If U.S. healthcare costs were the GDP of a country in 2019, it could have ranked 5th in the world, behind Germany with a GDP of $3.8 trillion and ahead of India with a GDP of $2.9 trillion. In 2017, the U.S. spent 18% of the country’s GDP on health care. Expenditures totaled 3.5 trillion, more than any other developed comparable country.

Soaring expenses in healthcare have been caused by ongoing misaligned incentives in the industry. An examination of waste in health care, hospital billing, insurance companies, and pharmacy benefit managers (PBMs) showed how the U.S. got on track to spend an annual sum of $6 trillion on health care by 2027.

Waste in Health Care

Despite having less office visits and shorter average hospital stays, the U.S. spent twice as much per person on health care than the average of comparable wealthy countries. The 2019 meta-analysis, “Waste in the US Health Care System,” took a look at estimated costs due to “failure of care delivery, failure of care coordination, overtreatment or low-value care, pricing failure, fraud and abuse, and administrative complexity.” An annual waste of $760 billion to $935 billion was reported, tantamount to the 2019 GDP of Saudi Arabia ($779 billion) or the Netherlands ($902 billion). According to the meta-analysis published in JAMA, interventions to address the waste could have saved up to $286 billion, about 25% of the total waste, which was a smidge above the GDP of Pakistan ($284 billion).


When hospitals have accepted network payments from insurance companies, they have lacked incentives to produce quality outcomes because they have not been held financially responsible for outcomes. The JAMA study found that up to $101.2 billion of waste was due to overtreatment or low quality care. Health plans that held hospitals financially accountable for quality outcomes were in a better position to mitigate stratospheric billing.

Insurance Companies

Insurance companies have been caught in a warped impetus aggravated by the Affordable Care Act (ACA) and the pressure to maintain large provider networks.

Since the ACA was enacted on March 23rd, 2010, insurance companies have been required to spend at least 80 percent of premiums on claims. This was denominated as the Medical Loss Ratio (MLR). The remaining 20 percent was left for insurance companies’ administration and profit.

However, insurance companies were expected to meet their fiduciary responsibility to their shareholders regardless of the MLR. Reducing premiums would have made it difficult to meet that expectation. To compensate for the MLR, insurance companies raised premiums, thereby increasing their own portion and ensuring they could meet their fiduciary responsibility to their shareholders.

Under the ACA’s 80/20 rule, insurance companies have been required to rebate excess premiums charged if they did not spend 80 percent on claims, so accepting higher prices from providers helped insurance companies reap their 20 percent.

In contrast, the Humana healthcare for Medicare model has operated for nearly three decades off of a fixed amount of money from the government. With this set amount, Humana was tasked to pay out claims for its members and retain a profit. For Humana, it has been in their best interest to contain health care costs because, by lowering healthcare costs, their profits increased. In 2018, Humana’s profits amounted to $1.6 billion.

Patients and employers have been funding the cost of healthcare, paying for everything, while they have been left in the dark, unable to see for what they have been paying. The current healthcare system has not had a built-in structure that incentivises insurance companies to decrease spending. Instead, insurance companies have benefited when projecting higher claims. Higher claims allowed insurance companies to charge higher premiums, so the 20 percent portion they were allotted for profit and administration was greater when the premiums were higher.

Additionally, it has been in the best interest of insurance companies to maintain large provider networks that appeal to employers, a task that could have become difficult if they had rejected high price tags from providers. When hospitals and physicians named their price, insurance companies greenlit their pricing in order to keep them in their networks. Insurance companies wanted to attract more membership, regardless of cost and provider quality outcomes.

In essence, the 80/20 rule and the pressure to build large provider networks have served as disincentives for insurance companies to reduce premiums. The healthcare industry’s misaligned incentives have been causing healthcare costs to rise at a flagrant rate.


Health insurance brokers have been receiving a flat percent commission on health plans, so as the costs have risen, they have been paid more. Most brokers and consultants have not been disclosing their total compensation amount to customers, and few brokers have been paid based on quality outcomes (i.e. the health of the population).

Moreover, the majority of brokers have received bonuses from insurance companies, often based on premiums. The higher the premium, the higher the broker bonus. There have not been incentives for brokers to manage premiums.

Pharmacy Benefit Managers

PBMs, infamous for their spread pricing, have garnered more scrutiny as their spread has widened even when drug manufacturing costs have lowered. New drugs have often been more expensive, but as production and demand of new drugs has increased, the manufacturing process has become more efficient, allowing for generic drugs to become available with a lower cost of manufacture. After a closer look, it has become clear that only the middlemen, PBMs, have been benefiting from increased demand and production efficiencies of generic drugs, and they have also been pocketing rebates from drug manufacturers.

