The Clandestine Healthcare Cartel
By Vedhanth Vijayakumar Jayanthi
You shouldn’t have to bury your child because of a spreadsheet.
Alec Smith died alone in his apartment—because of a disease that’s been treatable for over a century. Treatable with a drug that costs at most a few dollars. But living in the United States, he couldn’t afford the insulin he needed to stay alive. He was just 26. Alec grew up in Richmond, a small town near Minneapolis in Minnesota. He graduated from Bloomington Kennedy High School and went to Hennepin Technical College. He had a good job as a restaurant manager. He was doing everything right. But when he aged out of his mother’s insurance, the cost of his insulin skyrocketed to $1,300 a month. He was dead within a month.
Alec was caught between a handful of massive corporations that control nearly every step that his insulin takes to get from the factory and to his fridge. The pharmacy where Alec bought his insulin? Owned by the same company as the pharmacy benefit manager that negotiated the price and the insurer that decided how much they’ll cover.
The healthcare market is made up of many players, many hidden from consumers’ view. Individuals interact directly with hospitals and pharmacies, which provide services and drugs, respectively. The relationship between the two is more transparent—doctors in hospitals prescribe drugs to patients, which they can get from pharmacies. Complex players, such as Pharmacy Benefit Managers (PBMs), have a more murky role in this exchange.
PBMs are the middlemen between insurers and pharmacies. They bargain with pharmaceutical firms on behalf of insurers, negotiate which drugs insurance covers, which pharmacies are in-network, and what the insurer will be charged for drugs (i.e., not list price). Doctors often seem disconnected from the cost of care because they can’t tell their patients how much a treatment or medication will cost. A patient’s employer might negotiate one kind of deal with an insurer. The insurer then negotiates another deal with a PBM, who has its own deals with individual drug companies. These layers of obscurity mean the final price the patient pays is unpredictable—and doctors are left out of these negotiations, restricting their access to real pricing information.
The top PBMs control nearly 80% of prescription claims. The high concentration ratios, barriers to entry, interdependence of major firms, and the history of consolidation point towards oligarchic market structure. This is made worse double-fold for consumers, as the largest PBMs are also vertically integrated with the largest insurers–for example: Caremark and CVS Health (Aetna), Express Scripts and Cigna, OptumRx and UnitedHealth Group.
Vertical integration, where a single company controls multiple parts of the supply chain, has become the norm in US healthcare. Such control can reduce cost and improve efficiency—think Amazon creating essentially their own postal network. Or, increase market power—less transparency, fewer options, and skyrocketing prices, all while giant corporations profit billions of dollars at every stage of the process.
Most Americans receive health insurance through their employers, most of which are large firms that need to offer coverage that is regulatory compliant across multiple states. This requirement restricts the pool of insurers into a tightly concentrated market. Thus, employers rely on only a few large national insurers, continuing the cycle of market consolidation. Much of this concentration is due to mergers and acquisitions, but also because some insurers simply exit markets that they see as risky, making it even difficult for disruptive competitors to exist. Disruptors are often unable to continually invest the capital necessary to beat Goliath. David falls.
The market power that these PBMs have allow them to use the strategy of spread pricing. They charge payers (e.g., Medicaid) more than they reimburse the pharmacy (e.g., CVS) for a prescription. The difference between the prices paid by the insurer/individual and the PBM is the spread, which these firms keep as profit.
Vertical integration allows corporations to take a cut of what the patient pays multiple times. CVS can charge the consumer for a drug (as a pharmacy), take a cut of the insurance payout for the drug (as the PBM), and charge the patient as an insurer (i.e., Caremark) more than the cost of the drug. Making profit at every step of the transaction allows these corporations to effectively triple dip into the transaction, getting around the regulatory limit on insurer profits.
