Reversing Vertical Merger-Mania in Health Care

May 15, 2024

Medicare Advantage and Vertical Consolidation in Health Care
American Economic Liberties Project
April 30, 2024
By Hayden Rooke-Ley

[HJM Editor: Today’s excerpt is dense with policy, economic, and regulatory ideas. We’ve bolded major points. See the Comment for a summary of Rooke-Ley’s 3-part policy vision.]

From the Executive Summary

A new wave of health care consolidation is underway. Health insurance and retail conglomerates are rapidly acquiring providers, from primary care practices and surgery centers to home-based and post-acute care. UnitedHealth Group (UnitedHealth), for example, is now the nation’s largest insurer and the largest employer of physicians. Humana is now the largest provider of “senior-based” primary care and in-home care. CVS Health, Walgreens, and Amazon, which have been aggressively consolidating the prescription drug supply chain, are now acquiring physician practices. And private equity investors—looking to consolidate industry segments and then sell to these conglomerates as an eventual exit—are accelerating these rollups.

With dominant market power, the new health care conglomerates dictate which physicians patients can see, which medications are prescribed to them, and which insurance plans they enroll in. By acquiring medical practices, these corporate employers shorten visit times, require more clinical coding and box-checking, and replace physicians with lower-cost clinicians. Meanwhile, by coordinating across lines of business, conglomerates like UnitedHealth squeeze out independent practices and community pharmacies. They can also shuffle money between subsidiaries and use other financial tactics to skirt regulations and exploit payment loopholes, increasing health care costs.

This paper details the causes and costs of this new frontier of consolidation …. In short, sweeping changes in health care financing policy are causing insurers and retailers to restructure as vertically integrated conglomerates. While technical, how the government pays providers and insurers fundamentally shapes the business strategies of health care companies. As the government continues to privatize Medicare and Medicaid, it is significantly overpaying insurance companies to administer benefits. With this excess capital, insurers are acquiring providers, gaining control of key points in the delivery system that enable them to capture greater government payments and minimize spending on patient care. To take one prominent example, control over primary care clinicians allows these corporate owners to manipulate billing and coding practices to make patients appear sicker to the government, thereby increasing payments.

Government policy over the last two decades has transformed health care financing. In an attempt to solve health care’s value problem— high spending and poor health outcomes—policymakers have steadily abandoned “fee- for-service” financing … [in favor of] “capitation-based” financing. In this model, the government pays a fixed budget to a “risk-bearing entity”—an insurance company, hospital system, or group of physicians—to manage the total health care costs for a patient. The risk-bearing entity turns a profit if it keeps costs below the established budget … In this paper this policy [is] referred to as [the] “Capitation Consensus.”

Medicare Advantage, the privatized version of Medicare that now covers more than half of Medicare beneficiaries, is the most prominent example of the Capitation Consensus. But this financing approach has spread across public health care programs: nearly all of Medicaid has moved to capitation-based financing, and Medicare’s prescription drug benefit, Part D, operates entirely on capitation. In the last decade, traditional Medicare— the historically fee-for-service model of Medicare—has been integrating versions of capitation through accountable care organizations and other value-based care models. Despite high hopes, the shift to capitation has yet to deliver on its primary objective of cost reduction. Most concerning is that Medicare Advantage now costs taxpayers anywhere from $75 billion to $140 billion annually in over-subsidization relative to traditional Medicare.

