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In the United States, the bulk of health care spending is paid by health insurance companies or the government through Medicare and Medicaid. 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? -Physicians concerned that insurance companies may not approve payments tend not to order expensive tests for their patients.-Consumers have an incentive to over-consume health care services because they pay prices well below the cost of providing these services.-Health insurance companies do not have an incentive to control cost and therefore increase demand for cutting edge medical treatments.-Consumers fearing that excessive use of health care services may lead to a rise in insurance premiums tend to under-consume health care services.

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