By Julia Burleson and Lachlan Vaughn
Introduction
In May, CHIR hosted a panel discussion on the impacts of vertical integration in the health care industry. The panel brought together a former federal regulator, an academic, a physician, and a union benefit fund representative to discuss how large corporations are reshaping health care markets and patient care. Four major themes arose from the discussion: 1) consolidation can increase prices without improving quality, 2) consolidation challenges traditional antitrust analysis, 3) opaque corporate structures can obscure oversight, and 4) financial interests can drive consolidation.
Key Themes
Consolidation Can Increase Prices without Improving Quality
As health care organizations become more integrated, panelists noted rising costs for consumers as well as limits on how purchasers can design provider networks and benefits. Dr. Debra Patt described challenges she and her colleagues have faced with vertically integrated pharmacy benefit managers (PBMs) and specialty pharmacies. As an oncologist, she often reduces drug dosages to avoid toxicity in patients. Yet she noted cases in which integrated PBMs have directed patients to affiliated specialty pharmacies that dispensed medications at higher dosages than prescribed. This leads to unnecessary costs for her patients and potentially worse health outcomes for those who do not adjust their dosage.
Union benefit fund representative Misha Sharp described a case in which her organization designed a maternity program with one low copay covering prenatal through postpartum care. However, a dominant health system’s contract would have prevented the union benefit fund from encouraging patients to use the lower-cost, high-quality maternity providers participating in the program. The union benefit fund could not include all providers in the program because its financial viability depended on lower rates that the participating providers offered. To preserve the ability to design benefit programs and control costs overall, the union benefit fund ultimately dropped the health system from its network. Together, these examples show how consolidation can increase costs for patients and purchasers while creating incentives that do not necessarily improve the quality of care.
Consolidation Challenges Traditional Antitrust Analysis
Former Assistant Attorney General Jonathan Kanter argued that many antitrust tools and market definitions were developed for a health care system where entities such as insurers, providers, and PBMs operated independently. However, today, many of these organizations are part of integrated conglomerates that span multiple sectors of the health care industry.
Panelists explained that this evolution creates challenges for existing competition policy and antitrust enforcement frameworks that may not fully capture how affiliated entities interact across multiple parts of the health care system. As a result, regulators can miss ways that corporate structures create conflicts of interest, enable self-dealing, and make it difficult for independent competitors to survive in the market. For example, a company that controls an insurer, physician practices, a PBM, and a pharmacy may steer patients toward affiliated providers or pharmacies. In doing so, it directs revenue and market share toward related businesses while disadvantaging independent competitors. More broadly, integrated conglomerates could use their position in one part of the health care system to strengthen their position in another. These dynamics can be difficult to identify using traditional antitrust analysis.
As a result, the panelists argued that regulators should evaluate consolidation more holistically. Regulators should consider how integrated conglomerates influence patient access and quality, steer business toward affiliated entities, and affect competition across the health care system. They also emphasized the importance of examining acquisitions cumulatively rather than in isolation. For example, “roll-up” acquisitions allow firms to expand their influence through a series of smaller transactions that fall below the threshold for regulator scrutiny. Evaluating these transactions as part of a broader corporate strategy can provide a more complete picture of their effects on competition, consumer choice, and patient access to care.
Opaque Corporate Structures Can Obscure Oversight
Limited visibility into corporate structures and financial relationships makes it difficult to determine whether and to what extent integrated entities are exploiting regulatory loopholes. Several panelists pointed to the medical loss ratio (MLR) requirement as an example of a well-intentioned policy that has evolved into a mechanism to reinforce market power and increase profitability. The MLR requires plans to spend at least 80-85% (depending upon the market segment) of premium revenue on medical care and quality improvement rather than profit or administrative costs. The policy was intended to increase transparency around insurer spending and lower health care costs, particularly administrative expenses. However, some academics argue that vertical integration has created opportunities for insurers to comply with the MLR requirement while undermining its intent.
During the panel, Professor Erin Fuse Brown explained when a conglomerate controls both the insurer and health care provider, it can direct premium dollars to affiliated providers. Those payments would count as medical spending under the MLR while remaining within the larger organization. Emerging evidence finds that some conglomerates pay affiliated providers more than non-affiliated providers, allowing them to retain more premium dollars within the organization while increasing profitability. Additionally, limited oversight can allow some administrative expenses to be categorized as medical claims under the MLR.
The lack of transparency into vertically integrated organizations makes it difficult to understand how money moves through conglomerates. Researchers and policymakers often are prohibited from having visibility into transactions and financial relationships among affiliated entities. This includes ownership structures, joint ventures, and management arrangements that can give corporate-backed firms de facto control over medical practices. Improving transparency around ownership, affiliations, and related-party transactions could help regulators, researchers, and policymakers identify potential regulatory loopholes and develop more effective safeguards.
Financial Interests Can Drive Health Care Consolidation
Health care consolidation has received increasing attention from researchers and policymakers. However, panelists argued that this focus should be paired with greater attention to the complex web of health care financial interests that drive consolidation and other practices that increase health care spending. They noted that limiting mergers and acquisitions may not be sufficient if the underlying incentives that reward profit seeking for shareholders and company executives remain unchanged.
The panelists pointed to outpatient facility fees as an example. Under current payment policies, hospitals have incentives to acquire independent physician offices, convert them to hospital outpatient departments, and charge facility fees for outpatient care. These fees often increase costs for patients without meaningfully improving quality of care. In this case, payment reforms such as site-neutral payment policies could limit the underlying financial incentives more directly than antitrust enforcement alone.
More broadly, the discussion highlighted the need for a policy toolkit that extends beyond competition policy. As long as private entities are part of the health care system, policymakers will need to balance the benefits of private investment with incentives for profit seeking. Reducing health care and market power may therefore require a combination of antitrust enforcement, payment reform, rate regulation, and policies that support independent providers.
Takeaways
As health care organizations become larger and more interconnected, policymakers face growing challenges in understanding how consolidation affects competition, costs, and patient care. The panelists suggested that effective oversight will require updated enforcement frameworks, greater transparency into ownership and financial relationships, and policy tools that curb consolidation as well as financialization. To learn more, watch the recorded briefing and review the recommended readings and resources.