Part II … explains how the Capitation Consensus is driving vertical consolidation. With excess capitation payments, Medicare Advantage insurance conglomerates are plunging capital into provider acquisitions, and retailers and private equity investors are following suit. As noted above, owning physician practices enables conglomerates to inflate the perceived disease burden of patients, thereby enhancing capitation-based payments from the government. Vertical consolidation also enables patient steering: conglomerates can push patients to receive care at their own provider subsidiaries. In doing so, these companies squeeze out local providers, such as independent physician practices and community pharmacies. Steering also generates “captive revenue,” which allows conglomerates to game federal regulations requiring that government payments are spent on patients, not profits. …

…Part III … argues for … at a new “industrial policy” for health care … suspicious of concentrated corporate power—whether horizontally or vertically combined … promote the autonomy and collective power of clinicians [and] protect the medical profession from corporate influence … minimize [corporate] financial strategies that increase prices and administrative costs … [embolden] policymakers, particularly in Medicare, to exercise greater control of public money and directly rationalize the production and allocation of health care capacity. … [and] build robust health care infrastructure—owned by clinical providers and local communities …

 

Comment by: Jim Kahn

This is exciting work. Hayden Rooke-Ley offers a policy vision consistent with, and extending, the Biden administration’s pro-public regulatory philosophy. For too long, US health policymakers and regulators have accepted the “Capitation Consensus” that enabled and served as cover for the corporate takeover of insurance and then providers – as a result tolerating rising prices and profits coupled with fading access and outcomes. This can change.

In the Executive Summary excerpted above, Rooke-Ley describes how widespread dysfunction arose from the “Capitation Consensus.” In the full report, he also calls out pharmacy benefit managers (PBMs). This corporate mechanism, supposedly to negotiate lower drug prices, has been co-opted by insurer ownership, permitting manipulation of the formulary, prices, and rebate structures to benefit the vertical conglomerates while financially penalizing patients and independent pharmacies.

Rooke-Ley calls for a new “industrial policy” for health care: an integrated framework to structure the sector towards public aims, not corporate interests. As the Federal Trade Commission (transformed by visionary Chair Lina Khan) and Department of Justice pursue vigorous interventions in various economic sectors, this report offers a compelling roadmap for a broad activist approach in health care. It advocates fundamentally remaking regulation, policy, and financing.

I spoke with Hayden about his policy vision. It has 3 core elements:

(1) Combat corporate consolidation and elevate the power and autonomy of clinicians and their patients. This has regulatory components: Strengthened antitrust enforcement, e.g., forcing break-up of vertical consolidation; and supporting clinicians by fostering unionization and banning restrictive contracting practices like noncompete agreements. On the policy side: Congress can prohibit insurance company ownership of providers, similar to the New Deal era Glass-Steagall Act for banks. States can update and repurpose existing bans on the corporate practice of medicine to limit private equity and insurance company control of medical practices. Investment can be incentivized toward physician and public ownership of hospitals and practices.

(2) Use public utility regulation to foster healthy and fair competition: Rooke-Ley persuasively argues that price competition is harmful in health care: it needlessly fuels consolidation, undermines small providers and community pharmacies, and disadvantages patients on public entitlement programs like Medicaid. Congress could standardize prices, generating immense savings and encouraging providers to focus on delivering the best clinical care. For example, it could treat hospitals as critical public infrastructure, migrating to standard payment rates and ultimately global budgets. On the payment side, more ambitiously, Medicare could get insurers (e.g., Medicare Advantage) out of the business of widespread prior authorization and claims adjudication, instead operating like traditional Medicare. Rooke-Ley also advocates for a “public option” Medicare Part D drug benefit that bypasses insurers and PBMs, with their collusive rebate schemes.

(3) Use public funds more responsibly to build and deploy health care resources. The Center for Medicare and Medicaid services could recapture known over-payments to Medicare Advantage and redirect the funds to expanded traditional Medicare benefits. It would use Medicare leverage to improve physician specialty mix and geographic distribution. For primary care, it could align compensation with specialties and explore global reimbursement.

I’m pleased to see a convergence of proposed actions that are consistent with the new anti-monopoly mindset of the Biden administration, and also with single payer. For example, under single payer insurers would not own providers, hospitals would use standard payment rates and likely global budgets, and public funds – the entire health care budget! – would be dedicated to efficient and effective pursuit of an appropriate balance of primary and specialty care. Thus, these proposed steps would advance key principles and practices of universal publicly-funded comprehensive, equitable, and efficient insurance.