and reach mutually beneficial agreements. An exchange is not consummated unless it benefits both parties. The preferences of others who are not parties to the exchange are rarely considered.
In the medical marketplace, however, rules imposed by third-party institutions are increasingly shaping the practice of medicine. When Medicare patients interact with the health care system, what procedures are performed – and whether a procedure is performed – is increasingly determined more by Medicare's rules than by patient preferences or the physician's experience and judgement. Although this phenomenon is more true of government health care programs (Medicare and Medicaid), private insurers and large self-insured companies are increasingly copying the methods of government.
The Role of Information. One of the strangest features of the medical marketplace is how little information patients have – even on matters of life and death. Most patients who enter a hospital do not know (and cannot find out) what they will be charged for the procedures that are going to be performed. At the time of discharge, patients are frequently confronted with lengthy line item bills which they cannot read or understand. They have no idea why they were charged what they were charged and no way of checking to see that it was reasonable. Although many patients assume that their health insurer will check the bill and look out for their interests, third-party insurers frequently cut their own deals with hospitals and leave patients to fend for themselves.
If patients have little knowledge about prices in the medical marketplace, they know even less about quality. In the market for any professional service, consumers often have difficulty making judgments about the quality of services being rendered. In the medical marketplace, these problems are worse. Although patients frequently assume that third-party institutions are their agents, these institutions frequently sacrifice the patient's interest in pursuit of their own interest. For example, third-party payers often put pressure on medical providers to lower the quality of care in order to control costs.
Thus, patients receiving a pacemaker implant frequently are not told – and may never learn – that a better, higher-quality pacemaker was available but not used. Patients receiving drugs in a hospital frequently are not told – and may never learn – that more effective (and more expensive) drugs were available but not administered. In general, medical equipment manufacturers, pharmaceutical manufacturers and other suppliers (who have a great deal of information about quality) do not communicate this information to patients because patients are not viewed as the principal buyers. Instead, the principal customers are hospitals, physicians and third-party institutions.
Patients frequently do not have information about quality for yet another reason. In an effort to suppress competition among the providers, associations of physicians and hospitals have gone to great lengths to make it difficult (if not impossible) for patients to get information about quality. The obligation not to make quality comparisons became a matter of professional ethics. In the past, adherence to these ethical codes was backed by the force of state law. As a result, in most communities patients cannot even discover the mortality rate for surgery and for specific surgeons at public hospitals funded by the patients' own tax dollars.
An Exception: Cosmetic Surgery. In one area of the medical marketplace, most of the generalizations made above are no longer true: cosmetic surgery. In general, cosmetic surgery is not covered by any private or public health insurance policy. Yet in every major city, it is a thriving industry. Patients pay with their own money, and they are almost always given a fixed price in advance – covering all medical services and all hospital charges. Patients also have choices about quality (e.g., surgery can be performed in a physician's office or, for a higher price, on an outpatient basis in a hospital). Overall, patients probably have more information about quality in the field of cosmetic surgery than in any other area of surgical practice.