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Three open bottles of prescription medications.
The American medical system has become undeniably complex, a far cry from the days when doctors made house calls and patients paid directly for care.
With the rise of advanced medical technologies, expensive procedures, and for-profit insurance, American health care had transformed into a vast and sophisticated industry by the end of the 20th century. As hospitals expanded and insurance options expanded, individuals and businesses quickly became overwhelmed by the system.
To help manage the increasing complexity, a new class of healthcare intermediaries emerged. These “medicine middlemen” helped healthcare providers, patients, and employers with tasks such as billing, selecting insurance plans, and negotiating drug prices. At a time when healthcare was becoming increasingly complex, they provided valuable solutions.
But today, instead of evolving to meet modern challenges and streamline healthcare, these intermediaries have become obstacles to progress, often perpetuating inefficiencies in ways that exacerbate medicine’s problems.
Stuck in the middle
In this way, the most established healthcare intermediaries are different from the disruptive intermediaries of other industries.
Americans looking to book a hotel, play the stock market or buy just about anything can turn to “middlemen” like Expedia, Robinhood and Amazon. These disruptors rose to power by lowering prices, widening access, and making life easier. By offering near-total transparency on pricing and quality, they gave customers maximum control.
In healthcare, however, intermediaries serve a different type of “customer.” Instead of focusing on what is best for patients or their employers, they often act in ways that protect the profits of pharmaceutical companies and for-profit insurers.
The consequences of these poorly coordinated arrangements are clear: healthcare costs are skyrocketing, making medicine an even more difficult maze than before.
Today, half of all Americans cannot pay their own medical bills and 70% are unsure of what healthcare will cost before receiving treatment. Meanwhile, employers now pay well on average $25,000 per year to insure a family of four.
To understand the failure of healthcare intermediaries, let’s examine two of the most influential types:
1. The middlemen of medication: PBMs
Pharmacy benefit managers emerged in the 1960s and became a major force in the 1980s by helping insurers solve two problems:
- Managing the vast and growing number of medications on the market.
- Tame their prices.
In the United States today more than 20,000 FDA-approved medications some are prescribed 6.7 billion times every year. With thousands of generic or biosimilar alternatives to expensive brand-name drugs, deciding which drugs belong on an insurer’s formulary is a complex task that requires specialized expertise.
That’s where PPE comes into play. They were created to help insurers make smarter formulary decisions, negotiate lower prices with drug manufacturers, and set co-payment levels that balance affordability with patient health.
Today, however, PBMs and pharmaceutical companies collaborate in ways that disadvantage payers and patients. To secure favorable placement of their drugs on insurance forms, pharmaceutical companies offer PBMs significant discounts – especially for more expensive brand-name drugs, even when cheaper generics or biosimilars are available.
Suppose a pharmaceutical company knows it can make a healthy profit by pricing a drug at $600 per month, but instead sets the list price at $1,000 and offers the PBM a $400 rebate. The PBM in turn tells self-funded employers that it has negotiated a $300 rebate on the list price, places the drug in a low co-pay category, and quietly keeps the remaining $100 of the rebate as additional profit. The pharmaceutical company benefits by ensuring better positioning of the formulations, boosting sales and earning significantly more than if the drug were marketed at $600.
One would expect insurers to push back against these practices, especially given that higher drug prices drive up overall healthcare costs and insurance premiums. So why don’t they? The answer lies in the fact that the three largest PBMs – CVS Health’s Caremark, Cigna’s Express Scripts and UnitedHealth’s OptumRx – are owned by or closely tied to the insurers that depend on them. Together, these PBMs verify 80% of all prescriptions in the United States.
This arrangement allows insurers to benefit directly from their PBM activities. And because all major insurers engage in the same practices, higher drug prices do not create a competitive disadvantage; they simply result in higher premiums for employers and patients.
By 2023, these practices contributed to an average annual list price of $300,000 for new drugs, up from $222,000 in 2022 and $180,000 in 2021.
What can be done? When it comes to exorbitant drug prices fueled by monopolistic practices and market manipulation, elected officials are in the best position to effect change. While major bipartisan healthcare reform may be difficult given the political climate, voters and major interest groups could push for federal legislation that would require full transparency around rebates and ensure that PBMs pass savings directly to patients and payers.
This law would reflect the “Sun law,” which requires physicians to disclose any financial relationships or inducements from drug or device manufacturers.
2. The insurance intermediaries: brokers and ASOs
Unlike PBMs, whose financial models encourage profit extraction at the expense of payers and patients, brokers and ASOs present a different problem: they are wedded to traditional insurance models and therefore fail to address today’s healthcare challenges .
Before the Affordable Care Act (ACA) of 2010Selecting an insurance plan was a daunting task, with insurers offering a bewildering variety of premiums, out-of-pocket costs and exclusions for pre-existing conditions. Brokers played a crucial role during this period, helping individuals and small businesses navigate the confusion to find policies they could afford.
The ACA introduced significant reforms, including the standardization of insurance policies and greater price transparency, making it easier for consumers to compare plans. While these reforms simplified the process, they did not address the growing affordability problem. Health insurance premiums continue increase by 7% Unpleasant 9% twice the rate of inflation annually. For small businesses and their employees, this trend is unsustainable, placing a significant financial burden on both employers and employees.
Today, a surprising 64% of companies still rely on brokers to select their health insurance plans. Many believe that agents have inside information that can get them better deals or more customized coverage. In practice, they are typically compensated through commissions and loyalty bonuses from insurers, which incentivize them to push traditional insurance plans. As a result, brokers often recommend the same expensive plans from the same major insurers year after year, rather than promoting newer value-based care models that focus on keeping patients healthy and offering virtual care options.
Just as brokers fail to adapt to new healthcare models, large self-insurance companies face similar obstacles with a different type of intermediary: administrative-only (ASO) departments within existing insurance companies.
Instead of purchasing traditional insurance coverage and paying premiums up front, self-insured companies assume financial responsibility for their employees’ medical costs, but only pay after care has been provided and claims have been processed. This approach allows companies to free up money for other investments while avoiding the extra profit margins built into traditional insurance premiums.
However, managing medical claims, negotiating with healthcare providers and building effective networks requires specialized expertise. Companies therefore rely on ASOs to perform these tasks.
Like brokers, ASOs have little incentive to reduce costs or stimulate innovation. They typically receive a percentage of the total health care costs incurred by the self-insured companies they serve. This creates a conflict of interest: as healthcare costs rise, ASOs’ incomes rise. But when expenses are reduced, their income falls.
A more aligned approach for self-insured companies would be to partner with third-party administrators (TPAs) that work with accountable care organizations (ACOs). ACOs are groups of health care providers focused on delivering coordinated, preventive care aimed at managing chronic diseases and improving overall health outcomes. Research shows that ACOs can reduce medical costs while improving the quality of care. In this model, TPAs can contract with ACOs that reward providers for keeping people healthier and minimizing unnecessary medical care, rather than for the volume of care provided. This shift could help companies control costs while providing higher quality for their employees.
Ultimately, PBMs, brokers, and ASOs can do much to lower medical prices, improve care delivery, and advance healthcare transformation. However, in the current system, these intermediaries lack the financial incentives to bring about meaningful change.
To address these issues, Congress must make information about PPE rebates public. Companies should require brokers to offer value-based insurance options. And self-funded companies must renegotiate with ASOs to create partnerships with ACOs and value-based care models that focus on disease prevention, improved clinical outcomes, and greater affordability.
Only by recognizing and addressing the perverse financial incentives of middlemen can we begin to solve America’s health care crisis.