Washington, DC—With the CEO of UnitedHealth Group set to testify before Congress after a cyberattack on its subsidiary paralyzed the healthcare system and exposed the dangers of consolidation in the sector, the American Economic Liberties Project today released a new white paper, “Medicare Advantage and Vertical Consolidation in Health Care,” laying out the causes and consequences of the contemporary wave of vertical consolidation and proposing a wide-ranging set of solutions as a new “industrial policy” for healthcare.

“Insurance giants like UnitedHealth Group are rapidly restructuring as vertically integrated conglomerates—fueled by wasteful government subsidies and a lax regulatory regime,” said Hayden Rooke-Ley, Sr. Fellow for Healthcare at the American Economic Liberties Project. “We know the risks of vertical consolidation and putting insurance companies in charge of care delivery: increased costs and denials of care, fewer independent practices and local pharmacies, and corporate executives empowered over physicians and their patients. But less recognized is how the prevailing model of government healthcare financing—epitomized by Medicare Advantage—is driving this latest wave of healthcare corporatization. It’s time for a new approach that embraces the government’s vital role in structuring the health care system toward public aims and restores power to clinicians and their patients.”

The paper details how changes in healthcare financing policy—particularly in Medicare over the last decade—have driven this new frontier of vertical consolidation. Seeking to rein in healthcare spending, policymakers have steadily moved the government away from “fee-for-service” financing, reimbursing practitioners for services provided, to embrace “capitation-based” financing, allocating a budget to a private “risk-bearing entity”—such as an insurance company, hospital system, or physician group—to manage patient care. The entity turns a profit if it keeps expenditures below the total budget, creating an incentive to limit utilization to control costs, instead of lowering prices, profits or administrative costs.

Medicare Advantage is the most prominent example of capitation financing, but Medicare’s prescription drug benefit, Part D, nearly all of Medicaid, and increasingly traditional Medicare also use this bipartisan “Capitation Consensus” model, which has failed to deliver on its primary objective of cost reduction. In Medicare Advantage, the government pays insurance companies roughly $500 billion annually to administer the benefit, $88 billion of which are overpayments relative to traditional Medicare.

Instead of cutting costs, insurers are plunging this excess capital into acquisitions, creating healthcare giants that abuse their market power. UnitedHealth Group, the poster child of this incentive model, is now the nation’s largest insurer and the largest employer of physicians. Humana is the largest provider of “senior-based” primary care and in-home care. CVS Health, Walgreens, and Elevance, which have aggressively consolidated the prescription drug supply chain, are now acquiring physician practices. These vertically consolidated giants inflict a range of harms, including inflating patient disease burden to extract billions in government subsidies; steering patients away from medically necessary care to protect profit margins; and squeezing out independent providers by anticompetitive coordination across their various lines of business.

Solutions: The final section of the paper offers a set of solutions to these harms, framed as a new “industrial policy” for healthcare that is centered around three core principles.

1. Antimonopoly policies combating consolidated corporate power: Recommendations range from greater antitrust enforcement to a “Glass-Steagall for Healthcare” that would ban insurers and PBMs from owning pharmacies and medical providers. This agenda would also ban coercive contractual arrangements that bind clinicians, like noncompetes and gag clauses, and codify employment protections for clinicians.
2. Regulation of the ownership structure and governance of medical providers: Recommendations here include ownership transparency, updating and repurposing corporate practice of medicine (CPOM) laws, regulating ownership of facilities, and reconsidering the requirement, increasingly embedded in payment policy, that physicians assume the insurance function.
3. Centering government’s role in designing the healthcare system:  Strengthening control over public money and reducing wasteful corporate extraction which means Medicare Advantage subsidies and strengthening the regulation of insurance companies. It also requires greater attention to the “supply side”: adequately producing and allocating physician supply, financing much-needed primary care capacity, and re-conceptualizing hospitals as public utilities to enable the regulation of prices and administrative costs.

Read “Medicare Advantage and Vertical Consolidation in Healthcare” here.

Learn more about Economic Liberties here.

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The American Economic Liberties Project works to ensure America’s system of commerce is structured to advance, rather than undermine, economic liberty, fair commerce, and a secure, inclusive democracy. Economic Liberties believes true economic liberty means entrepreneurs and businesses large and small succeed on the merits of their ideas and hard work; commerce empowers consumers, workers, farmers, and engineers instead of subjecting them to discrimination and abuse from financiers and monopolists; foreign trade arrangements support domestic security and democracy; and wealth is broadly distributed to support equitable political power.