VERTICAL INTEGRATION UNDERMINES QUALITY HEALTH CARE Part 1

UnitedHealth Group is a huge corporation that owns businesses in every part of the health care system. This is called vertical integration and creates major conflicts of interest along with opportunities for monopolistic behavior. It furthers the ability and incentives to put profits before patients.

This is the fourth post in a series on how the U.S. health care system has been privatized so profits rather than patients have become the priority. The result is a system with very high costs and poor outcomes. The first post presented an overview of the for-profit U.S. health care system. The second and third ones focused on the role of the extreme capitalism of private equity firms in the health care system.

(Note: If you find my posts too long to read on occasion, please just skim the bolded portions. They present the key points I’m making. Thanks for reading my blog!)

UnitedHealth Group (United) is a huge corporation that owns an insurance company, primary care and mental health clinics, surgical and urgent care centers, pharmacies and a pharmacy benefit manager, home health and hospice agencies, a bank, and much more. It is the fifth largest publicly-traded corporation in the U.S., as well as the country’s largest and most powerful health care company. Its health services division, Optum, has 103 million patients (almost a third of the U.S. population), revenue of $186 billion a year, and profits of over $28 billion. It’s the country’s largest employer of doctors – 70,000 of them – across 2,200 locations. Its health insurance business covers 50 million people. [1]

This is called vertical integration – when a company owns multiple parts of a supply chain, i.e., when a company owns companies that supply goods or services to it. United owns so many companies (i.e., subsidiaries) that one quarter of its revenue comes from its subsidiaries.

Vertical integration creates opportunities for monopolistic behavior, although the more common horizontal integration (i.e., domination of the market for a particular good or service) is what’s typically monopolistic. United’s vertical integration is designed to maximize profits via monopolistic behavior, i.e., by exerting control over patients, providers, and payers, including the government. It also creates conflicts of interest.

United began in 1974 as Charter Med. Health Maintenance Organizations (HMOs) were being created in an effort to control rapidly rising health care cost. However, they were required to be non-profit organizations run by doctors. Charter Med, a for-profit, non-doctor run company, created a loophole by contracting with non-profit HMOs to provide management services. These HMO contracts were the beginning of managed care, where the power to control health care spending is in the hands of insurance companies rather than health care providers.

In 1982, United introduced the use of a list of approved prescription drugs with tiered co-payments that its insurance would pay for. This list, called a drug formulary, was a strategy for reducing spending on drugs. Two years later it introduced a new business model where the drugs on its formulary were linked to “rebates” (aka kickbacks) from drug manufacturers. This spawned a whole new industry – and opportunity to make profits – the creation of pharmacy benefit managers (PBMs). United marketed its PBM services to HMOs.

United grew rapidly from revenue of $13 million in 1984 to $606 million in 1990. Its growth was aided by states relaxing the requirement that HMOs be non-profits, which allowed United to buy several HMOs. United also bought a large, traditional, fee-for-service insurer.

In 1990, the federal government created an exemption to anti-kickback laws to allow pharmacy benefit managers to legally get “rebates” from drug manufacturers. Higher drug prices produce bigger rebates and bigger profits for PBMs. Therefore, this business model results in higher costs for patients because PBMs get more revenue and profit from the use of expensive brand-name drugs than from cheaper generic drugs. It also tends to put private pharmacies out of business by favoring the big chain drug stores’ pharmacies. By 2022, United’s PBM, Optum Rx, had almost $100 billion in revenue.

As early as the mid-1990s, United’s size and vertical integration gave it “critical mass,” as it wrote in an SEC filing. This meant it had monopolistic power to demand lower prices from doctors and hospitals, to undercut rival insurers, and drive out competition. United’s implementation of aggressive managed care practices and their detrimental effects on patient care led to a powerful backlash. In the late 1990s, over 400 bills regulating managed care practices were introduced in state legislatures based on evidence that United and other health plans were denying treatment for patients and incentivizing doctors to limit services.

Nonetheless, United continued its expansion through acquisitions and contracts to manage government paid health care provided under Medicare and Medicaid. By 2002, it was overseeing the care of over 1 million Medicaid enrollees and 6 million Medicare beneficiaries in its Medicare Advantage plan.

By 2020, United had the largest Medicare Advantage plan in the country with 26% of the market and roughly $80 billion in revenue. I’ve written extensively about how Medicare Advantage plans undermine Medicare and how corrupt the Medicare Advantage plan providers are. (See previous posts here, here, and here.) United and other Medicare Advantage plan providers engaged in a multi-million dollar lobbying campaign to stop the federal government from reducing excessive payments to Medicare Advantage plans, as was required by the Affordable Care Act (aka Obama Care). They succeeded, and actually got the government to increase payments to Medicare Advantage plans.

The next post in my series on the U.S. health care system will further describe the problems created by vertical integration in health care and the corruption it engendered at United. It will also suggest that these huge, vertically integrated health care system companies could be used to move the U.S. to a single-payer health care system.

[1]      Brown, K., & Sirota, S., 8/2/23, “Health care’s intertwined colossus,” The American Prospect (https://prospect.org/health/2023-08-02-health-cares-intertwined-colossus/) This post is, for the most part, a summary of this article.