In the “good old days” — let’s call that period pre-2008 — the majority of commercial insurance was full-risk; Increases came out of payor profitability rather than employers’ and consumers’ pockets, and patients were protected from high out-of-network/out-of-pocket costs. In 15-20 years, everything has changed. A lot.
UnitedHealth Group is the poster child for this seismic shift in the underlying design of the healthcare system. At the end of the day, it’s all about leveraging your scaled assets to lock in margins.
Playing the Vertical Integration Game
Using UnitedHealth Group as a marquee example here, there’s a yin and yang between healthcare services (the company’s Optum division) and medical spend/medical loss ratios (UnitedHealth Networks). When you combine those segments under one umbrella, you create something different entirely.
Blake Madden put it this way in a July 27 analysis for Workweek, entitled The Vertical Integration Imitation Game:
“Services unlock profits for insurers. Quarter over quarter, you can see the movement of profit and cash flow to Optum (whose profits are uncapped and unregulated) when compared to UnitedHealthcare (whose profits are capped and regulated) under its health insurance segment. It’s an unstoppable machine and an incredible business. And that’s the vertical integration game: the ability to lock in margin on a core business segment, whether that’s a PBM, drug margin, medical loss ratio, or anything in between. Accountants be working overtime.
Through intercompany eliminations between UnitedHealthcare (Insurance Co) and Optum (Service Co), UnitedHealth Group’s organizational structure and long-term bet on Optum drives growth in the bottom line for the broader organization.”
United’s “Good Problem” Sets a Flywheel Effect into Motion
Practically, this means UnitedHealth Networks can pay its own physicians, UCCs, ASCs and the care delivery sites it owns above market rates — through something called intercompany elimination — then starve other providers with low rates. This accomplishes two things: it makes the starving providers more likely to sell their practices to Optum, and it allows UnitedHealth to post amazing profitability and stay under federal MLR caps. This is what we call “a good problem” in business.
This “good problem” for United, which creates a really bad and worsening problem for hospitals and other providers, creates a flywheel effect in UnitedHealth’s business operations. As Wendell Potter wrote in July about UnitedHealth’s second quarter 2023 profits:
“While enrollment in the company’s employer-sponsored and individual businesses grew by a little more than 2%, enrollment in its highly profitable taxpayer-supported government businesses grew more than twice that rate. The company’s Medicaid enrollment increased by 4.6% to 8.4 million while enrollment in its Medicare Advantage plans grew twice as fast as even that, to 7.6 million, a 9.3% increase. But it was the Optum division, which in addition to the company’s prescription drug middleman encompasses hundreds of physician practices and outpatient facilities UnitedHealth has bought in recent years, that really shined. Optum’s revenues increased by an eye-popping 25% (from $45.1 billion to $56.3 billion). And it is that growth that also enabled the company to avoid an even bigger hike in its overall medical loss ratio (MLR), which is a measure of how much an insurer pays in claims as a percentage of revenue.”
Insurers Are Driving Profits — But at What Cost?
These kinds of issues are not at all unique to UnitedHealth, although it clearly is the industry leader among insurers/payors. Elevance — the company formerly known as Anthem and Wellpoint — is another massive payor pursuing a similar strategy. As Potter wrote in early August about that company’s second-quarter profits and business practices:
“Elevance is a very big player in Medicaid. More than one of every seven Medicaid beneficiaries in the United States is now enrolled in a plan managed by the company, which encompasses several for-profit BlueCross BlueShield plans. One way big insurers avoid paying claims in both their Medicare Advantage and Medicaid businesses is by refusing to cover treatments and medications patients’ doctors say are necessary. It has become such a big issue in the Medicare Advantage program that Congress is calling on the Biden administration to do something about it. In late June, Sen. Sherrod Brown (D-Ohio) led a joint letter signed by 300 of his fellow lawmakers in both the House and Senate asking the Center for Medicare & Medicaid Services to fix the prior authorization process in Medicare Advantage. As bad as the problem is in Medicare Advantage, federal investigators say it is considerably worse in Medicaid.”
And among those 115, Elevance really stood out — by denying more than one of every three requests (34%) for coverage in one or more of the company’s Medicaid health plans. Only Molina Healthcare, a smaller competitor, denied more in some states than Elevance (up to 41%).” Healthcare Uncovered, Elevance Health is denying care for Medicaid patients at high rates.
Buckle Up
As you can see from this sampling of issues and media coverage, the challenges creating this trend are myriad and complex. The tension between health systems, physician groups, and other providers and the payors’ very business models has never been greater. We must seek to understand what the payors are doing strategically and operationally to protect ourselves but also to go on the offense in key areas before these payor strategies get full traction everywhere.
Not every contract negotiation needs to bloom into a problem, and not every difficult negotiation must become a public issue. Yet it’s critical to understand what payors are doing and prepare for a wild ride over the next couple of years. It’s not easy and it’s not going to get easier any time soon.