The Costly Failure of Middlemen’s Medicine

America’s health care system has become undeniably complex, a far cry from the days when doctors made house calls and patients paid directly for services.

With the rise of advanced medical technologies, affordable procedures and for-profit insurance, healthcare in the US – in the late 20th century – evolved into a large and sophisticated business. As hospitals expanded and insurance systems expanded, individuals and businesses found themselves burdened by the system.

To help meet the growing challenges, a new class of health care providers emerged. These “medical intermediaries” helped providers, patients and employers with tasks such as billing, choosing insurance plans and negotiating drug prices. At a time when healthcare was in turmoil, he provided valuable solutions.

But today, instead of changing to meet current challenges and improving healthcare, these middlemen have become barriers to progress, often perpetuating ineffectiveness in ways that exacerbate medical problems.

Stuck in the middle

In this way, sustainable health care providers are different from the distractions of other companies.

Americans who want to book a hotel, play the market or buy anything can turn to “middlemen” such as Expedia, Robinhood and Amazon. These innovations gained momentum by lowering prices, increasing accessibility and making life easier. By providing complete transparency on pricing and quality, they gave customers more control.

In healthcare, however, middlemen serve different “customers”. Instead of thinking about what is best for patients or employers, they often act to protect the profits of pharmaceutical companies and profit-making insurance companies.

The consequences of this wrong arrangement are obvious: the prices of medical care are rising, which makes medicine more difficult than before.

Today, half of all Americans cannot afford out-of-pocket costs and 70% do not know how much health care will cost before they receive treatment. Currently, employers pay about $25,000 a year to insure a family of four.

To understand the failure of healthcare providers, let’s look at the two most powerful types:

1. Among Medicines: PBMs

Pharmacy benefit managers emerged in the 1960s and became a major force in the 1980s in helping insurers solve two problems:

1. Controlling the volume and growth of drugs in the market.
2. Controlling their prices.

In the United States today, more than 20,000 FDA-approved drugs are prescribed approximately 6.7 billion times each year. With thousands of generic or biosimilar drugs available to replace expensive drugs, choosing which drug is on the insurance formulary is a difficult task that requires special expertise.

This is where PBMs come in. They are designed to help insurers make informed decisions, negotiate lower prices with drug manufacturers and set payment tiers to improve affordability and patient health.

Today, however, PBMs and pharmaceutical companies work together in ways that compromise payers and patients. In order to secure a favorable position in the insurance industry, pharmaceutical companies offer PBMs significant discounts—especially for expensive, brand-name drugs, even when cheaper generics or biosimilars are available.

Let’s say a drug company knows it can make a healthy profit by selling a drug for $600 a month but, instead, sets the price at $1,000 and gives the PBM a $400 rebate. The PBM, in turn, tells prescribers that they will negotiate a $300 discount off the list price, places the drug in a lower-paying category, and quietly keeps the remaining $100 as an additional benefit. The pharmaceutical company benefits by developing a better strategy, increasing sales and making more money than it would have by listing the drug at $600.

You can expect insurers to push back against this, especially since higher drug prices raise both medical costs and insurance premiums. Why not? The answer lies in the fact that the three largest PBMs—CVS Health’s Caremark, Cigna’s Express Scripts, and UnitedHealth’s OptumRx—own or are closely affiliated with the insurers they rely on. Together, these PBMs manage 80% of all prescriptions in the United States.

This system allows insurers to profit directly from their PBM services. And because all the major insurers are doing the same thing, higher drug prices don’t create a competitive problem – they just result in higher premiums for employers and patients.

In 2023, these systems contributed to the annual list of $300,000 for new drugs, from $222,000 in 2022 and $180,000 in 2021.

So, what can be done? When it comes to high drug prices caused by monopolies and market manipulation, elected officials are the ones with the most power to effect change. While sweeping, dual health care reform may be difficult due to the political climate, voters and interest groups may push for federal legislation that would require more transparency in deductibles and ensure that PBMs pass those costs on to patients and payers.

The law would be similar to the “Sunshine Act,” which requires doctors to publicly disclose any financial relationships or incentives from drug or device companies.

2. The Intermediaries Of Insurance: Brokers And ASOs

Unlike PBMs, whose financial models encourage the production of profits without paying for payers and patients, brokers and ASOs present a different story: they are wedded to traditional insurance models and, therefore, fail to deal with today’s medical problems.

Before the Affordable Care Act (ACA) of 2010, choosing insurance was a daunting task, with insurers offering a bewildering array of premiums, out-of-pocket costs and deductibles for pre-existing conditions. Brokers played a major role during this period, helping individuals and small businesses navigate through the confusion to find the right policy for them.

The ACA introduced many changes, including the introduction of insurance policies and greater price transparency, which made comparing plans easier for consumers. However, while the reform eased the process, it did not solve the growing problem of affordability. Health insurance premiums continue to rise by 7% to 9% per year, double the rate of inflation. For small businesses and their employees, this is unsustainable, leaving employers and their employees burdened.

Today, a staggering 64% of businesses still rely on vendors to select their health insurance plans. Many believe that brokers have inside information that can secure them better deals or better protection. Instead, they are paid through commissions and loyalty bonuses from insurers, which incentivize them to push insurance plans. As a result, brokers often recommend the same high-cost plans from the same major insurers year after year, rather than promoting new models of care that focus on keeping patients healthy and providing care options.

Just as brokers fail to adapt to new forms of care, large self-insured companies face similar obstacles to another type of middleman: administrative services units (ASO) within existing insurance companies.

Instead of purchasing regular insurance and paying upfront, self-insured companies take financial responsibility for their employees’ medical problems but only pay providers after treatment is provided and repairs are made. This approach allows businesses to save on additional costs and avoid the additional benefits that are created in insurance premiums.

However, managing medical claims, negotiating with providers, and building effective networks require specialized expertise, so companies rely on ASOs to perform these tasks.

Like brokers, ASOs have no incentive to cut costs or drive innovation. They are usually paid a percentage of the total medical expenses that the private insurance companies send them. This creates a conflict of interest: when service prices go up, ASOs make money. But if the money is reduced, their income is reduced.

The most common way for insurance companies to work with third-party administrators (TPAs) is to partner with managed care organizations (ACOs). ACOs are groups of health care providers focused on providing coordinated, preventive care aimed at managing chronic disease and improving health outcomes. Research shows that ACOs can reduce healthcare costs and improve care. In this example, TPAs ​​can negotiate contracts with ACOs that reward providers for keeping people healthy and reducing unnecessary health care, rather than the amount of care provided. This change can help businesses manage costs while providing benefits to their employees.

Ultimately, there is much that PBMs, brokers and ASOs can do to reduce drug costs, improve care management and promote health care reform. However, in the current system, these intermediaries do not have the financial incentives to drive significant change.

To address these issues, Congress should make PBM reimbursement information publicly available. Businesses should request that brokers provide cost-based insurance policies. And self-funding companies should also negotiate with ASOs to partner with ACOs and sustainable care models that focus on disease prevention, improving clinical outcomes and affordability.

Only by recognizing and addressing the underlying economic incentives can we begin to address America’s health crisis.