A new wave of health care consolidation is underway. Health insurance and retail conglomerates are rapidly acquiring providers, from primary care practices and surgery centers to home-based and post-acute care. UnitedHealth Group (UnitedHealth), for example, is now the nation’s largest insurer and the largest employer of physicians. Humana is now the largest provider of “senior-based” primary care and in-home care. CVS Health, Walgreens, and Amazon, which have been aggressively consolidating the prescription drug supply chain, are now acquiring physician practices. And private equity investors—looking to consolidate industry segments and then sell to these conglomerates as an eventual exit—are accelerating these rollups.

With dominant market power, the new health care conglomerates can dictate which physicians patients can see, which medications are prescribed to them, and which insurance plans they enroll in. By acquiring medical practices, these corporate employers can shorten visit times, require more clinical coding and box-checking, and replace physicians with lower-cost clinicians. Meanwhile, by coordinating across lines of business, conglomerates like UnitedHealth can squeeze out independent practices and community pharmacies. They can also shuffle money between subsidiaries and use other financial tactics to skirt regulations and exploit payment loopholes, increasing health care costs.

This paper details the causes and costs of this new frontier of consolidation and offers a set of solutions to address it. In short, sweeping changes in health care financing policy are causing insurers and retailers to restructure as vertically integrated conglomerates. While technical, how the government pays providers and insurers fundamentally shapes the business strategies of health care companies. As the government continues to privatize Medicare and Medicaid, it is significantly overpaying insurance companies to administer benefits. With this excess capital, these insurers are acquiring providers, gaining control of key points in the delivery system that enable them to capture greater government payments and minimize spending on patient care. To take one prominent example, control over primary care clinicians allows these corporate owners to manipulate billing and coding practices to make patients appear sicker to the government, thereby increasing payments.

Part I of this paper explains how government policy over the last two decades has transformed health care financing. In an attempt to solve health care’s value problem— high spending and poor health outcomes—policymakers have steadily abandoned “fee- for-service” financing, in which medical providers are reimbursed for each service that a patient receives. Instead, public programs have increasingly adopted “capitation-based” financing. In this model, the government pays a fixed budget to a “risk-bearing entity”—an insurance company, hospital system, or group of physicians—to manage the total health care costs for a patient. The risk-bearing entity turns a profit if it keeps costs below the established budget, which is adjusted based on the perceived sickness of the population and metrics of care quality. In this paper, this policy agenda and its underlying ideological framework are referred to as health policy’s “Capitation Consensus.”

Medicare Advantage, the privatized version of Medicare that now covers more than half of Medicare beneficiaries, is the most prominent example of the Capitation Consensus. But this financing approach has spread across public health care programs: nearly all of Medicaid has moved to capitation-based financing, and Medicare’s prescription drug benefit, Part D, operates entirely on capitation. In the last decade, traditional Medicare— the historically fee-for-service model of Medicare—has been integrating versions of capitation through accountable care organizations and other value-based care models. Despite high hopes, the shift to capitation has yet to deliver on its primary objective of cost reduction. Most concerning is that Medicare Advantage now costs taxpayers anywhere from $75 billion to $140 billion annually in over-subsidization relative to traditional Medicare.

Part II of this paper explains how the Capitation Consensus is driving vertical consolidation. With excess capitation payments, Medicare Advantage insurance conglomerates are plunging capital into provider acquisitions, and retailers and private equity investors are following suit. As noted above, owning physician practices enables conglomerates to inflate the perceived disease burden of patients, thereby enhancing capitation-based payments from the government. Vertical consolidation also enables patient steering: conglomerates can push patients to receive care at their own provider subsidiaries. In doing so, these companies squeeze out local providers, such as independent physician practices and community pharmacies. Steering also generates “captive revenue,” which allows conglomerates to game federal regulations requiring that government payments are spent on patients, not profits. Further, these conglomerates use their insurance-side subsidiaries to pressure independent practices to sell to their provider-side subsidiaries, effectively “flipping” new patients to their own medical practices and insurance plans.

Turning to solutions, Part III of this paper argues for an alternative policy framework— aimed at a new “industrial policy” for health care—that would depart from the Capitation Consensus and center at least three principles. First, this approach would be suspicious of concentrated corporate power—whether horizontally or vertically combined—and would promote the autonomy and collective power of clinicians. Second, it would revive a legal and policy focus on the ownership structure and governance of health care providers, protecting the medical profession from corporate influence and minimizing financial strategies that increase prices and administrative costs. Third, a proactive health care industrial policy would emphasize the “supply side”: how policymakers, particularly in Medicare, can exercise greater control of public money and directly rationalize the production and allocation of health care capacity.

The paper offers two sets of policy recommendations. The first would directly combat the emerging forms of vertical consolidation that are fueled by the Capitation Consensus. The second set of policies offers alternatives to large-scale, investor-driven health care. These proposals are geared toward building robust health care infrastructure—owned by clinical providers and local communities—that meets growing care needs and is insulated from corporate consolidation.