Introduction and summary
Health care costs remain one of the top concerns for American families.1 Health insurance premiums and out-of-pocket expenses continue to climb, even as the nation spends more than any other country on its health system.2 At the same time, consolidation in health care markets has left patients with fewer choices, higher bills, and a system increasingly structured around the financial interests of large conglomerates—spanning health insurance, health care services, and the prescription drug supply chain—rather than the health needs of individuals and communities.3
The medical loss ratio (MLR)—the share of premium dollars insurers must spend on patient care rather than on administration and profit—was established to check these excesses.4 By requiring that most premium revenue be directed to medical claims, Congress sought to ensure that people receive value for the premium dollars they pay.5 Yet in today’s highly consolidated health system, the MLR no longer delivers on its promise, particularly because insurers have found a way to exploit the system.6 Consolidation accelerated in the late 2010s as major insurers vertically integrated, acquiring providers, pharmacies, and pharmacy benefit managers (PBMs).7 By 2023, UnitedHealth Group’s Optum had become the nation’s largest physician employer, while acquisitions such as Cigna Corp.’s of Express Scripts and CVS Health’s of Aetna left 4 of the 5 largest PBMs integrated with insurers and nearly 80 percent of PBM markets highly concentrated.8 Once integrated, insurers can count inflated payments to their own subsidiaries as medical spending while shifting profits to other corners of the corporate family that sit outside the reach of MLR regulations.9 The result is that a regulatory tool originally intended to safeguard consumers by capping insurers’ margins now creates incentives that fuel corporate behaviors that are driving costs upward.
Policymakers can reform the MLR to push back on corporate excess, check the power of vertically integrated health care conglomerates, and lower costs for families. This issue brief reviews the origin of the MLR, explores how insurers are exploiting it to maximize profits, and concludes with federal policy recommendations to restore the MLR’s effectiveness.
The medical loss ratio was intended to keep premiums focused on care
MLR rules were meant to protect individuals by ensuring that more of their premium dollars went to medical care than to bloated overhead and excessive profits. Prior to the Affordable Care Act (ACA), 34 states used MLR standards as a regulatory tool to hold insurers accountable.10 Some regulators set minimum thresholds or used MLR benchmarks when reviewing insurer rate increases, but the rules lacked consistency across states.11 The ACA standardized MLR requirements in 2011 and required insurers in the individual and small-group markets to spend at least 80 percent of premiums on medical claims and quality improvement; it required large employer plans to spend at least 85 percent.12 In 2014, Medicare Advantage (MA) and Part D plans were also brought under an 85 percent requirement, and in 2016, the U.S. Department of Health and Human Services (HHS) extended an 85 percent standard to Medicaid managed care.13 Self-funded employer plans remain exempt.14 For reference, traditional Medicare’s MLR is above 97 percent.15
MLR rules were meant to protect individuals by ensuring that more of their premium dollars went to medical care than to bloated overhead and excessive profits.
Insurers that fail to meet the thresholds must issue rebates to their customers, including individuals and employers.16 MLR rebates are calculated based on a three-year average.17 Rebates for individuals and employers who purchased health coverage in 2024, for example, are calculated using insurer data from 2022 through 2024. These rebates have returned nearly $12 billion to individuals and employers since 2012.18 In 2023, the average rebate received by individuals and families was $172 if they were in the individual market, $231 if they were in the small-group market, and $92 if they were in the large-group market.19 Rebates across states can vary significantly. For example, in 2023, Alabama health insurers issued an average rebate of $749 to individuals in the individual market, while insurers in many states did not issue any rebates at all.20
In Medicare Advantage and Part D, plans that fall short can face direct financial penalties. If a plan’s MLR falls below 85 percent in a given year, it must pay back the difference to the federal government.21 Persistent underperformance triggers escalating sanctions: Plans that fail for three consecutive years are barred from enrolling new beneficiaries, and contracts can be terminated altogether after five consecutive years of noncompliance.22 Since 2020, eight plans, including four UnitedHealthcare plans, have been barred from enrolling new MA Part D members after failing to meet the MLR threshold for three consecutive years.23
How MLR gaming fuels rising costs and consolidation
Over time, it has become clear that the MLR rules can be gamed to create perverse incentives, entrenching corporate power in health care.24
The medical loss ratio can incentivize further consolidation
Insurers have pursued vertical consolidation aggressively in recent years. In 2011, UnitedHealth Group formed Optum as a subsidiary that includes Optum Health, one of the nation’s largest physician groups, and Optum Rx, a PBM.25 In 2018, CVS Health purchased Aetna, combining one of the largest national insurers with the country’s biggest retail pharmacy chain and its PBM, CVS Caremark.26 Today, across all private insurance markets, major insurers are part of vertically integrated conglomerates.27
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Researchers have argued that the MLR requirement, while intended as a consumer safeguard, has further fueled this consolidation by giving insurers an added incentive to expand into provider, pharmacy, and PBM markets.28 Because MLR caps apply only to the insurance entity itself, insurers that become more than just insurance companies by vertically consolidating with providers, pharmacies, and PBMs can evade these caps.29
Vertical integration allows the parent company to be both the buyer (through its insurance subsidiary) and the seller (through its provider subsidiary, for example) of health care goods and services. As both buyer and seller, the parent company is in a uniquely powerful position to shape how health care is delivered. The company can, for example, steer patients toward its own entities, even when that may not be in the patient’s best interest. The parent company can also determine how money flows from one arm of the company to another by setting prices, and this is the mechanism that allows insurers to game the MLR. As both buyer and seller of health care services, the parent company can set inflated prices for medical services or drugs that count as medical spending for MLR compliance purposes and then recoup that spending as profit on the provider side.
