Cost Failures in Central Medicine

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 technology, expensive procedures and lucrative insurance, US health care had not – by the end of the 20th century – become a sophisticated industry and advanced. As hospitals expanded and insurance options expanded, individuals and businesses soon found themselves overwhelmed by the system.

To help deal with the growing problems, a new class of health care centers emerged. These “medical middlemen” helped providers, patients and employers with tasks such as billing, choosing insurance plans and negotiating drug prices. At a time when health care was on the rise, they provided an important solution.

But today, instead of evolving to meet modern challenges and simplifying health care, these middlemen have become obstacles to progress, often perpetuating inefficiencies in ways that exacerbate medical problems. .

Stick to the Middle

In this way, health-conscious entrepreneurs are not like the barriers between other industries.

Americans looking to rent a hotel, play the stock market or buy just about anything can turn to “middlemen” like Expedia, Robinhood and Amazon. These barriers began to dominate by lowering prices, expanding access and making life easier. By providing transparency about prices and quality, they equipped consumers with high control.

However, in healthcare, middlemen serve different “customers”. Instead of focusing on what is best for patients or their employers, they often act in ways that protect the profits of drug companies and for-profit insurance companies.

The consequences of these incorrect preparations are clear: the cost of health care is rising, which makes medicine more chaotic than before.

Today, half of all Americans cannot afford their out-of-pocket medical expenses and 70 percent are unsure how much health care will cost before they receive treatment. Meanwhile, employers now pay about $25,000 a year to protect a family of four.

To understand the failure of health workers, let’s examine the two most influential types:

1. Pharmaceutical Middlemen: 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 large and growing number of medicines on the market.
2. To control their prices.

In the United States today, more than 20,000 FDA-approved medications are dispensed approximately 6.7 billion times each year. With thousands of generic or biosimilar alternatives to more expensive brand-name drugs, deciding which drugs are on the insurance formulary is a daunting task. which requires special knowledge.

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

However, these days, PBMs and pharmaceutical companies work together in ways that disadvantage payers and patients. In order to find the right place for their drugs in insurance systems, pharmaceutical companies offer large PBM discounts—especially for high-cost, brand-name drugs, even though There are cheaper generics or biosimilars.

Say the drug company knows it can make a healthy profit by selling the drug for $600 a month, but, instead, sets the list price at $1,000 and gives the PBM a $400 discount. The PBM then tells dependents that it has sold a $300 discount off the list discount, places the drug in a lower-paying category, and secretly keeps the remaining $100 of the rebate as extra profit. The pharmaceutical company benefits from better placement, increased sales and more revenue than it would have by listing the drug at $600.

You can expect insurers to push back against these practices, especially since high drug prices drive up health care 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 or closely aligned with 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 since all the major insurers do the same thing, high drug prices don’t create competition—they just result in higher premiums for employers and patients.

In 2023, these trends contributed to the annual cost 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 the exorbitant drug prices fueled by witch-hunt practices and market manipulation, elected officials are in the best position to affect change. However, health care reform can be difficult given the political climate, voters and large interest groups can push for federal legislation that would require transparency about discounts and ensure that PBMs transfer money directly to patients and payers.

This law will mirror the “Day Law,” which mandates that doctors 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 extraction of profits at the expense of payers and patients, vendors and ASOs present a different issue: they are wedded to traditional insurance models and, therefore, they fail to solve today’s health problems.

Before the Affordable Care Act (ACA) of 2010, choosing an insurance plan was a daunting task, with insurers offering a bewildering array of premiums, out-of-pocket costs and deductibles. aside for pre-existing conditions. Brokers have played an important role in this era, helping individuals and small businesses navigate the confusion to find strategies they can afford.

The ACA introduced major changes, including standardization of insurance policies and greater price transparency, which made comparing plans easier for consumers. However, while these improvements have eased the process, they have not solved the growing cost problem. Health insurance premiums continue to rise 7% to 9% annually, which is twice the rate of inflation. For small businesses and their employees, this practice is unsustainable, creating a significant financial burden for employers and employees alike.

Today, a staggering 64% of businesses still rely on vendors to select their health insurance plans. Many believe that dealers have insider knowledge that can secure them better deals or provide special protection. In fact, they are often paid with commissions and loyalty bonuses from insurers, which encourage them to push traditional insurance plans. As a result, marketers often recommend the same expensive plans from major insurers year after year, rather than promoting quality care innovations that focus on keeping patients healthy. and providing real care options.

Just as retailers fail to adapt to new forms of care, large independent companies face the same obstacles as different types of middlemen: administrative services only (ASO) divisions within insurance companies available.

Instead of purchasing traditional insurance and paying premiums upfront, private companies bear financial responsibility for their employees’ medical expenses but only pay providers after care is provided. provided and claims are processed. This approach allows businesses to save money for other investments while avoiding the interest rate added to old insurance premiums.

However, managing medical claims, communicating with providers, and building an effective network requires specialized skills, so companies rely on ASOs to handle these tasks.

Like marketers, ASOs have little incentive to drive down costs or drive innovation. They are usually paid a percentage of all health care costs incurred by the private companies they work for. This creates a conflict of interest: when health care costs rise, ASO’s income increases. But if expenses are reduced, their income is reduced.

A more consistent approach for private companies would be to work with third-party administrators (TPAs) that partner with accountable care organizations (ACOs). ACOs are groups of health care providers focused on providing integrated, 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 healthy and reducing unnecessary medical care, rather than the volume of care provided. This change can help businesses control costs while providing better value for their employees.

Ultimately, there is much that PBMs, vendors, and ASOs can do to lower medical costs, improve care delivery, and promote health care reform. However, in the current system, these intermediaries have no financial incentives to drive meaningful change.

To address these issues, Congress needs to make PBM reimbursement information publicly available. Businesses should require vendors to present value-based insurance options. And private companies should also negotiate with ASOs to create partnerships with ACOs and value-based care models that focus on disease prevention, improved clinical outcomes and affordability. a lot.

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