How to halt the cycle of healthcare's broken incentives

After 31 years of witnessing how health insurance has always been the centerpiece of conversations in the employee benefits industry, I've watched this system evolve. And while many things have changed, the most frustrating realization is how much has stayed the same. 

Healthcare in the U.S. remains trapped in a cycle of rising costs, declining benefits, and a deep misalignment between financial incentives and patient well-being. Employers dread annual renewal meetings, knowing another painful increase is coming. Employees face ever-higher out-of-pocket costs, pushing many into medical debt or even bankruptcy. Doctors struggle under administrative burdens, leading to burnout at alarming rates.

And yet, year after year, the industry repeats the same behaviors, expecting different results.

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When I entered this field, HMOs dominated the market. Deductibles were minimal, often around $100. Patients had predictable, affordable care with little concern about whether they could afford a doctor's visit.

Today, PPOs are the dominant plan type, deductibles routinely exceed $2,000 per person and out-of-pocket maximums are at bankruptcy-inducing levels. According to the Kaiser Family Foundation (KFF), the average employer-sponsored family plan cost $7,739 in 2000. By 2023, that number skyrocketed to $23,968, nearly three times as much, far outpacing wage growth.

Meanwhile, the number of health insurance carriers has shrunk. When I started, the New York market featured dozens of insurers. Now, just a handful remain, mirroring a national trend of consolidation that has left employers and patients with fewer choices.

Despite these shifts, the fundamental dysfunctions of the system remain. Carrier and provider consolidation continues, health insurance companies and hospital systems keep merging, reducing competition and premiums continue to rise while coverage consistently declines. Every year, employers face higher costs with comparatively diminished benefits. 

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Doctors are burned out. Physicians suffer from some of the highest rates of suicide and substance abuse among professionals, administrative bloat increases while clinical staffing stagnates. Administrative bloat increases while clinical staffing stagnates. Hospitals are filled with more administrators than ever, yet nurse and physician shortages persist, all while insurance companies dictate care. Instead of relying on their training and experience, providers first check what a patient's insurance covers before deciding on treatment. And then there's the part that never changed for me personally: the pit in my stomach before a renewal meeting with a client, knowing I was about to deliver bad news.

At some point, I had to ask myself: "Why does this keep happening?"

The power of incentives

Financial incentives drive human behavior. We've seen this throughout history, from tax policies that influenced trade in ancient civilizations to modern corporate compensation structures designed to maximize productivity.

In healthcare, however, incentives have been perverted and become increasingly misaligned with patients' needs. The system rewards higher costs rather than better outcomes. For example, hospitals and doctors are paid more when they provide more services, not necessarily better care. Fee-for-service reimbursement incentivizes quantity over quality. 

Insurance carrier profit increases when claims increase. Since most insurers operate on a percentage-based revenue model, higher premiums mean bigger profits. Pharmacy benefit managers (PBMs) and pharmaceutical companies inflate drug costs and the opaque rebate system drives up prices, benefiting intermediaries rather than patients. Brokers are often paid more when employer premiums rise. Commissions and carrier bonuses incentivize higher costs, which knowingly or unknowingly, supports further consolidation in the market.

These misaligned incentives explain why costs continue to soar while patient outcomes lag behind other developed nations.

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The meeting that changed everything

One day, I was sitting across from the owner of a multi-location family-owned car dealership, delivering yet another painful renewal. Here are the facts: the initial rate increase of 40% was negotiated down to 24%. Through plan design changes (aka making benefits worse), we got it to a "mere" 18%.

I could see the distress on his face – not just for his business, but for his employees and their families. That's when I asked, "Do you know how I get paid?"

He assumed I was paid by the carrier but didn't know the details. I explained that my compensation was based on a percentage of premiums, meaning the higher his costs, the more I made. Additionally, if I placed more business with one carrier, I earned additional bonuses.

I assured him that I wasn't making recommendations based on commissions, but then I proposed something radical: "What if we strip all that out? What if you paid me directly instead? But since I'd be giving up carrier bonuses, what if we tie my compensation to achieving your goals?"

He was intrigued. "And what exactly do you want me to accomplish?" I asked.

His answer was simple: "I want you to lower my healthcare costs."

In that moment, a harsh reality hit me. I spent my entire career negotiating premiums, but I had no control over the actual cost of healthcare services. For example, I couldn't influence the price of an MRI. I couldn't control how much a hospital charged for a routine procedure. I had no say in the cost of a prescription drug.

If I truly wanted to help my clients, I had to go beyond insurance and get involved in how care was delivered and paid for.

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Flipping incentives

Once my compensation was tied to cost reduction, everything changed. I had to find new solutions – ones that the traditional industry ignored.

Here's what happened when we realigned financial incentives:

• Direct contracts with hospitals and independent providers reduced costs by 30% to 50%. Instead of paying inflated insurance-negotiated rates, we negotiated cash-based, transparent pricing with high-quality providers.

• Employees gained access to care and medications with zero out-of-pocket costs. Eliminating middlemen and PBM markups meant lower overall spending, allowing employers to cover costs in full.

• Total healthcare spend dropped without reducing quality. By cutting waste and focusing on value-based care, clients saved millions while improving employee satisfaction.  

Self-funded employers implementing these models consistently save 30% to 50% compared to traditional insurance. (Self-funding alone does not accomplish that). Direct primary care models improve health outcomes and reduce hospitalizations. Reference-based pricing reduces hospital bills by 40% to 60%. (Self-funding alone does not accomplish that). The solutions already exist, but they require breaking free from traditional incentives.

Stop playing a losing game

If we want real change, we can no longer repeat the same behaviors while expecting the industry to change around us. We have to stop doing what we have always done while expecting different results.

That means:

1. Employers must rethink how they pay brokers. If their broker is paid a percentage of premiums, they have no financial motivation to lower costs.

2. Brokers must take ownership of cost control. That means moving beyond renewals and engaging in direct contracting, pharmacy cost management and proactive care navigation.

3. We must realign every stakeholder incentive. When doctors, hospitals, insurers and brokers profit from lower costs and better outcomes, the system works.

The U.S. healthcare system isn't broken by accident – it's broken by design. But if we change the incentives, we can change the outcomes.

The question is: "Are we willing to change the way we play?"