Are Health Plans Driving Costs At Patients’ and Providers’ Expense?

High healthcare costs are a heavy burden for many patients. And while it’s easy to blame hospitals and health systems for the cost of healthcare (they’re the ones providing the care, right?), doing so leaves out a critical piece of the story.

In Indiana, the numbers are very enlightening. According to a report published by Kaufman Strategic Advisors, in 2020, fully-insured health plans in Indiana generated nearly $560 million in administrative fees and profits – an almost $1 million increase over 2015’s earnings of $460 million.

Plan profits alone grew from $5 per member per month (PMPM) to $16 PMPM. That’s a 220 percent increase, in just five years. No wonder so many consumers are astonished and outraged by the cost of healthcare.

The Indiana situation

One reason for the high cost of care is because insurance companies in Indiana raised their premiums faster than total claims rose. As premium payments outpaced actual spending, profits spiked.

Gross prescription drug costs for fully-insured plans in Indiana also doubled, jumping from $64 PMPM (per member per month) in 2015 to $121 PMPM in 2020. Also during this time, prescription drug rebates retained by Indiana health plans rose, tripling from $9 PMPM to $27 PMPM.

In other words, the amount health plans in Indiana recouped as rebates grew – from 14 percent in 2015 to 22 percent in 2020 – representing a sharp increase in profit for insurers.

Vertical integration as a profit-increase strategy

But it’s not just Indiana. The rising cost of healthcare is the result of a growing trend within the insurance industry: vertical integration, particularly with pharmacy benefits. Why?

Under the Affordable Care Act, the Medical Loss Ratio (MLR) was designed as a form of “checks and balances” for insurers. The MLR sought to limit insurers’ profits by requiring insurance companies to spend a percentage of premiums collected directly on patient claims. This sounded like a good idea, in theory.

But in response, several of the nation’s largest insurers, including Anthem and UnitedHealthcare, acquired or developed other business segments, like pharmacy benefit managers (PBMs) and specialty pharmacies. These integrations increased insurance company profits without “technically” violating MLR regulations.

It should be noted that the three biggest PBMs – which control more than three-quarters of the nation’s prescriptions – are owned by or aligned with three of the country’s biggest insurance companies: CVS Health’s Caremark, UnitedHealthcare’s OptumRx, and Cigna’s Express Scripts.

PBMs are particularly profitable

Pharmacy benefit managers control the cost of prescriptions for patients. As it turns out, these “middlemen” in healthcare often seem to do more harm than good to patients. Between 2012 and 2016, it’s estimated that over half of the increase in drug list prices were paid to PBMs in the form of higher rebates, and that the value of rebates paid to PBMs doubled, according to Kaufman’s report.

These rebates boost profits for PBMs and their insurer parent companies, while the amount patients pay at the pharmacy counter increases.

So, what’s the solution? Policymakers must focus on health plan expenses that do not directly contribute to the delivery of care – including administrative costs and profits that represent over 18 percent of our premiums.

Finally, we must advocate for more transparent costs and transactions from all sides, including health plans, PBMs and pharmaceutical companies. Because a world in which patients can afford their care, including medication, is a world that anyone who needs or works in healthcare should hope to see.