In 2018, Bloomberg analyzed prices of 90 of the top-selling pharmaceutical generic drugs in Medicaid managed-care plans based on public data from a government survey of pharmacy purchase prices. Of the $4.2 billion Medicaid insurers spent on generic drugs in 2017, PBMs and pharmacies took in $1.3 billion.

Bloomberg reported a case where the PBM, CVS Health Corp, billed the client, Wapello County, a whopping 3,400 percent of what they had paid the pharmacy for a bottle of antipsychotic pills. The oversized profit has been a result of unrestrained spread pricing—the markup of a drug by the PBM, i.e. the difference between the amount they reimburse pharmacies and the amount they charge their employer clients.

In their analysis, Bloomberg encountered evidence indicating that the spreads on pharmaceuticals have been increasing. A Leukemia drug with a spread of $482 in 2016 had a spread of $3,342 in 2017.

Not only have PBMs been marking up pharmaceuticals in a gross and arbitrary fashion, they have also withheld rebates from insurers and self-funded employers—further increasing the spread. Pharmaceutical manufacturers have been offering rebates to PBMs in exchange for having their drug listed on the health plan formularies with a lower copay.

PBMs have been billing their clients based on the list price and have clung to the steep discounts drug manufacturers have provided via mysterious rebates. Though PBMs have passed along a small cut of the drug manufacturer rebates to pharmacies and insurers, they have held onto the majority of rebates instead of ceding rebates to the pharmacy, which would lower costs for the insurer or self-funded employer.

In 2019, the Trump administration proposed a rule for Medicare Part D that would have prohibited rebates and passed the discount directly to the customer. While drug companies applauded the proposed rule in favor of reining in the exorbitant profits PBMs made off of their deals, PBMs claimed that it would increase premiums. In July of 2019, the Trump administration retracted the proposed rule amid concerns drug costs would rise for the elderly.

Ultimately, the business practices of PBMs have reverberated throughout multiple sectors of the healthcare system. Rebate arrangements with drugmakers have resulted in excessive profits for PBMs, pharmacies have been receiving inadequate reimbursements from PBMs, and insurance companies have raised premiums in part due to high costs for pharmaceuticals. Employers and patients have been left to cover the majority of costs.

The Solution

Powered by employers who have sought solutions to the healthcare problem, Health Rosetta is composed of benefits consultants with an upgraded approach to healthcare focused on quality care transparency, open networks, and transparent broker payments tied to health plan savings.

Adjusting health plan policies to hold hospitals financially  accountable for quality care may not be possible for all health plans. However, utilizing resources like Hospital Compare or the Leapfrog Hospital Safety Grade report can direct patients toward the best quality care.

Instead of the old fee-for-service payment model, transparent open networks offer employers the opportunity to negotiate a fixed amount for a bundled set of services. This amount is paid upfront, allowing for providers to offer steep discounts and still benefit, since they are receiving payment in advance.

Another healthcare pricing variable that can be contained through vetting are broker payments. Brokers who are motivated by higher premiums can be avoided by seeking transparent brokers who disclose their compensation and are monetarily incentivized by the amount of savings they can offer their client.

Lawmakers are alarmed by the rate of inflation in healthcare and are working on initiatives to hold back prices. The towering costs from pharmaceuticals is an issue that can be mitigated by lawmakers. The drug costs from other comparable countries can be used as a touchstone, or supporting the production of more generic drugs can potentially lower drug costs.

Prevention Model

In addition to lowering the healthcare costs of acute care, forward-leaning companies have been focussing on wellness and preventive care. For over a century, the focus of the healthcare industry has been to treat the sick while maintaining wellness has taken a back seat. A prevention model addresses overall well-being through lifestyle, accessible primary care, and health education.

A Health Rosetta case study of Rosen Hotels & Resorts (RH&R) showed how this employer saved $240 million on health care over 24 years. RH&R offered employees onsite health screenings, vaccines, nutritional services, and family planning. By focussing on preventive care, RH&R increased the well-being of their employee population and reappropriated the savings toward community philanthropy, such as providing scholarships for youth in nearby underserved neighborhoods.

The 20th century acute care model was an important stepping stone in human history, but it was incomplete. Marginalizing preventive care has tethered public health. A well-rounded health plan includes a prevention model that improves quality of life for employees.

Though the rising costs in healthcare have seemed relentless, there are ways to combat the surge. It is paramount to address misaligned incentives in healthcare and mitigate costs wherever possible by seeking decent healthcare plans with transparency of the quality of care, open networks, and forthright brokers whose compensation hinges on the savings they can provide their client. Adding a prevention model completes the effort to maximize savings.


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