How insurers can profit by charging themselves
When a patient goes to an independent cardiology practice for a routine test that costs $100, the insurer pays that practice $100 and records that amount as medical spending for MLR purposes. None of the payment comes back as profit to the insurer. If that same cardiology practice were acquired by the insurer, the parent company can now decide that its cardiology practice will charge its insurer $200 for the exact same test. On paper, the insurer now records $200 of medical spending for MLR purposes, and the extra $100 flows back as revenue to the insurer’s provider subsidiary, which boosts the parent company’s profits.
Although regulators and the public have little visibility into just how much these conglomerates are charging their own subsidiaries for services because no comprehensive data on this internal pricing (known as transfer pricing or affiliate markups) are available, research indicates that the practice is widespread.30
For example, in 2023, the Medicare Payment Advisory Commission (MedPAC) found that vertically integrated plans consistently paid more for drugs purchased at their pharmacies than for those bought at independent outlets.31 In 2024, a STAT investigation similarly found that UnitedHealth Group pays doctors in the physician groups it owns more than others, driving up costs for consumers as well as its own profits.32 A 2023 House Oversight Committee investigation revealed that a generic chemotherapy drug would cost nearly $18,000 at CVS compared with just more than $70 at the independent pharmacy Cost Plus Drugs.33 Those inflated costs are still booked as medical expenses for MLR purposes, enabling the plan to avoid rebates even though much of the payment ultimately flows back as profit to CVS through its pharmacy arm.
Company financial filings also point to how insurers are moving an ever-larger share of health care dollars through their own subsidiaries. In its 2025 outlook, UnitedHealth Group projected that nearly $165 billion of its revenue—about 27 percent of the company’s total business—would come from transactions between its own subsidiaries.34 In 2008, that figure was just 15 percent.35 A Brookings Institution study documented a similar trend in Medicare Advantage, finding that parent companies such as UnitedHealth Group and CVS Health were directing a growing share of their plan spending to their own subsidiaries: UnitedHealth’s share of MA plan spending going to its subsidiaries doubled to 17 percent from 2016 to 2019, while CVS’ quintupled to 13 percent over the same period.36 Together, this evidence shows how self-dealing has become central to insurers’ business models, enabling them to meet MLR requirements on paper while capturing profits elsewhere in the corporate family.
Recommendations for federal policymakers
When Congress established minimum MLR standards as part of the ACA, the goal was to keep insurers from siphoning off premiums into administrative overhead and excessive profits. But at the time, the typical insurer was not part of a health conglomerate that also owned physician practices, PBMs, and pharmacies. The assumption was that medical spending meant payments flowing to independent providers delivering care to patients.
In the current health care landscape dominated by a handful of companies, that assumption no longer holds. Today’s insurers are increasingly paying themselves, and the MLR requirements, as currently written, cannot discriminate between legitimate care and internal profit shifting.
