Something bad happened to US healthcare in 2010. 

Before the Affordable Care Act (or Obamacare), health insurers made money primarily by managing costs. The more they could reduce expenses—for instance, by negotiating lower rates with healthcare providers—the more they profited. Cost containment was their core incentive. 

However, the ACA introduced the Medical Loss Ratio (MLR) rule, which requires insurers to spend 80-85% of premium revenue on medical care and quality improvements, leaving only 15-20% for profits and administrative costs. While this seemed beneficial at first glance, it had an unintended consequence: With profit margins capped as a percentage of spending, insurers no longer had a strong incentive to reduce costs. Instead, they could increase their absolute profits by encouraging higher healthcare spending overall, since 15-20% of a larger pie means more revenue.

This shift fundamentally changed the incentives of health insurance companies and drove a wave of vertical integration. Vertical integration refers to insurers acquiring other parts of the healthcare system, such as providers, pharmacies, and other ancillary businesses. Companies like UnitedHealth, which owns Optum, and CVS, which merged with Aetna, are prime examples of this trend. By controlling multiple parts of the healthcare supply chain, insurers could capture revenue not just from premiums but also from delivering care, dispensing medications, and managing services.

While vertical integration has potential benefits, such as streamlining care and reducing administrative redundancies, it also consolidates power in the hands of fewer players. This reduces competition and may ultimately drive up costs over time, contrary to the ACA’s goals. The ACA’s reforms were well-intentioned, focusing on expanding coverage and reducing the uninsured rate. But by capping profit margins without addressing the structural drivers of high healthcare costs, it unintentionally incentivized insurers to prioritize market dominance and integration over cost containment.

The history of health insurance in the US reflects a continuous adaptation to regulatory changes. The ACA’s implementation reshaped incentives, encouraging insurers to grow larger, integrate vertically, and function more like monopolies than cost managers.

The system needs reform, but repealing is not an option. We need a thoughtful solution that provides coverage, without enabling monopolies. Thoughts?