Shining a Much-Needed Spotlight on Vertical Integration
By Penn Quarter Partners
Let’s stipulate that we still have an election, a lame duck congressional session, and next January’s swearing-in to get through. And yet, with voter concerns about affordability front and center, it’s clear that vertical integration in our healthcare system will — and should — demand considerable attention in the 120th Congress.
Look at two recent news stories:
A recent report from the Commonwealth Fund found that one of every three Americans who have health insurance coverage have nonetheless accumulated a considerable amount of medical debt. And 30 percent of those surveyed said they are cutting back on essentials like food and heating or cooling their homes to pay those medical bills that their health plans didn’t cover.
In September, CBS News brought into the issue of vertical integration into mainstream media. As the CBS News story put it, “Hospitals are buying doctors’ practices and surgery and imaging centers. Insurers are buying doctors’ practices and specialty pharmacies and sometimes merging with pharmacy chains. Hospitals are buying or creating insurers. Private equity firms are behind many of the deals, buying practices, reorganizing operations, paring costs, then selling at a profit in a few years to a hospital or insurer higher up the healthcare food chain.” The story also cites studies showing that this vertical integration is resulting in higher prices for patients and worse health outcomes.
Over the past year, we’ve seen different segments of the government pay close attention to vertical integration, particularly the integrated insurer/pharmacy benefit manager/provider model.
For example, the Department of Justice has taken notice, singling out vertical integration as a major driver of healthcare costs. The Federal Trade Commission created the “Healthcare Task Force” to coordinate competition and consumer protection enforcement and advocacy across the healthcare sector, following several reports from FTC and others demonstrating how insurers and PBMs are abusing their consolidated power at patients’ expense.
So, yes, the major health policy issue for 2027 and beyond should be comprehensive reform of a system that, put simply, is placing increasingly onerous financial burdens on American households while providing less value.
We saw earlier this year that Congress also is willing to take on aspects of the issue. The PBM reform measure enacted by lawmakers and signed by President Trump was an important step in shifting the balance of power toward patients. But it left more work to be done. PBMs are still just a component in complex oligarchies that include multi-billion-dollar health insurance companies, chain and specialty pharmacies, group purchasing organizations, medical group practices and other health care entities. These massive corporate structures can increase out-of-pocket costs for patients while using tools like drug formularies, prior authorization practices and step therapy policies to delay or deny care.
We’d also be remiss to not revisit the impact of vertical integration on the 340B drug discount program. 340B costs have soared as hospitals learned they can game the system by acquiring off-site clinics and medical group practices and using them to prescribe more higher-priced pharmaceuticals with handsome profit margins. Meanwhile, contract pharmacies vertically integrated with PBMs and their insurer parent companies have also been able to tap into 340B drug discounts with no requirement to pass the benefits on to patients.
Bipartisan legislation has been introduced that would prohibit companies from owning healthcare providers while also owning a health insurer, PBM, or wholesaler. And during recent congressional hearings, CEOs of major insurers have faced bipartisan criticism on vertical integration and related consolidation. Reform-minded policymakers recognize that vertical integration encourages enrichment within the chain of ownership to the detriment of the patient needing affordable access to quality care recommended by his or her doctor.
People are paying attention and the drumbeat for action is intensifying.
Why? Because the anti-patient nature of the current system is in direct conflict with the promise of access to transformative diagnostics, medicines, vaccines, and cell and gene therapies to tackle a range of life-threatening health challenges from cancer to Alzheimer’s to rare diseases.
The opportunity to substantially improve public health and extend lifespans is before us, but not in a health coverage infrastructure that has the value proposition backward. Stay tuned heading into 2027.
Penn Quarter Partners is working with stakeholders to encourage health system reforms that make breakthrough medical advances affordable and accessible, while also continuing to advise companies on how to navigate the current multi-layered and constantly evolving health coverage and payment structure.
