Obamacare Tactic Faces Hill Scrutiny as Health Costs Surge

A policy meant to limit insurance profits under the Affordable Care Act is driving market consolidation and higher health-care costs, researchers say.

House Republicans repeatedly criticized the law’s “medical loss ratio” during a pair of hearings before the Energy and Commerce and Ways and Means committees last week, blaming the policy for discouraging insurers from negotiating lower medical costs.

The provision requires insurers in the individual and small group markets to spend at least 80% of their profits on medical services, in a bid to block them from profiteering on patients. But critics say the MLR has led to vertical integration and financial sleights-of-hand as insurers’ parent companies look for other ways to make money.

The parent companies of Aetna Inc., Anthem Inc., the Cigna Group, and UnitedHealthcare Inc. all own medical clinics, pharmacies, and pharmacy benefit managers that oversee prescription drugs for health plans. That type of “vertical” integration has historically received less scrutiny from regulators, but critics say the trend is eliminating competition across the health-care industry and elevating costs for patients inside and outside the ACA market.

The insurers’ executives argued in the hearings last week that integration helps them streamline operations and lower costs for patients. But critics say there’s no evidence to support those claims, and that the rising cost of care disproves that theory.

Ge Bai, an accounting and health policy professor at Johns Hopkins University, said the MLR was “very well-intentioned,” but has favored big companies that can diversify their revenue streams outside of the MLR’s constraints.

“Vertical integration is a predictable consequence of MLR,” she said.

Because the MLR restricts insurers’ slice of the cake, she said, it encourages them to increase the size of the cake overall. The policy also forces out smaller, innovative insurers that may have lower premiums and spend less on medical claims, because they might struggle to eliminate enough overhead costs to meet the MLR threshold.

“The law encourages insurance companies to offer expensive plans with high premiums,” she said.

The evidence that MLR is contributing to vertical integration is “becoming harder and harder to refute,” said Andres Arguello, a policy fellow with the advocacy group Groundwork Collaborative and a former Department of Health and Human Services official in the Biden administration.

A vertically integrated company lacks the traditional tension that exists between doctors pushing for higher prices and insurers pushing for lower prices, he said.

He pointed to a recent study showing that UnitedHealth Group Inc. pays its own doctors between 17% and 61% more than external doctors. Arguello likened the dynamic to real estate agents trying to sell their own houses and pocket the commissions.

“In a vertically integrated model, there’s zero tension because both sides are benefiting from the higher spending,” he said.

A spokesperson for UnitedHealth Group disputed the study’s findings.

“UnitedHealthcare pays Optum Health consistent with other providers in the market, which is essential for staying competitive,” he said. “The study, funded by groups with known biases, cherry-picks data and is flat-out wrong.”

Insurance lobby group AHIP said insurers make care “more coordinated and easier for Americans to navigate.”

“Health plans operate in highly competitive marketplaces and are the only part of the health care system that has a clear incentive to reduce costs—a stark contrast to hospital systems and brand‑name drug manufacturers that use anticompetitive strategies to drive prices higher for Americans,” spokesperson Chris Bond said.

Congressional Scrutiny

CVS Health’s acquisition of Aetna and Express Scripts’ acquisition of Cigna met with little congressional pushback in 2018, but last week’s hearings demonstrated how lawmakers’ attitudes have changed. Insurance executives weathered bipartisan grilling surrounding their consolidated power over the market.

Republicans blamed the MLR for incentivizing vertical integration.

“The less that your companies contain the costs of health care, then the more your premiums increase, and that results in an increase in your total profit potential,” Energy and Commerce Chair Brett Guthrie (R-Ky.) said. “So then the Obamacare MLR policy effectively is an incentive for your premiums to be higher because you’re penalized when you curtail health costs.”

Rep. Alexandria Ocasio-Cortez (D-N.Y.) meanwhile, accused the companies of dodging the MLR’s requirements. She urged Congress to pass legislation to bust up the health care industry in the vein of the Glass-Steagall Act, which separated commercial banking from investment banking in the wake of the 1929 stock market crash.

“We should be considering that in our health-care system,” she said.

Insurance executives refuted allegations around the MLR, pointing to ongoing losses in the Affordable Care Act market.

“We lost money in the exchange all but two years since 2014,” Cigna CEO David Cordani testified, “so that phenomenon has not affected us favorably.”

Potential Solutions

Relaxing the MLR spending requirements is the only way to fix the distorted incentives, Bai argued, calling the policy an “iron dome” that kills competitive startups.

“Nothing can grow except those outlandish, integrated systems,” she said.

But eliminating the requirement won’t remove the underlying profit incentives that still benefit vertically integrated insurance companies, Arguello said.

He pointed to Arkansas, which passed a law banning pharmacy benefit managers from owning pharmacies in the state. The law is currently paused after Express Scripts and UnitedHealth’s Optum Inc. sued.

Lawmakers could also require more transparency in pricing between companies under the same corporate umbrella, and set benchmarks to discourage self-dealing, Arguello said.

“If we do this right, it’s an opportunity to get at that incentive too,” he said.