Insurance premiums are projected will increase by 7% in 2025, comparable to the 6% premium increase that took place in 2024. While this reflects many contemporary problems, the causes of today’s rising prices are rooted in decisions made 15 years ago with the passage of the Affordable Care Act of 2010. The bill led to market consolidation and vertical integration, which contributed significantly to meet the current price increases. It’s ironic because one of the problems this legislation was intended to address was the rising cost of health insurance.
Shortly after the passage of the Patient Protection and Affordable Care Act, I wrote one report for the Heritage Foundation correctly predict that the ACA’s supposed innovations “will not only fail; they will most likely exacerbate the very problems they set out to solve.” 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 come true: both Payer and provider consolidation has intensified and prices have continued to rise as a result of the ACA.
According to a KFF reportBetween 2010 and 2017, 778 hospital mergers took place, with the number of hospitals in large systems increasing from 53% in 2005 to 66% in 2017. Over the past decade, two of the largest segments within health insurers and pharmacy benefit managers – vertically are integrated into colossi, a topic I have written about extensively. The PBM department of these organizations manages as many as 80% of prescriptions filled in the US. UnitedHealthcare, one of the largest companies in the world, offers health insurance 29 million Americans, work with more than 1.3 million doctors and healthcare professionals and more than 6,700 hospitals and healthcare institutions nationwide.
What caused this consolidation? As I noted in an earlier column, an avalanche of regulations caused insurers to merge and physicians to give up their independence and become employees of ever-larger health care systems.
Take the Medical loss ratiofor example, an ACA requirement that forces 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 instead of defining meaningful healthcare outcomes to be achieved, the ACA has established a proxy ratio: administrative and marketing costs should not exceed 15-20% of expenses, depending on the size of the organization. One way companies could reduce costs below that threshold was by merging and avoiding duplicative administrative processes. Economies of scale ensured that increasingly larger organizations could maintain lower administrative costs in relation to turnover. In contrast, smaller insurers, which typically had higher administrative costs and smaller profit margins, struggled with the new regulatory burden and joined the industry giants to survive. The acquisition of PBMs and other entities could be seen as an attempt to shift overall corporate profitability to the parent company’s non-insurance divisions in order to remain compliant with MLR restrictions.
At the same time, other participation and reporting requirements had the same effect on physician practices, giving larger, more complex organizations an unspoken advantage. Both groups of independent practitioners and other types of small and medium-sized practices often lacked the infrastructure, technology, or other resources needed to succeed on their own.
Large organizations – whether insurers or health systems – have little incentive to reduce spending or improve the quality of care once they have consolidated their hold on substantial parts of the market. In the absence of competition, they can set prices high and expect members and patients to be forced to pay them.
One recent one report In detailing the effect of consolidation on prices, it was noted that hospitals with no competitors within 15 miles have prices that are 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 applies to insurers. Consolidation in the private health insurance market is causing premiums to rise, with larger insurers often paying lower prices to healthcare providers while employers and individual members are charged more.
More than a decade ago, I predicted that the kind of regulation the ACA embodies would result in greater consolidation, more expensive care, and higher premiums. Today we should not be surprised that these have become reality. While some features of the ACA undoubtedly benefited American consumers—namely its requirements to cover pre-existing conditions and to allow young adults to remain on their parents’ plans until age 26—the biggest part of the legislation problematic. The ACA was built on our existing health care framework, a framework that was fundamentally flawed.
As I said in my book Adding value to healthcarethe only way to bring prices down is to change the underlying business model. To achieve better health outcomes at a lower overall cost of care, our country must prioritize cost and quality transparency, link payment to outcomes that matter, and demand accountability for care across the continuum. Patient-consumers need information to find providers and health care plans that make sense for them. And the relevant data to make informed decisions must be easily accessible. This is the market model, and it can only work if industry stakeholders compete to provide the highest quality care at a lower total cost. The model works in all other parts of our economy. It can also work in healthcare.