Vertical integration and E=CUP

Let’s talk about vertical integration and how it impacts E=CUP, the equation for healthcare costs.

On Monday, I broke down the basic algebraic equation behind total costs.
Yesterday, I covered how the MLR (Medical Loss Ratio) incentivizes insurers to pay more, not less, in claims.

Today, we’re diving into how insurers use vertical integration to influence costs and revenue.

What is vertical integration?

It’s when a company owns its supply chain.

If you sell lightbulbs, this could mean owning the lightbulb manufacturer, the shipping company, and the retailer.

A famous example: Luxottica. They don’t just design sunglasses—they manufacture, retail, and insure them. A powerful model.

But in healthcare? This model interacts with MLR in ways that might surprise you.

Here’s the hypothetical:

• Insurance Co. contracts with two doctors: Dr. Independent and Dr. Company.

• Both doctors work in the same building and provide identical services.

The difference?

Every dollar Insurance Co. pays Dr. Independent leaves their dominion forever. But with Dr. Company—who sold their practice to Insurance Co.—the money simply moves from one pocket to another.

Now, Insurance Co. has an incentive to pay higher costs per claim (P) to Dr. Company.
Why?
Because it boosts their claims costs (MLR calculation) while keeping more revenue in-house.

Since the ACA mandated an MLR, vertical integration has skyrocketed in the healthcare space.

• The largest employer of physicians in the U.S.? A health insurance company.

• 80% of Americans get their pharmacy benefits through just three insurers.

What does vertical integration look like in health insurance? Take a look at the graphic from Drug Channels Institute, an HMP Global Company below.

Vertical integration isn’t inherently wrong. But when price manipulation is rewarded by the system, it can drive higher costs for all Americans—straining personal and national budgets alike. When P increases without commensurate reductions in C or U, E increases.

Let’s rethink how our healthcare systems incentivize behaviors.
What are your thoughts on vertical integration and its impacts?

P.S. If this resonated with you, consider resharing to your network.