HHS itself has acknowledged the risks of vertical integration and the need to improve the MLR. In a 2022 request for information (RFI) on Medicare, HHS asked specifically about both.37 In 2024, the Centers for Medicare and Medicaid Services (CMS) issued a Medicare Advantage RFI that again asked about insurer consolidation and vertical integration.38 That same year, HHS joined the Federal Trade Commission and Department of Justice in a broader RFI on consolidation in health care, where they sought comment on how MLR rules may be exploited.39 In the 2026 MA and Part D proposed rule, CMS asked for input on “potential policies that CMS could adopt regarding how the MA and Part D MLRs are calculated in order to enable policymakers to address concerns surrounding vertical integration.”40 Despite these efforts, HHS has yet to take significant steps to address MLR issues in MA and other markets.
To restore the MLR’s effectiveness, policymakers must update it to reflect the realities of the United States’ consolidated health system. Several of the proposals outlined below reflect ideas raised in public comments for the RFIs mentioned above. Although many of the proposals were specific to Medicare Advantage, their relevance extends across health insurance markets. Broader application would likely require congressional approval.
Ownership transparency
The first step to closing the MLR loophole is knowing who owns what. Without this visibility, regulators cannot assess how consolidation shapes markets or how insurers that own providers, pharmacies, and PBMs are advantaged over independent competitors. To fix this, CMS should require and publicly release comprehensive reporting on ownership of plans and providers.41 CMS already collects some of this information in Medicare, although of limited quality.42 Just as importantly, CMS should monitor and publicly report changes in ownership or control—as it already does in Medicare for hospitals and skilled nursing facilities—that result from mergers, acquisitions, and partnerships.43 With this information, policymakers and watchdogs could map the corporate web of large insurers, track consolidation in real time, and evaluate how shifting ownership structures affect competition, costs, and patient access.
Related-party transaction transparency
Even when ownership is disclosed, the financial flows inside conglomerates can remain largely hidden. To more effectively protect against MLR gaming, CMS should require parent companies to disclose the transfer prices they charge between affiliates and how they compare with prices paid to other providers.44 This would make it possible to see when “medical spending” is in fact just inflated payments shifting profits across the corporate family.
Transfer pricing benchmarks
Policymakers can more forcefully address how insurers use vertical integration to game MLR rules by setting guardrails around how much plans are permitted to pay their affiliated subsidiaries. CMS could be required to establish transfer pricing benchmarks, as researchers have proposed for Medicare Advantage.45 This would mean creating clear standards for what counts as an acceptable internal payment when an insurer does business with its own subsidiaries. If the internal payment exceeds the benchmark, the excess is disallowed for MLR purposes. For example, if the plan pays its own doctor $250 for a service Medicare would price at $100, only $100 counts as medical spending. The plan’s MLR would be calculated based on the adjusted spending figure. If the adjusted MLR falls below the statutory threshold, the plan must issue rebates (in ACA marketplaces and for applicable employer-based insurance) or pay penalties (in MA), with escalating sanctions for repeated failures, as required by law. Where no clear schedule exists, such as for PBM services, CMS could create benchmarks that leverage the prices used in contracts between MA plans and independent pharmacy benefit managers.46 Non-Medicare markets could establish transfer pricing benchmarks as a multiple of Medicare fee-for-service rates.
Structural separation
A more far-reaching reform would be to prohibit certain ownership structures and to bar insurers from owning providers or pharmacies outright. Several policy experts have proposed a health care equivalent of the Glass-Steagall Act, which mandated the separation of commercial and investment banking to reduce conflicts of interest.47 Under this model, companies could either sell coverage or deliver care, but not both. The goal is to eliminate the conflict of interest that arises when insurers pay themselves and to restore a level playing field for independent providers. This would directly address the root cause of MLR gaming by removing the opportunity for profit shifting altogether. While such a step would be politically and legally challenging, it represents the clearest way to disentangle financial incentives from clinical decision-making and to reduce the market power of conglomerates that dominate both insurance and delivery. A recent example comes from Arkansas, which passed a first-in-the-nation law barring PBMs from owning pharmacies, a direct attempt at structural separation.48 Although the law has been challenged in court, it highlights growing state-level interest in breaking up vertically integrated models that allow companies such as CVS and UnitedHealth to profit on both sides of the transaction.49
Conclusion
The medical loss ratio was designed as a consumer protection, but in a system transformed by vertical integration it no longer delivers on that promise. Insurers can meet MLR thresholds on paper while shifting profits across subsidiaries, leaving the rule vulnerable to manipulation. Updating the MLR to reflect the realities of today’s health care market would strengthen its role as a guardrail, ensure that reported medical spending reflects real care for patients, and reduce the opportunities for conglomerates to use self-dealing to drive profits at the expense of patient care and affordability.