Executive Summary: The Bundle Is the Problem
TOS.01 — The Other Side#
The bundled small group health plan combines three economically distinct transactions under one contractual wrapper: access to a negotiated provider network, access to negotiated prescription drug pricing, and catastrophic financial protection. Only the third is actual insurance. The first two are purchasing functions, and purchasing functions do not require an insurance structure to work.
RAND’s Round 5 Hospital Pricing Transparency Study found that private employer plans paid an average of 254 percent of Medicare rates for inpatient services and 289 percent for outpatient services. The FTC’s January 2025 Second Interim Staff Report documented that between 2017 and 2022, the three largest PBMs generated more than $7.3 billion in dispensing revenue from specialty generic drugs in excess of estimated acquisition costs, and that spread pricing added an estimated $1.4 billion more. A markup on tadalafil reached 7,736 percent for commercial payers in 2022. These margins exist because the PBM’s position inside the bundled product is protected by the bundle itself. A small employer cannot separate the pharmacy purchasing function without effectively exiting the whole arrangement.
What remains after stripping the network discount and the PBM is the genuine insurance event: catastrophic protection above a specific attachment point, typically $20,000 to $50,000 per member annually in a level funded small group plan. That function should be the front end of product architecture, not the back end. The employer designs against the catastrophic threshold first, then assembles the purchasing functions separately through direct primary care, a transparent PBM or pharmacy discount card, and a rented network accessed at a per-member monthly fee. These are contracts with separate counterparties, not components of a single plan document.
The unbundled model is not a high-deductible health plan. An HDHP is still a bundled product with a full plan document, prior authorization apparatus, and TPA administrative stack. The model described here has no plan for routine care because there is no routine claims function. The cost difference is structural: a bundled plan for 25 employees at the 2024 small-group average produces total premium approaching $430,000 annually. The unbundled model eliminates the overhead that exists only to hold three economically distinct functions together through one bureaucratic apparatus.
The economic and political barriers are real. Every entity in the current value chain loses revenue if the bundle breaks: the carrier loses premium, the TPA loses adjudication fees, the PBM loses spread pricing income, the network aggregator loses access fees, and the broker loses commission. These interests sustain the architecture through contract terms and advisory relationships. Fully insured small group enrollment has already fallen from approximately 17 million covered lives in 2013 to approximately 10 million in 2023. Level funded, which shares some transparency characteristics of the unbundled model while retaining the plan document framework, is the market’s intermediate response. The regulatory architecture, particularly ERISA preemption and the inapplicability of essential health benefit requirements to self-funded plans of any employer size, already permits more unbundling than the market has achieved. The remaining barrier is commercial: no integrated platform makes the unbundled model as operationally simple as a single broker call and a bundled invoice.