https://www.healthaffairs.org/content/forefront/insurers-own-providers-can-game-medical-loss-ratio-rules

Recent analysis of spending data from five states with health care cost growth targets—Connecticut, Delaware, Massachusetts, Oregon, and Rhode Island—revealed an unexpected trend in 2023: Spending grew sharply in service categories that have historically increased more slowly. The most notable increase was in non-claims payments—payments made through financial arrangements between providers and health insurers that are not tied to individual claims. These payments rose by an average of 40.4 percent across the five states, driven largely by increases in Medicare Advantage non-claims spending.

Increases in non-claims payments are often seen as a positive sign. They suggest a shift away from fee-for-service payments toward alternative payment methods (APMs)—value-based payment models that incentivize care coordination, efficiency, and a focus on outcomes. However, it’s unclear what is included in these non-claims payments. A closer examination of this issue revealed a less visible but important concern: the role of insurer-provider vertical integration in potentially weakening the effectiveness of Medical Loss Ratio (MLR) requirements for insurers.

MLR Requirements

Medical Loss Ratio is a measure of the percentage of premium dollars that a health insurer spends on medical care and quality improvement activities—as opposed to administration, marketing, or profit. Since 2011, the Affordable Care Act has required insurers to maintain an MLR of at least 80 percent in the individual and small group markets, and 85 percent in the large group market. That is, for every dollar spent by an insurer, 80 cents or 85 cents—depending on the market—must go toward actual care and improvement. Insurers that don’t meet these required thresholds must pay a rebate to consumers for the premium dollars that were not spent on health care, less taxes, fees, and adjustments. In 2014, the Centers for Medicare and Medicaid Services instituted a requirement for Medicare Advantage and Part D plans; they must maintain an MLR of at least 85 percent or rebate any excess revenues to the federal government.

These MLR requirements aim to ensure that the majority of premium revenue is used to deliver or improve care. However, a significant loophole allows insurers that have “vertically integrated” with providers to inflate reported medical spending. This reduces their rebate liability while increasing held profits. Since the MLR provisions took effect in 2012, an estimated $13 billion in rebates have been issued—highlighting the strong incentive insurers have to minimize these payouts.

The MLR Loophole

A company is vertically integrated when it owns or controls more than one entity in the supply chain. For insurers, this means acquiring physician practices, outpatient clinics, and even entire health systems. As a result of this vertical integration, payments to these affiliated providers count as medical spending when calculating an MLR for the insurer. However, there is no MLR requirement for providers. This creates an incentive for the insurer to direct spending to these affiliated provider entities, which may charge inflated prices, allowing the insurer to increase its reported MLR without delivering more care or improving quality.

Consider a hypothetical scenario: Company X owns Health Insurer A and Clinic Y. There’s another health insurer, B, in the market, but it is not owned by Company X. It costs Clinic Y $300 to deliver a particular service.

When a patient covered by Health Insurer B receives this service at Clinic Y, Insurer B pays the clinic $300 for delivering the service. But when another patient covered instead by Health Insurer A receives the same particular service at Clinic Y, Health insurer A pays the clinic a lot more: $500. The full $500 is counted as medical spending in Health Insurer A’s MLR calculation, even though the additional $200 didn’t buy any more services or any better care. It just represents internal profit for the vertically integrated entity, Company X, that is captured on the provider side of the business, and not true care delivery (see exhibit 1 below).

Exhibit 1: Incentives for vertically integrated insurers to direct spending to these affiliated provider entities

Source: Authors’ analysis.

The structure of APMs exacerbates this problem by making it easier to mask price increases. In fee-for-service systems, a price increase shows up directly. However, in APM payments that are per capitation or per episode, providers receive lump-sum payments for a group of services or a population. There is no service breakdown for these APMs. These lump-sum payments can facilitate investment in population health improvement, but if vertically integrated entities are exploiting the MLR loophole by increasing internal payment rates, the use of APMs make such profit maximization easier to conceal.

This dynamic reveals a limitation of the MLR rules. When the insurer is also the provider, there is less transparency into how health care dollars are actually allocated. The vertically integrated insurer and provider entity can also artificially inflate prices for medical services, worsening the nation’s health care affordability problem.

Potential Impact

Currently, there is no standardized way to assess the extent to which insurers that own or are otherwise affiliated with clinics and health systems are taking advantage of this loophole, or how much the practice contributes to high health care prices. However, with the growing trend toward insurer-provider vertical integration, the potential cost implications are significant.

Insurers That Own Providers Capture A Significant Share Of Commercial And Medicare Advantage Enrollment

In the large-group commercial market, the three largest insurers—Kaiser Permanente, UnitedHealthcare, and Elevance—held a combined 39 percent of the national market share in 2023. In the Medicare Advantage market, the top five plans—UnitedHealthcare, Humana, CVS Health/Aetna, Elevance, and Centene—accounted for 68 percent of total enrollment in 2023.All of these insurers operate within larger parent companies that own or control a range of health care provider entities.

