A Little Known Reason for Sky High Medical Costs

When I worked in manufacturing, we sometimes had to help with Department of Defense (now War Department) contracts. I thought military contracting was bad.

Then I discovered the Medical Loss Ratio (MLR) rule established under the Affordable Care Act.

While well-intentioned, this regulation has been exploited by insurance companies in ways that may have actually accelerated premium increases over the past decade.

The MLR rule, requires health insurance companies to spend a minimum percentage of premium dollars on actual medical care—80% for individual and small-group plans, and 85% for large-group plans.

The remaining 20% or 15% can go toward administrative costs, overhead, and profits. The rule was designed to increase transparency and prevent insurers from taking excessive profits while limiting what consumers pay in premiums.

If the insurance companies don’t spend the 80-85% on medical care, they’re actually supposed to refund you the difference.

Have you ever received a refund?

The rule has created a perverse economic incentive—one that major insurance companies have exploited through vertical integration.

Over the past 15 years, insurers have acquired:

• Pharmacy benefit managers (PBMs)

• Specialty pharmacies

• Clinics, and

• Healthcare providers

They consolidated them under a single corporate umbrella.

• CVS acquired Aetna in 2018.

• UnitedHealth owns Optum, which controls a vast network of clinics, PBMs, and specialty pharmacies.

• Cigna owns Express Scripts, one of the nation's largest PBMs.

Currently, 77% of commercial and Part D enrollees use insurance plans where the insurer and PBM are vertically integrated.

This vertical integration enables a sophisticated exploitation of the MLR rule. When an insurance company owns both its PBM and the pharmacies it pays, it can inflate prices for internally provided services—charging extraordinarily high rates to purchase drugs, tests, and procedures from its own subsidiaries.

The insurer then "spends" the 80% on these inflated internal services, meeting the legal requirement on paper. But because the money stays within the same corporate parent, the inflated costs don't represent genuine healthcare spending—they represent internal profit transfers that circumvent the MLR rule's intent.

Research confirms this creates substantial competitive harm. These vertically integrated firms pay their own pharmacies at significantly higher rates than external pharmacies, effectively diverting patient volume and profits to their own businesses while raising costs for everyone.

A RAND Corporation analysis found that insurers responding to the MLR rule increased claims costs by an average of 7% and as much as 11%, without lowering premiums accordingly. From 2011 to 2021, even adjusting for general medical inflation, median premiums in the ACA individual market increased 59%, from $3,574 to $5,683.

The MLR rule has been rendered ineffective not just by flawed design, but by deliberate corporate restructuring. By owning the providers, pharmacies, and benefit managers they pay, insurance companies have created closed loops where they control both sides of the transaction. They can inflate internal prices without constraint, satisfy the MLR requirement through self-dealing, and pocket the difference—all while raising consumer premiums year after year.

This isn't a technical problem to be fixed with better regulation of the percentage. It's a structural problem that requires breaking up these vertically integrated empires.

So long as one company controls the insurance, the PBM, the pharmacy, and the clinic, conflicts of interest are inevitable. The company will always prioritize internal profit transfers over genuine cost control.

The federal government has begun to recognize this threat. Regulatory scrutiny of UnitedHealth's dominance has intensified, and antitrust challenges to vertical integration are moving forward.

Many people believe the answer is more legislation to prevent insurance companies from purchasing other medical businesses.

I say government regulations and laws are a lot like pharmaceutical medications. People often think they need more drugs or regulations to fix the problems of the previous ones.

And just like deprescribing medications, the answer is to roll back the regulations that provided these incentives. With fewer drugs the patient often feels better. Maybe we can also try that with fewer regulations?