Vertical Integration Raises Spending for Medicare Advantage Plans

Owning related businesses was associated with higher healthcare expenditures for Medicare Advantage plans, pointing to some of the consequences of vertical integration, a report from the USC-Brookings Schaeffer Initiative for Health Policy highlighted.

Vertical integration in the healthcare sector can lead to differing results when it comes to quality and spending.

The report looks at how Medicare Advantage plans’ ownership of related businesses may impact the plans’ spending patterns and regulation of those plans. Researchers used data from 2016 to 2019 from the Mark Farrah (MF) Health Coverage Portal, the National Association of Insurance Commissioners, and CMS.

Between 2016 and 2019, around 77 percent of Medicare Advantage plans had parent companies that owned related businesses. These plans accounted for approximately 86 percent of Medicare Advantage beneficiaries. The findings suggest that the plans associated with parent companies that own related businesses are larger than those that do not.

Gross spending per beneficiary increased by 11 percent from $9,523 in 2016 to $10,567 in 2019, while risk-adjusted spending grew by 6.9 percent from $8,904 to $9,520.

Researchers looked at spending per beneficiary for plans with purchases from related businesses that account for more than 10 percent or less than 10 percent of their spending.

They found that plans with a higher share of their costs being accounted for by related businesses had higher gross and risk-adjusted spending.

For example, plans with over 10 percent of spending going to related businesses had gross health expenditures per beneficiary that were 4.6 percent higher than those with less than 10 percent of their spending going to businesses in 2019. Risk-adjusted spending per beneficiary was 2.4 percent higher for plans associated with larger shares of related business spending.

The spending differences were larger when looking at plans with more or less than 25 percent of spending accounted for by related businesses, the report noted.

The researchers also assessed the medical loss ratios (MLRs) for plans associated with parent companies with high shares of related business spending.

Past research has shown that vertical integration may impact the regulation governing Medicare Advantage plans’ MLR, which is the ratio of a plan’s spending on healthcare claims to its premium revenues.

The Affordable Care Act (ACA) requires Medicare Advantage plans to spend at least 85 percent of premium revenues on healthcare expenses. However, spending directed to related businesses is treated as cost and counted as claims spending when determining the MLR, even if some of the spending represents profits for the parent company.

The report found that MLRs for plans with high shares of spending going to related businesses were lower than plans with less spending on related businesses. In 2019, plans above the 10 percent threshold had an MLR of 86.07, while plans below the 10 percent threshold had an MLR of 88.08.

“This may reflect the larger set of mechanisms for managing how expenditures are incurred and reported that are at the disposal of vertically integrated plans,” the researchers wrote.

The findings indicate that a 10 percentage point change in the share of spending on related businesses is associated with a $140.18 increase in raw spending per beneficiary (1.41 percent) and a $105.23 increase in risk-adjusted spending per beneficiary (1.15 percent).

After considering the 28 million people enrolled in Medicare Advantage in 2022, these increases would translate to around $3.9 billion in additional Medicare Advantage plan spending over the existing base level of spending. The 1.4 percent boost in health expenditures would also translate to a change in the MLR of 1.3 points.

“This implies that increases in related business spending have the potential to move health plans from the region where they would be subject to penalties to where they would meet the MLR standard,” the report stated.