Picture of Anthony M DiGiorgio, DO, MHA, FAANS

Anthony M DiGiorgio, DO, MHA, FAANS

Neurosurgery Economics: Middlemen

“Middlemen are one of the most misunderstood elements of the economy. Their role in the economy is to facilitate the distribution of goods and services, which ultimately benefits the consumer by lowering costs and increasing convenience.” – Thomas Sowell

Middlemen get a bad rap from both the media and the public. This perception is magnified when conditions are murky.  This is especially pronounced in healthcare, where insurance companies and pharmacy benefit managers (PBMs) are often cast as the villains. A recent New York Times article harshly criticized PBMs, describing them as operating in the “bowels of the healthcare system.” Consumers frequently see only the negative aspects of these entities, leading to complaints that they serve no purpose other than driving up prices.

Yet, middlemen are everywhere.  Your general contractors, online retailers and even local grocery store are all middlemen.  Most institutions we work with are middlemen. Amazon primarily acts as a middleman between producers and consumers. Retail stores like Starbucks and grocery stores facilitate easier access to goods from producers. They don’t actually produce the coffee, eggs, milk or Nutella you purchase there.  General contractors coordinate various subcontractors to complete complex projects. They don’t typically put up the drywall themselves.  We don’t begrudge these middlemen for making a profit.  Similarly, in healthcare, middlemen are essential due to the industry’s complexity and need for specialized knowledge.

Most Americans receive their health insurance through their employers, who generally lack expertise in the delivery and pricing of healthcare services. This is where middlemen, such as insurance companies and PBMs, come into play. They coordinate the pricing and management of healthcare services, navigating the complexities of tens of thousands of medical procedure codes and drugs. Could you imagine a hapless HR manager trying to figure out if the local neurosurgeon is overcharging for an ACDF or what the right price and indication is for Ozempic?  This level of complexity necessitates specialized intermediaries.

PBMs negotiate prices with pharmaceutical companies, while insurance companies handle negotiations with hospitals, doctors, therapists, and imaging centers. Despite the opacity of these negotiations and the surrounding rhetoric, evidence suggests that these middlemen save their clients money. Reports from the Congressional Budget Office, Government Accountability Office, and Department of Labor all confirm that PBMs help reduce drug spending and that prohibiting their rebates would increase medication costs. 

While there are undeniable market failures, many are exacerbated by regulatory distortions, particularly in drug pricing. Mechanisms like the Medicaid Drug Rebate Program and the 340B drug pricing program create inefficiencies, transforming what should be a dynamic market into one distorted by sclerotic regulations. Additionally, the Affordable Care Act’s Medical Loss Ratio (MLR) has driven significant vertical integration in the PBM and insurer markets.

One of the most significant issues is that consumers often do not shop around for the best prices. The New York Times article highlights this problem, noting that employers have the ultimate say over formularies since PBMs work for them. They often fail to perform due diligence.  That can’t be blamed on the PBM.  Patients are also often surprised to find better deals through alternatives like Mark Cuban’s Cost Plus Drugs. Just as consumers compare prices on Amazon, patients may need to shop to find the best healthcare prices.

Middlemen are necessary in a complex economy. When market failures occur, we should identify and address the regulatory causes rather than imposing additional regulations. Altering incentives, rather than destroying middlemen, will help avoid unintended consequences and ensure a more efficient market. Middlemen play a crucial role in making our healthcare system, and many other sectors, function more effectively.