Insurance premiums are projected to rise 7% in 2025, similar to the 6% premium increase that took place in 2024. While this reflects myriad contemporary issues, the causes of today’s rising prices are rooted in decisions made 15 years ago with the passing of the Affordable Care Act of 2010. The bill led to market consolidation and vertical integration which are core contributors to today’s price increases. It is ironic since one of the problems this legislation was positioned to address was the increasing cost of health insurance.
Shortly after the passage of the Patient Protection and Affordable Care Act, I wrote a report for the Heritage Foundation correctly predicting that the presumed innovations of the ACA “will not only fail; they will most likely exacerbate the very problems they set out to fix.” Rather than promoting competition, I wrote, the new legislative mandates “will concentrate more and more power in fewer and fewer organizations, allowing them to become ‘too large to fail.’” Unfortunately for the country, my prediction has been borne out: both payer and provider consolidation has intensified and prices have continued to climb as a result of the ACA.
According to a KFF report, between 2010 and 2017, there were 778 hospital mergers, with the number of hospitals in large systems increasing from 53% in 2005 to 66% in 2017. Over the last decade, two of the largest segments in healthcare–insurers and pharmacy benefit managers–have vertically integrated into behemoths, a topic I’ve written about extensively. The PBM arm of these organizations control a staggering 80% of prescriptions filled in the U.S. UnitedHealthcare, one of the largest companies of any kind in the world, provides health insurance to 29 million Americans, working with more than 1.3 million physicians and care professionals and over 6,700 hospitals and care facilities nationwide.
What caused this consolidation? As I noted in a previous column, an avalanche of regulations caused insurance providers to merge and physicians to give up their independence, becoming employees of increasingly large healthcare systems.
Take the Medical Loss Ratio, for instance, a requirement of the ACA forcing insurance companies to spend 80% (85% in the large group market) of premiums on direct medical care and efforts aimed at improving quality, including reporting on outcomes. But rather than defining meaningful care outcomes to be achieved, the ACA instituted a proxy ratio: mandating that administrative and marketing costs not exceed 15-20% of spending, depending on the size of the organization. One way companies reduced costs below that threshold was to merge, avoiding duplication of administrative processes. Economies of scale allowed increasingly large organizations to maintain lower administrative costs relative to revenue. Smaller insurers, on the other hand, which typically had higher administrative costs and smaller profit margins, struggled with the new regulatory burdens and joined industry behemoths to survive. The acquisition of PBMs and other entities could be seen as an effort to shift overall corporate profitability to non-insurance arms of the parent company in order to remain compliant with MLR restrictions.
At the same time, other eligibility and reporting requirements had the same effect on physician practices, giving larger, more complex organizations an unspoken advantage. Groups of independent practitioners as well as other types of small and mid-sized practices often lacked the infrastructure, technology, or other resources needed to succeed on their own.
Large organizations–be they insurers or health systems–have little incentive to reduce spending or improve quality of care once they consolidate their hold on substantial portions of a market. Lacking competition, they can set prices high and expect that members and patients will be forced to pay them.
One recent report detailing the effect of consolidation on prices noted that hospitals without competitors within a 15-mile radius have prices 12% higher than hospitals in markets with four or more competitors, and that mergers of two hospitals in the same state led to 7% to 9% price increases for the growing hospitals. The same is true for insurers. Consolidation in the private health insurance market causes premiums to go up, with larger insurers often paying negotiated, lower prices to health care providers while charging more to employers and individual members.
Over a decade ago, I predicted that the type of regulation embodied in the ACA would end in greater consolidation, more expensive care, and higher premiums. Today, we shouldn’t be surprised that those have become a reality. While some features of the ACA have undoubtedly benefited American consumers, namely, the requirements to cover preexisting conditions and allow young adults to stay on their parents’ plans until age 26, the bulk of the legislation was problematic. The ACA was built upon our existing healthcare delivery framework, a framework that was fundamentally flawed.
As I said in my book Bringing Value to Healthcare, the only way to bring down prices is to change the underlying business model. To reach better health outcomes at lower total cost of care, our nation must prioritize transparency in cost and quality, connect payment with outcomes that matter, and require accountability for care across the continuum. Patient-consumers must have information to shop for providers and health plans that make sense to them. And the relevant data to make informed decisions must be easily accessible. This is the market model, and it can only work when industry stakeholders compete with each other to provide the highest quality care at lower total cost. The model works in all other parts of our economy. It can work in healthcare, too.
