Healthcare’s Hidden Cost Crisis: How Middlemen and Outdated Tech are Bankrupting America
By Navin Nagiah
Navin Nagiah, MS is co-founder and CEO of Daffodil Health.
Recent articles, including those in The New York Times, have shone a spotlight on how middlemen contribute to rising healthcare costs, notably out-of-network (OON) pricing companies like MultiPlan and pharmacy benefit managers (PBMs), whose fees often obscure and inflate costs. While these analyses are thorough, they often focus on single facets of a sprawling, deeply rooted problem.
The truth is more intricate and defies simplistic solutions. High costs in US healthcare have accrued over decades, shaped by actions across the board, from government policy to insurer practices, provider pricing, and patient behavior.
The presence of intermediaries such as PBMs, OON re-pricing firms, and healthcare consultants reflects the US healthcare model’s structural complexity. As a hybrid of public, private, and even cash-based systems, it has produced a $4.1 trillion industry — 22% of the total economy — where $1 trillion alone goes toward administrative costs, with an estimated $500 billion of that deemed unnecessary or wasted.
For ordinary Americans, this complexity translates into hardship. Forty-one percent are burdened with medical debt; 46% forgo needed care due to cost; and 58% of debt collection involves medical bills. This financial strain is unsustainable for individuals, society, and the nation at large.
An underlying issue is healthcare pricing, which is inelastic, opaque, and tethered to outdated systems. Unlike typical markets, healthcare prices in the US do not respond to supply and demand. The pricing framework is labyrinthine, requiring deep domain expertise to navigate tens of thousands of procedural codes and varied pricing methods. Additionally, administrative systems used by both payers and providers often rely on outdated technology, exacerbating inefficiencies.
However, this does not make the primary actors — whether insurers, providers, or third-party entities — the villains of the story. In a capitalist framework, each stakeholder is incentivized to prioritize revenue and profits. Healthcare is no exception. It’s probable that any rational actor in similar roles would make comparable decisions.
The question we must address is: How do we move forward? What changes are necessary to begin mending this broken system?
The solution demands both regulatory and technological reform. First, let us take a closer look at regulation, where bipartisan consensus on the need for reform offers rare common ground. The No Surprises Act, for instance, was enacted under one administration and implemented by another, underscoring shared political will to mitigate healthcare’s impact on everyday Americans. Yet if we are to achieve genuine change, regulatory bodies need to adopt a more thoughtful and strategic approach.
Understand the market dynamics of payers and providers
Insurers and providers operate with the goals of revenue and profit growth, which regulators and regulations often fail to consider. Laws that don’t account for potential loopholes simply shift costs rather than reduce them, creating the illusion of progress. It is imperative to keep in mind that rising healthcare costs implies higher revenue for providers; a higher revenue for providers means higher premiums, i.e. revenue for payers.
The stock market rewards revenue growth way more than improved margins. This provides extensive incentive to payers and providers to be innovative in how they “shift costs” when regulations are passed.
Regulation must be crafted with an understanding of its potential impact on healthcare costs for ordinary people, avoiding the squeezed balloon effect, where costs shift without any overall cost reduction.
Recognize healthcare’s local monopolies
While other sectors, like technology, are subject to national antitrust scrutiny, healthcare operates across many local micro-markets with localized monopolies. Regulation should reflect this structure, addressing these micro-monopolies with tailored policies that account for regional market dynamics.
Stop adding to the middlemen problem
Regulations must be enacted with caution to avoid inadvertently inflating the healthcare sector’s administrative footprint. The Transparency in Coverage Act, for example, while intended to increase transparency, has spawned a cottage industry of compliance tools companies and consultants — more middlemen — with minimal impact on consumer costs. Future regulations should include clear expectations and mechanisms for affordable, effective compliance without adding new categories of middlemen to the already bloated system. Additionally, regulatory enforcement should be robust, ensuring that non-adherence results in significant penalties that deter cost-shifting practices.
Without these considerations, regulatory measures may perpetuate the inefficiencies they aim to resolve. Now more than ever, Americans need a healthcare system that prioritizes access, transparency, and genuine affordability. Legislative reform, combined with strategic enforcement, could be the first step toward this elusive goal.
Second, let us take a closer look at technology. Once a system, any system, reaches a certain level of complexity, simplifying it again becomes a near-impossible task. However, technology offers a pathway to managing complexity in ways that improve usability and efficiency. Consider the internet. It’s an enormous, convoluted system, yet search engines allow us to find information quickly and (usually) accurately.
In healthcare, however, technology has so far largely added to both complexity and the cost burden rather than easing it. Generative AI could mark a turning point. This technology is unique in its ability to emulate human skills like storytelling, a talent that was once thought exclusive to humans, which helps achieve shared understanding and collaboration. The potential is enormous. AI systems can now analyze, interpret, and convey information much like a human, which could impact healthcare administration, a sector valued at $1 trillion, half of which is estimated to be wasteful expenditure.
Take the process of claim re-pricing and payment as an example. After a doctor generates a bill for reimbursement, that claim may pass through as many as 10 companies and 12 software systems, each with its own requirements and procedures, before the doctor is paid. This labyrinthine process stems from decades of regulations, changing market dynamics, and piecemeal ad hoc solutions. Yet by deploying Generative AI and semi-autonomous agents, we could digitize and automate this entire process from end to end, significantly cutting down on time, costs, and redundancies.
Similar opportunities exist across other healthcare administration processes, whether in prior authorizations, member enrollment, or patient management. I am not suggesting that technology or Gen AI is a silver bullet. This is a long-term undertaking, demanding deep expertise in both healthcare and technology, a rigorous attention to detail, and considerable patience. Still, nothing in the nature of the problem makes it unsolvable.
Companies routinely embark on “moonshot” projects that demand decades to bear fruit, like Facebook’s Metaverse, Elon Musk’s SpaceX and Neuralink, and Google’s Waymo, Wing, and Loon. These projects capture public imagination and dominate media cycles, but moonshots in healthcare administration, though less glamorous, offer far greater potential for transforming lives.
We need to encourage visionary entrepreneurs to pursue these difficult challenges within healthcare. Initiatives that, though unglamorous, offer substantial benefits to consumers and society at large. Government support is also crucial. Legislation that promotes competition within local healthcare markets and policies that encourage innovative solutions for complex healthcare issues would drive meaningful progress.
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