How health insurance plans get around the law that regulates their profits

You go to a restaurant and order a meal. The menu says 80% of what you pay goes to food and cooking. But the restaurant also owns the farm, the delivery truck, and the kitchen equipment company, charging itself triple the market rate for all of them. Technically, 80% went to “food-related costs.” Your wallet doesn’t know the difference.

That’s essentially what vertically integrated health insurers are doing with your premium dollars. And thanks to this trickery, they’re doing it while staying technically compliant with a law designed to keep health insurance premiums down.

The law that was supposed to protect you

Insurers collect premium dollars to pay the health care bills (known as claims) for their beneficiaries. To keep the insurers honest, we need to make sure that those collected sums are spent on the care people need, not the companies’ overhead. That’s why, under the Affordable Care Act, health insurers are required to spend at least 80% of the premium dollars on medical care and quality improvements, not administrative expenses or profit. Large group insurers have to spend at least 85%. This requirement is called the Medical Loss Ratio, or MLR.

But in today’s health care marketplace, some insurers have found a way to meet the MLR requirements but still grow their larger network’s income. That means consumers might not really be getting the value we have come to expect for our premium dollars.

Today’s health insurance plans no longer operate independently.

Vertical integration is a strategy where a parent company owns or controls entities that offer the different elements of the supply chain. For example, our restaurant analogy where the restaurant owned the farm, delivery truck, and other parts of the chain. In health care, vertical integration has become increasingly common: over the last 10 years, there has been a doubling of the number of physicians working for larger health systems, instead of running independent practices. In fact, we now have over half of U.S. physicians employed by these integrated systems. It’s not just Insurers and providers that are vertically integrated. Today consolidated systems include pharmacy benefit managers (PBMs), home health agencies, ambulances and data firms. 

Similar to the restaurant example, when a parent corporation controls the insurer, the pharmacy, and the doctors, it also controls the prices each of those entities charges. 

Integrated insurers increase profits for their parent company while still complying with the law

When an insurer pays for care, those payments count toward the 80% MLR threshold. When providers owned by the parent company inflate their prices above fair market rates, the inflated payment still counts as a “medical expense” under MLR rules. The insurer might be technically losing profits by paying more for those medical expenses, but those higher payments flow right back into the parent company’s pocket through the providers’ door. The providers can be paid more because they aren’t limited in the same way the MLR limits insurers’ profits.

The result is that the insurer appears to meet the 80% MLR threshold on paper. Yet, it avoids having to issue premiums rebates, and still generates profit to the parent company through its subsidiary entities. 

What this means for you and your insurance premium costs

With vertical integration, health care dollars flow between the various entities in the health system. We can no longer expect the Minimum Loss Ratio and subsequent rebates to make sure our premium dollars assure high value (good quality at low cost) care.  When insurance companies are part of a parent company that owns more parts of the healthcare system, the MLR cost-containment tool can’t do its job. What’s the result?

• Your premiums likely get more expensive to cover the higher payments charged by the system’s providers.
• You may have fewer choices as independent doctors, pharmacies, and clinics struggle to compete with companies owned by larger systems.
• Health care spending overall increases as vertically integrated companies shift money to avoid cost containment regulations, like the MLR. 

Solutions for a return to cost-savings

Advocates and researchers have identified several policy solutions to address rising costs caused by vertical consolidation

• MLR Reform: To more effectively protect against MLR gaming, CMS could require parent companies to disclose the transfer prices — the rate a parent company charges its own affiliated subsidiaries. Regulators currently have little visibility into how much these transfer prices are marked up, since there is currently not enough comprehensive data. CMS could close this gap by requiring transfer price disclosure and establishing benchmarks to contain cost, as researchers have proposed for Medicare Advantage.
• Antitrust Enforcement to Target Vertical Integration: Studies show why regulators need to crack down on unhealthy vertical integration through antitrust enforcement. When reviewing mergers, regulators shouldn’t just look at market share and whether prices go up. Antitrust evaluations could also consider whether the merger makes it harder for competitors to survive or for new players to enter the market. Hospital mergers don’t just hurt other hospitals; they can also squeeze out less expensive alternatives, such as ambulatory surgery centers.
• Employer-sponsored insurance: Efforts to implement health care cost containment reforms have been more easily obtained through Medicare regulation under the Department of Health and Human Services. But most of those efforts have not reached  employer sponsored insurance because those health plans are regulated under a different law: ERISA. The Department of Labor is the agency in charge of implementing ERISA. A recent analysis offered ideas on how ERISA could be improved to better address cost containment,including  controlling unreasonable service provider compensation (which may be due to MLR gaming).

PIRG will continue to promote opportunities to improve the value of health care. Addressing MLR gaming and other cost drivers are certainly top of the list.