Health insurance is a necessity, either mandated by employers or required to avoid penalties from governments, meaning consumers have little choice but to participate. Consumers have little choice in the market due to the limited options available and the dominance of employer sponsored plans. The system is also designed so that people can only enroll or change insurance in a certain time period—both on the individual market and through employers, effectively trapping them among the same large national insurers.
Employer-sponsored plans tend to be cheaper—but they also tend to be provided to higher-income workers. The average monthly premium per capita was $55 lower for employer-sponsored plans than individual plans in 2022; that difference rises to $138 between employer-sponsored plans and Marketplace Gold Tier plans (which provides equivalent coverage). Employers can negotiate with insurers to pool risk and get a lower premium from the insurer. Employers also cover part of that premium, lowering out-of-pocket cost of the premium for workers. Additionally, those premiums are paid with pre-tax dollars while individual plan enrollees aren’t given that benefit. The options available to interstate firms (and, thus, most individuals) are limited due to licensing requirements in each state—there are few national insurers. Specific states also tend to be highly concentrated—in fact, most are.
As insurance remains doggedly concentrated, healthcare firms are pressured to integrate to compete.
For example, CVS bought Caremark, a PBM, in 2007, then, in 2018, it bought Atena, an insurance firm. Through the last decade, this integration has created a sharp contrast between CVS and Walgreens, once a similarly sized competitor.
Controlling the entire chain allowed CVS to self-preference. Caremark funnelled drug prescriptions to CVS pharmacies, helping CVS beat out Walgreens (its largest competitor in the retail pharmacy market). CVS now makes up 47% of the prescription market in the US, compared to 15% for Walgreens. That’s up from a mere 14%, back in 2005. The Caremark acquisition provided CVS more stable revenue streams, better negotiating power, and growth in key areas like specialty pharmacy.
Lack of government regulation has allowed vertical integration to become a vital aspect of competition in the healthcare market. Competition policy formally started with the Sherman Antitrust Act of 1890. It started being used heavily by Roosevelt and Taft, kicking off the Progressive Era. Over the next few decades, more statutory and case law was created; for example, the FTC was created under the Federal Trade Commission Act in 1917.
Post-WW2, this strict enforcement fell off. The Chicago School, a school of thought from the University of Chicago, became extremely influential in late-20th century politics. Antitrust moved from structuralism to consumer welfare—regulators focused solely on whether a merger, cartel, or anti-competitive action raised prices for consumers. Market power was no longer illegal. Vertical integration was no longer heavily scrutinized—until the FTC and DOJ revised their merger guidelines under Former FTC Chair Lina Khan.
As firms seek to expand their market dominance and control multiple stages of the supply chain, the absence of oversight over mergers has enabled consolidation at an unprecedented scale. Healthcare has significant barriers to entry to the inherent economies of scale. Integration exacerbates that anti-competitive environment. Without robust oversight, dominant firms grow stronger, leading to a consolidated market where competition is diminished rather than encouraged.
Walgreens doesn’t have the bulwark against competition that CVS does. The firm never integrated like CVS did; it is still mainly a retail pharmacy. Especially as of late, the firm has been pressured by a competitive retail pharmacy market, and has been operating at a loss for the last couple years. Its stock price has been falling since a high in 2015, down 50% just in the last year. It’s instead chosen to go private; it will be bought out by Sycamore Partners, a private equity firm. From a high of $100 billion, it’ll be bought out for $10 billion, technically a premium over the $8 billion market valuation. Vertical integration became the norm, but Walgreens didn’t play the game the way CVS and its peers did. Didn’t buy out competitors. Didn’t double dip profits. Didn’t stay competitive.
Stronger oversight could involve mandating transparency in spread pricing, enforcing fair competition rules, and cracking down on self-preferencing behaviors that restrict market access for competitors. Agencies like the Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB), if properly empowered, could mitigate the adverse effects of vertical integration. However, even with the best intentions, oversight mechanisms come with inherent flaws. For instance, government healthcare programs like Medicare and Medicaid require a certain percentage of premiums to be spent on care rather than kept as profit or used for administrative costs. While the regulation is meant to force insurers to prioritize patient care, they are permitted to count payments made through spread pricing as medical spending rather than administrative costs. This accounting loophole enables PBMs and insurers to extract excess profits while technically staying within regulatory limits. It is estimated that this will cost the federal government $1.1 billion from 2024 to 2033.
