The American medical system has become undeniably complex, a far cry from the days when doctors made house calls and patients paid out-of-pocket for their care.

With the rise of advanced medical technologies, expensive procedures, and for-profit insurance, health care in the United States had transformed, by the end of the 20th century, into a sprawling and sophisticated industry. As hospitals expanded and insurance options increased, individuals and businesses quickly found themselves overwhelmed by the system.

To help manage this growing complexity, a new class of healthcare intermediaries has emerged. These “medical intermediaries“Assisted providers, patients and employers with tasks such as billing, insurance plan selection and drug price negotiation. At a time when healthcare was becoming increasingly complex, they offered valuable solutions.

But today, rather than evolving to meet modern challenges and streamline health care, 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 entrenched intermediaries in healthcare do not resemble disruptive intermediaries in other industries.

Americans who want 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, expanding access, and making life more convenient. By offering near-total transparency on pricing and quality, they gave customers maximum control.

In healthcare, however, intermediaries serve a different set of “customers.” Rather than focusing on what is best for patients or their employers, they often act in ways that protect the profits of for-profit pharmaceutical companies and insurers.

The consequences of these lopsided arrangements are clear: Health care costs are skyrocketing, making medicine an even trickier maze than before.

Today, half of Americans can’t afford medical bills, and 70 percent don’t know exactly how much health care services will cost before seeking treatment. Meanwhile, employers now pay on average more than $25,000 per year to insure a family of four.

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

1. Drug intermediaries: PBMs

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

1. Managing the vast and growing number of medications on the market.
2. Tame their prices.

In the United States today, more than 20,000 drugs approved by the FDA are prescribed certain 6.7 billion times every year. With thousands of generic or biosimilar alternatives to expensive brand-name medications, deciding which drugs should be on an insurer’s formulary is a complex task that requires specialized expertise.

That’s where PBMs come in. They were created to help insurers make smarter formulary decisions, negotiate lower prices with drug manufacturers, and establish co-payment levels that balance affordability and patient health.

However, today PBMs and pharmaceutical companies work together in ways that disadvantage payers and patients. To ensure favorable placement of their drugs on insurance formularies, pharmaceutical companies offer PBMs significant discounts, particularly for more expensive brand-name drugs, even when less expensive generics or biosimilars are available.

Suppose a pharmaceutical company knows it could make a nice profit by pricing a drug at $600 per month, but instead sets the list price at $1,000 and offers the PBM a $400 discount. dollars. The PBM, in turn, tells self-funded employers that it has negotiated a $300 discount off the list price, places the drug in a category with a low co-pay, and quietly keeps the remaining $100 of the rebate as profit additional. The pharmaceutical company benefits by achieving better placement on formularies, increasing sales and earn much more than he would have done by listing the drug at $600.

One might expect insurers to resist these practices, especially since rising drug prices drive up overall health care costs and insurance premiums. So 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 — are either owned or closely tied to the insurers that rely on them. Together, these PBMs control 80% of all prescriptions in the United States.

This arrangement allows insurers to profit directly from their PBM operations. And because all major insurers follow the same practices, higher drug prices don’t create a competitive disadvantage: they simply lead to higher premiums for employers and patients.

In 2023, these practices contributed to a median annual list price of $300,000 for new drugs, compared to $222,000 in 2022 and $180,000 in 2021.

So what can we do? When it comes to sky-high drug prices fueled by monopolistic practices and market manipulation, elected officials are best positioned to bring about change. Although sweeping, bipartisan health care reforms may prove difficult given the political climate, voters and major interest groups could push for federal legislation that would require full transparency around discounts and would ensure that PBMs pass savings directly to patients and payers.

This law would reflect the “Sun Law”, which requires doctors to publicly disclose any financial relationships or incentives from drug or device manufacturers.

2. Insurance intermediaries: brokers and ASOs

Unlike PBMs, whose financial models encourage the extraction of profits at the expense of payers and patients, brokers and ASOs present a different problem: they are tied to traditional insurance models and, therefore, fail to meet current health 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 have played a vital role during this time, helping individuals and small businesses overcome confusion and find affordable insurance policies.

The ACA introduced important reforms, including standardization of insurance policies and greater price transparency, which made it easier for consumers to compare plans. However, while these reforms have simplified the process, they have not solved the growing affordability problem. Health insurance premiums continue to rise increase by 7% has 9% per year, or twice the rate of inflation. For small businesses and their workers, this trend is unsustainable, creating a significant financial burden for both employers and employees.

Today, 64% of companies still rely on brokers to select their health insurance plans. Many believe that brokers have insider knowledge that can guarantee them better deals or more suitable coverage. In practice, they are generally remunerated by commissions and loyalty bonuses from insurers, which encourages them to promote traditional insurance schemes. As a result, brokers more often recommend the same expensive plans from the same large insurers year after year, rather than promoting new value-based care models that focus on patient health and offer virtual care options.

Just as brokers fail to adapt to new models of care, large self-insured companies face similar obstacles with another type of intermediary: administrative services only (ASO) divisions at the within existing insurance companies.

Instead of purchasing traditional insurance coverage and paying premiums upfront, self-insured companies assume financial responsibility for their employees’ medical expenses, but only pay providers after care is provided and claims are filed. processed. This approach allows businesses to conserve cash for other investments while avoiding the additional profit margins built into traditional insurance premiums.

However, managing medical claims, negotiating with providers, and building effective networks requires specialized expertise, which is why companies rely on ASOs to handle these tasks.

Like brokers, OLSs have little incentive to reduce costs or drive innovation. They typically receive a percentage of the total healthcare costs incurred by the self-insured companies they serve. This creates a conflict of interest: when health care costs increase, OLS revenues increase. But if expenses decrease, their income decreases.

A more aligned approach for self-insured companies would be to work with third-party administrators (TPAs) who partner with accountable care organizations (ACOs). ACOs are groups of healthcare providers focused on providing coordinated preventive care aimed at managing chronic diseases and improving overall health outcomes. Studies show that ACOs can reduce medical costs while improving the quality of care. In this model, TPAs ​​can negotiate contracts with ACOs that reward providers for keeping people healthier and minimizing unnecessary medical care, rather than for the volume of care provided. This change could help companies control costs while providing better quality to their employees.

Ultimately, PBMs, brokers, and ASOs could do much to reduce drug prices, improve care delivery, and promote health care transformation. However, in the current system, these intermediaries do not have the financial incentives needed to drive meaningful change.

To address these issues, Congress must make PBM rebate information public. Companies should require brokers to present value-based insurance options. And self-funded companies should renegotiate with ASOs to create partnerships with ACOs and value-based care models focused 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.