For example, UnitedHealth Group, UnitedHealthcare’s parent company, also owns OptumHealth, which employs or manages more than 90,000 physicians across the country. The recently released Sunlight Report on UnitedHealth Group shows that it grew more than 10 times its size over the past decade, and the company now consists of nearly 3,000 distinct legal entities.

UnitedHealth Group is not the only insurer pursuing this strategy of vertical integration. Elevance Health (formerly Anthem, Inc.) owns Carelon, a health services provider that claims to serve one in three people in the US. CVS Health encompasses retail pharmacy storefronts (CVS Pharmacy), a pharmacy benefits manager (CVS Caremark), a health insurer (Aetna), in-store clinics (MinuteClinic), and provider groups such as Oak Street Health and Signify Health. This high level of consolidation gives these companies significant control over how care is delivered, priced, and reported.

Transactions Between Insurers And Their Affiliated Provider Entities Are Substantial And Growing

A 2022 analysis by the Brookings Institution suggests that in Medicare Advantage plans, internal transactions between affiliated insurers and providers can account for spending that ranges from about 20 percent to as much as 71 percent of the total. Cost growth target states’ reports on 2023 spending growth appear to confirm these trends within the Medicare Advantage market. Upon examination of the drivers behind the sharp increases in non-claims payments, a clear pattern emerged. In Connecticut, UnitedHealthcare launched a program that paid its affiliated provider group, which was then called OptumCare Network, a fixed percentage of Medicare Advantage premiums to cover care and care coordination. Oregon reported that the rise in Medicare Advantage non-claims payments was largely due to UnitedHealthcare shifting a significant share of its claims payments into non-claims spending through Optum.

These trends are not limited to Medicare Advantage, however. UnitedHealth and other major insurers such as Elevance and Aetna operate across multiple markets, raising concerns about similar dynamics in the commercial market. A recent analysis by Seth Glickman, a physician and former insurance executive, shows that in the past five years, UnitedHealth Group’s reported corporate “eliminations”—intercompany revenues reported in its consolidated financial statements that represent all books of business—more than doubled, increasing from $58.5 billion to $136.4 billion. At the same time, the share of Optum’s revenue derived from UnitedHealthcare, as opposed to unaffiliated entities, increased by nearly 50 percent.

Prices Of Health Care Services From Vertically Integrated Insurers And Providers Are Higher Than Prevailing Market Prices

Growing evidence also suggests that insurers are paying more for services provided through their affiliated entities than for those delivered by non-affiliated entities. A STAT News investigation revealed that UnitedHealth Group reimburses its own physician groups considerably more than other providers in the same markets for the same set of services. Similarly, a Wall Street Journal investigation showed how certain insurers and pharmacy benefit managers are generating substantial profits by overcharging for generic drugs within their own networks. The analysis found that for a selection of specialty generic drugs, Cigna and CVS’s prices were at least 24 times higher, on average, than the drug manufacturers’ prices.

Stronger Oversight Is Needed

The potential impact of these trends is so significant that policy makers are beginning to take notice. In 2023, Senators Elizabeth Warren (D-MA) and Mike Braun (R-IN) requested that the Department of Health and Human Services Office of Inspector General evaluate the extent to which vertical integration is increasing costs and allowing insurers to bypass federal MLR requirements. Earlier this year, Representatives Lloyd Doggett (D-TX) and Greg Murphy (R-NC) submitted a bipartisan request to the Government Accountability Office—Congress’s independent, nonpartisan oversight agency—urging an investigation into the same issue in Medicare Advantage. It is unclear whether these investigations have been initiated.

Some states—understanding the role that market consolidation plays in driving up health care prices—have made efforts to strengthen oversight. In 2024, 22 states passed laws related to health system consolidation and competition. However, historically, these efforts have largely focused on promoting competition, preventing monopolies, and limiting dominant providers’ ability to charge prices well above competitive levels. Little attention has been given to the MLR loophole and the ability of vertically integrated insurers to report profits as medical care.

As states pursue policies to slow cost growth, they must apply greater scrutiny of vertical integration arrangements—especially around internal financial transactions between affiliated entities. States should require insurers to report detailed information on transactions between related parties, including non-claims-based APMs to affiliated providers and the pricing methodology used to develop these APMs. This reporting could be integrated into states’ premium rate review processes, allowing regulators to assess whether such transactions reflect actual medical costs. States could then modify or deny rate increases where evidence points to gaming of MLR rules.

Policy makers should also reassess whether, given these market dynamics, current regulatory tools such as the MLR are adequate. Addressing these issues will be essential for maintaining the integrity of cost containment efforts and ensuring that health care dollars are spent on delivering meaningful care.