Regulatory oversight is often reactive rather than proactive, responding to market abuses only after they have caused significant damage. For example, there are currently regulations on how much profit insurers can make on spread pricing—but, vertical integration serves as a workaround. Each business unit makes profit that, on its own, falls under the limit, but creating arbitrary levels of abstraction allows these firms to legally circumvent that.
Thus, oversight on its own cannot address the problem. It allows dominant firms to further entrench their market position, making it more difficult to dismantle anti-competitive practices. Furthermore, the complexity of the healthcare market, particularly regarding PBMs and insurance structures, creates challenges in enforcement, as firms can exploit loopholes and regulatory blind spots. It’s a cat-and-mouse game, not a solution.
Enhanced oversight carries significant administrative costs. Regulatory agencies require funding to conduct investigations, enforce policies, and litigate against corporations that violate competition laws. If improperly structured, regulatory burdens can also unintentionally create disadvantages for smaller firms that lack the resources to navigate complex compliance requirements, further entrenching the dominance of larger, vertically integrated entities.
The second Trump administration has been gutting the CFPB and politicizing the FTC. The gutting of these agencies has led to less effective oversight over business practices. The Trump administration is happy to take Khan’s wins–when they align with the administration’s political goals. In US and Plaintiff States v. Google LLC (2020), the Department of Justice reiterated its call to break up Google, a lawsuit started under Khan with the new merger guidelines. Yet, that enforcement is clearly becoming political, as the White House reigns in these “independent” agencies. Trump has since fired all the Democratic Commissioners at the FTC without cause, while also continuing enforcement against Big Tech. The far left and the far right love it for diametric reasons. Mark Zuckerburg might be able to donate $1 million to Trump and get some protection from being sued by the federal government. But that’s chump change for a billionaire that runs firms worth trillions. That is not a viable strategy for most small to mid-sized businesses.
Oversight tends to be plugging holes in a sinking ship. Given the clear market distortions caused by vertical integration, a more aggressive approach to merger policy is necessary.
While traditional antitrust enforcement has primarily focused on horizontal mergers—where direct competitors consolidate—contemporary policy has been open to cases that have demonstrated the urgent need for scrutiny of vertical mergers.
Historically, vertical mergers were less scrutinized than horizontal mergers under antitrust laws, based on the assumption that they would lead to efficiency gains rather than harm competition (thank the Chicago School and Co. for that). However, several past cases demonstrate that vertical integration can result in anti-competitive behavior. Recently, the FTC sought to block Microsoft's acquisition of Activision Blizzard. The agency argued that Microsoft, which owns the Xbox platform, could unfairly disadvantage rival consoles by withholding Activision's popular games. Microsoft promised to “be good” and conform to oversight—which had no teeth. Similar concerns exist in the healthcare sector, where vertically integrated firms can use their market position to prioritize their own services and products, excluding independent providers and raising costs for consumers.
Enforcement needs toaddress consolidation and increase consumer choice. This could involve outright blocking of major vertical mergers, implementing structural remedies such as divestitures, or imposing behavioral conditions that restrict anti-competitive practices.
Without government intervention, vertical integration will continue to dominate the healthcare industry, reducing competition and raising costs for consumers. Real prevention of monopolistic practices is crucial to address harms to consumers.
Vedhanth Vijayakumar Jayanthi is a freshman at New York University studying Business & Political Economy. He is interested in competition and developmental policy, with a focus on technology and energy infrastructure, respectively. He loves sci-fi and eagerly waits for new episodes of Andor every Tuesday.
