Expensive failures of medical intermediaries

The American healthcare system is undeniably more complex and much different from the days when doctors made house calls and patients paid directly for treatment.

Advanced medical technology, expensive treatments, and the rise of commercial insurance transformed U.S. health care into a vast and sophisticated industry by the late 20th century. As hospitals expanded and insurance options increased, individuals and businesses quickly found themselves overwhelmed by the system.

To manage the growing complexity, a new breed of healthcare intermediaries has emerged. These “health care intermediaries” assisted health care providers, patients, and employers with tasks such as billing, choosing insurance plans, and negotiating drug prices. They provided valuable solutions at a time when healthcare was becoming increasingly complex.

But today, rather than evolving to meet modern challenges and streamline healthcare, these intermediaries are impeding progress and perpetuating inefficiencies, often in ways that exacerbate healthcare problems. Masu.

stuck in the middle

The most powerful intermediaries in the healthcare industry are thus different from the destructive 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, widening access, and making life easier. We gave our customers maximum control by offering almost complete transparency regarding price and quality.

However, in the medical field, intermediaries serve different “customers”. Rather than focusing on what's best for patients and their employers, they often act in ways that protect the interests of pharmaceutical companies and commercial insurance companies.

The consequences of this misalignment are clear. Medical costs are skyrocketing, and healthcare has become an even more complex maze than before.

Currently, half of Americans cannot afford out-of-pocket medical costs, and 70% are unsure how much their health care services will cost before receiving treatment. Meanwhile, employers currently pay an average of more than $25,000 a year for insurance for a family of four.

To understand the failures of intermediaries in the healthcare industry, let's examine the two most influential types.

1. Drug intermediaries: PBMs

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

Manage the ever-growing number of medicines on the market. Taming prices.

Currently, more than 20,000 FDA-approved drugs are prescribed approximately 6.7 billion times annually in the United States. With thousands of generic and biosimilar alternatives to expensive brand-name drugs, deciding which drugs to include on an insurance company's formulary is a complex task that requires expertise.

That's where PBM comes into play. PBMs were created to help insurance companies make smarter prescribing decisions, negotiate lower prices with drug companies, and set copays that balance affordability and patient health.

But more recently, PBMs and drug companies have teamed up to the detriment of payers and patients. To favorably place their drugs on insurance formularies, drug companies offer PBMs significant rebates, especially on high-priced branded drugs, even when cheaper generics and biosimilars are available. Provide.

A pharmaceutical company knows that it can make a healthy profit by pricing a drug at $600 per month, but instead sets the list price at $1,000 and gives the PBM a $400 rebate. Suppose you provided it. Meanwhile, the PBM negotiates a $300 discount off the list price with the self-funding employer, puts the drug in the low-out-of-pocket category, and secretly keeps the remaining $100 of the rebate as additional profit. It is reported that Pharmaceutical companies can secure better formulation placement, increase sales, and earn significantly more profit than if they listed the drug for $600.

One might expect insurers to push back against this practice, especially given that rising drug prices are driving up overall medical costs and premiums. So why not? The answer lies in the fact that three of the largest PBMs – CVS Health's Caremark, Cigna's Express Scripts, and UnitedHealth's OptumRx – are owned by or closely aligned with the insurance companies that rely on them. . Together, these PBMs administer 80% of all prescriptions in the United States.

This arrangement allows insurance companies to directly benefit from PBM operations. And because all the big insurance companies do the same thing, higher drug prices don't create a competitive disadvantage, just higher premiums for employers and patients.

These practices will result in a median annual list price for new drugs of $300,000 in 2023, up from $222,000 in 2022 and $180,000 in 2021.

So what can you do? When it comes to exorbitant drug pricing fueled by monopolistic practices and market manipulation, elected officials are in the best position to affect change. Fundamental, bipartisan health reform may be difficult given the political climate, but voters and big interest groups are demanding full transparency about rebates to ensure PBMs pass savings directly to patients and payers. could advance federal legislation to do so.

The law would mirror the Sunshine Act, which requires doctors to publicly disclose financial relationships and solicitations from drug and medical device companies.

2. Insurance Intermediaries: Brokers and ASOs

Unlike PBMs, whose financial models encourage profiteering at the expense of payers and patients, brokers and ASOs have a different problem. In short, we are stuck with traditional insurance models that fail to address today's healthcare challenges.

Prior to the Affordable Care Act (ACA) of 2010, choosing an insurance plan was difficult, as insurance companies offered an incredible variety of premiums, copays, and pre-existing condition exclusions. It was a lot of work. Brokers played a critical role during this period, helping individuals and small businesses navigate through the turmoil and find insurance they could afford.

The ACA introduced significant reforms, including standardizing insurance policies and increasing price transparency, making it easier for consumers to compare plans. However, while these reforms simplified the process, they did not address the growing problem of affordability. Health insurance premiums continue to rise by 7% to 9% each year, twice the rate of inflation. For small businesses and their employees, this trend is unsustainable and poses a significant financial burden to both employers and employees.

Today, an astonishing 64% of businesses still rely on brokers to select health insurance plans. Many believe that brokers have insider knowledge that can secure better deals and more customized compensation. In practice, they are typically compensated through commissions and loyalty bonuses from insurance companies, which incentivizes them to promote traditional insurance plans. As a result, brokers recommend the same expensive plans from the same large insurers year after year, rather than promoting new value-based care models that focus on keeping patients healthy and offer virtual care options. Most of the time.

Just as brokers are unable to adapt to new models of care, large self-insured companies face similar obstacles from a different type of intermediary: the managed services only (ASO) division within incumbent insurance companies.

Instead of purchasing traditional insurance and paying premiums upfront, self-insurers take financial responsibility for their employees' medical costs, but only pay providers after treatment is provided and claims are processed. . This approach allows companies to save cash for other investments while avoiding the additional profit margins built into traditional insurance premiums.

However, managing medical claims, negotiating with healthcare providers, and building effective networks requires expertise, so companies rely on ASOs to handle these tasks.

Like brokers, ASOs have little incentive to reduce costs or drive innovation. Typically, they are paid a percentage of the total medical costs covered by the self-insured company providing the service. This creates a conflict of interest. In other words, as healthcare costs rise, ASO's revenue increases. However, if expenses are cut, income will fall.

For self-insured companies, a more tailored approach is to work with a third-party administrator (TPA) that partners with an accountable care organization (ACO). An ACO is a group of health care providers focused on providing coordinated preventive care to manage chronic conditions and improve overall health. Research shows that ACOs can reduce health care costs while improving the quality of care. Under this model, TPAs ​​can negotiate contracts with ACOs that reward providers for keeping people healthy and minimizing unnecessary medical care, rather than the amount of care provided. . This change could help companies control costs while providing higher quality to their employees.

Ultimately, there is much that PBMs, brokers, and ASOs can do to lower healthcare prices, improve healthcare delivery, and accelerate healthcare transformation. However, in the current system, these intermediaries lack financial incentives to drive meaningful change.

To address these issues, Congress should make PBM rebate information publicly available. Companies should require brokers to offer value-based insurance options. And, the self-funded company will build partnerships with ASOs to create value-based care models focused on preventing disease, improving clinical outcomes, and increasing affordability. should renegotiate with ASO.

Only by recognizing and addressing the perverse financial incentives of middlemen can we begin to solve America's health care crisis.