The world is being quietly rearranged by people who write very long documents.
A federal rule meant to limit insurance margins gave companies a reason to overcharge themselves for drugs.
→ The bet
Medicare wrote a rule to cap how much money an insurance company could keep. They assumed the leftover cash would naturally flow back to patients as lower premiums. They forgot that modern insurers do not just sell insurance. CVS owns Aetna. UnitedHealth owns Optum. Cigna owns Express Scripts. When the government put a lid on the insurance bucket, the companies simply ran a pipe to their own pharmacy bucket. They paid themselves higher prices for the same pills. The excess profit became an operating expense. Noisy is betting that trying to cap one subsidiary while ignoring the conglomerate attached to it will always fail.
For years, insurers took their profit directly from Medicare Part D premiums. Then regulators built a ceiling. If an insurer's margin crossed a certain threshold, they had to return the difference to the government. The insurers looked at the ceiling and moved the floor. Instead of returning the money, Aetna and UnitedHealth started paying inflated rates to the pharmacies they already owned. The cash never left the corporate parent. The accounting ledger simply recorded a massive new cost on the insurance side and a massive new gain on the pharmacy side. They complied with the law by billing themselves for the difference.
The federal government spent years pretending CVS the insurer and CVS the pharmacy were two different entities. This research is an admission that the legal fiction is a failure. A vertically integrated healthcare company does not experience costs. It creates them. If a single corporation controls the buyer and the seller, it controls the price. The regulation failed entirely because the government only audited the buyer.
The government built a dam to stop insurance profits. The insurers just rerouted the river through the pharmacy.
Conglomerates: UnitedHealth, CVS, and Cigna protected their margins. They turned a federal profit cap into a justification for charging higher internal fees.
The federal government: Medicare lost its primary cost control mechanism. Regulators assumed a corporate boundary existed where none actually did.
Taxpayers: The evasion was subsidized. Taxpayers handed over 2.1 billion dollars to cover the inflated pharmacy prices the insurers charged themselves.
Regulators have to close the pipe. Medicare is drafting new rules for the next contracting cycle to audit the money moving between corporate siblings. They are finally trying to govern the parent company rather than the subsidiary.
UnitedHealth and CVS will claim the inflated pharmacy rates are just the natural result of modern supply chain costs. They will present operational reports proving that moving pills is getting more expensive.
Ten years ago, insurers went on a buying spree. They acquired pharmacies, clinics, and pharmacy benefit managers. They told regulators they were building efficient care networks. This paper proves the acquisitions were actually about building a private plumbing system where money could flow around regulatory dams.
Utility companies invented this move fifty years ago. When the state caps the power plant's profit, the unregulated coal supplier next door suddenly raises its rates. The power plant and the coal supplier share a parent company. Healthcare conglomerates just adapted the mechanism for prescription drugs.
Moving money between corporate subsidiaries is boring. The language is impenetrable. Bureaucrats use terms like "internal transfer pricing" to keep outsiders from looking at the plumbing. The plumbing becomes suddenly visible when researchers calculate exactly how many taxpayer dollars flowed through it.
The Sendoff
The government ordered insurance companies to stop taking so much profit. The companies agreed, reclassified the profit as a pharmacy expense, and forwarded the bill to the public.