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, high-priced procedures and for-profit insurance, U.S. healthcare had—by the late-20th century—transformed into a sprawling and sophisticated industry. As hospitals expanded and insurance options multiplied, individuals and businesses quickly found themselves overwhelmed by the system.
To help manage the growing complexities, a new class of healthcare intermediaries emerged. These “middlemen of medicine” assisted providers, patients and employers with tasks like billing, selecting insurance plans and negotiating drug prices. At a time when healthcare was becoming increasingly convoluted, they offered valuable solutions.
But today, rather than evolving to meet modern challenges and streamline healthcare, these middlemen have become obstacles to progress, often perpetuating inefficiencies in ways that exacerbate medicine’s problems.
Stuck In The Middle
In this way, healthcare’s most entrenched middlemen are unlike the disruptive go-betweens of other industries.
Americans who want to book a hotel, play the stock market or purchase just about anything can turn to “middlemen” like Expedia, Robinhood and Amazon. These disruptors rose to power by lowering prices, broadening access and making life more convenient. By offering near-total transparency on pricing and quality, they equipped customers with maximum control.
In healthcare, however, middlemen serve a different set of “customers.” Rather than concentrating on what is best for patients or their employers, they often act in ways that protect the profits of drug companies and for-profit insurers.
The consequences of these misaligned arrangements are clear: healthcare costs are soaring, making medicine an even trickier maze than before.
Today, half of all Americans can’t afford their out-of-pocket medical expenses and 70% are unsure what healthcare services will cost before undergoing treatment. Meanwhile, employers now pay an average of over $25,000 a year to insure a family of four.
To understand the failure of healthcare’s middlemen, 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.
- Taming their prices.
In the United States today, more than 20,000 FDA-approved drugs are prescribed some 6.7 billion times each year. With thousands of generic or biosimilar alternatives to expensive brand-name medications, deciding which drugs belong on an insurer’s formulary is a complex task that demands 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 set co-payment tiers that balance affordability with patient health.
These days, however, PBMs and pharmaceutical companies work together in ways that disadvantage payers and patients. To secure favorable placement for their drugs on insurance formularies, pharmaceutical companies offer PBMs significant rebates—particularly for higher-cost, brand-name medications, even when less expensive generics or biosimilars are available.
Say a drug company knows it could 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 discount off the list price, places the drug in a category with a low copayment, and quietly keeps the remaining $100 of the rebate as additional profit. The pharmaceutical company benefits by securing better formulary placement, boosting sales and earning significantly more than it would have by listing the drug at $600.
You might 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 either owned by or closely aligned with the very 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 are engaged in the same practices, higher drug prices don’t create a competitive disadvantage—they simply result in higher premiums for employers and patients.
In 2023, these practices contributed to a median annual list price of $300,000 for new drugs, up from $222,000 in 2022 and $180,000 in 2021.
So, what can be done? When it comes to exorbitant drug pricing fueled by monopolistic practices and market manipulation, elected officials are in the best position to affect change. While sweeping, bipartisan healthcare reforms may be difficult given the political climate, voters and large interest groups could push for federal legislation that would require full transparency around rebates and ensure that PBMs pass savings directly on to patients and payers.
This law would mirror the “Sunshine Act,” which mandates that physicians publicly disclose any financial relationships or inducements from drug or device companies.
2. The Intermediaries Of Insurance: Brokers And ASOs
Unlike PBMs, whose financial models encourage profit extraction at the expense of payers and patients, brokers and ASOs present a different issue: they’re wedded to traditional insurance models and, therefore, fail to address today’s healthcare challenges.
Before the Affordable Care Act (ACA) of 2010, selecting 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 critical role during this time, 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, which made comparing plans easier for consumers. However, while these reforms simplified the process, they didn’t address the growing issue of affordability. Health insurance premiums continue to rise by 7% to 9% annually, twice the rate of inflation. For small businesses and their workers, this trend is unsustainable, creating a significant financial burden for employers and employees alike.
Today, a surprising 64% of businesses still rely on brokers to select their health insurance plans. Many believe brokers possess insider knowledge that can secure them better deals or more tailored 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 most often recommend the same expensive plans from the same large insurers year after year, rather than promoting newer, value-based models of care that focus on keeping patients healthy and offer virtual care options.
Just as brokers fail to adapt to new models of care, large companies that self-insure face similar obstacles with a different type of middleman: administrative services only (ASO) divisions 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 delivered and claims are processed. This approach allows businesses to preserve cash for other investments while avoiding the added profit margins built into traditional insurance premiums.
However, managing medical claims, negotiating with providers, and building effective networks requires specialized expertise, so companies rely on ASOs to handle these tasks.
Like brokers, ASOs have little incentive to lower costs or drive innovation. They are typically paid a percentage of total healthcare costs incurred by the self-insured companies they serve. This creates a conflict of interest: when healthcare costs rise, ASOs’ earnings increase. But if expenses are reduced, their revenue declines.
A more aligned approach for self-insured companies would be to work with third-party administrators (TPAs) that partner with accountable care organizations (ACOs). ACOs are groups of healthcare providers focused on delivering 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 shift could help businesses control costs while providing higher quality for their employees.
Ultimately, there is much that PBMs, brokers and ASOs could do to lower medical prices, improve care delivery and promote healthcare transformation. However, in the current system, these intermediaries lack the financial incentives to drive meaningful change.
To tackle these issues, Congress needs to make PBM rebate information publicly available. Businesses should demand that brokers present value-based insurance options. And self-funded companies should 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 the healthcare crisis in America.
