1.3. The Mechanism of Extraction: Stock Buybacks

The structure of these payouts further links corporate strategy directly to the maximization of stock value. Approximately 60% of the $2.6 trillion total was distributed through stock buybacks, where a company purchases its own stock to reduce the outstanding share count. This action artificially inflates the earnings per share (EPS), thereby boosting the stock price. This mechanism disproportionately benefits senior company executives whose compensation, often involving stock options, is directly tied to the rising stock price.   

This reliance on buybacks reinforces the link between aggressive, short-term profit extraction policies and executive compensation. When operational decisions, such as stringent utilization review or high-volume claim denials, maximize short-term net income, that income facilitates higher capital returns (buybacks), directly benefiting management. This creates a cyclical incentive for policies that prioritize immediate shareholder and executive financial gains over long-term stability or consumer affordability.

A case study of a major conglomerate, UnitedHealth Group (UHG), illustrates the scale of this activity. While UHG’s dividend payout ratio alone may appear moderate , the total capital deployment to investors is massive. In 2024, UHG returned over $16 billion to shareholders through a combination of dividends and share repurchases. Analyzing only dividend yield significantly understates the true scale of capital extraction used to satisfy the shareholder primacy mandate. The sheer volume of this capital flow dictates that premiums must remain high simply to sustain this expected level of return, regardless of cost containment successes within the delivery system.   

II. Market Concentration and the Inflationary Effect of Consolidation (Focus Area B)

The ability of commercial insurers to maintain high premiums while diverting massive capital rests heavily on their dominance in concentrated markets. Through aggressive consolidation—both horizontal (merging with rivals) and vertical (acquiring entities in the supply chain, particularly Pharmacy Benefit Managers)—payers have established market power that eliminates competition and generates significant economic rents.

2.1. Horizontal Consolidation and Premium Capture

Insurer consolidation has led to highly concentrated private insurance markets, resulting in increased healthcare prices and limited consumer choice. This concentration yields asymmetric negotiating leverage for the payers.   

Studies consistently demonstrate that when commercial insurers consolidate, they gain substantial market power, enabling them to negotiate lower prices and payment rates with healthcare providers. In a competitive market, these efficiency gains would typically be passed on to consumers via lower premiums to capture market share. However, in the oligopolistic health insurance sector, this does not occur. The lower prices paid to providers do not appear to be passed onto consumers, who instead experience higher premiums following insurer consolidation.   

This phenomenon signifies a market failure: the cost savings achieved by the dominant payer are captured entirely as profit (economic rent) rather than being used to reduce consumer costs. The lack of horizontal competition allows insurers to maximize value extraction from both their input (provider payments) and their output (consumer premiums). The value of competition is starkly illustrated by findings that having an additional insurer in a given area can result in premium savings of nearly $500 per individual, a saving that is eradicated through market consolidation.   

2.2. Vertical Integration: The Insurer-PBM Monolith

The acquisition of Pharmacy Benefit Managers (PBMs) by major national insurers represents the most consequential recent trend in vertical consolidation. This integration creates opaque, internal profit centers that decouple drug costs from patient price transparency, furthering the structural barriers to affordability.

2.2.1. PBM Market Dominance and Conflict of Interest

PBMs are intermediaries that manage prescription drug benefits, negotiate prices, and process claims. Today, the PBM landscape is dominated by three giants—CVS Caremark (owned by CVS Health/Aetna), Express Scripts (owned by Cigna), and OptumRx (owned by UnitedHealth Group). Combined, these three PBMs control approximately 80% of all prescription drug claims in the U.S. market.   

This tight vertical integration creates a profound conflict of interest. The same corporation that is theoretically tasked with controlling drug costs (the PBM) is integrated with the insurer that profits from the overall transaction and often owns the specialty pharmacies used to dispense the drugs.

2.2.2. Spread Pricing and Incentive Misalignment

A critical mechanism for profit extraction in the PBM sector is “spread pricing.” This is a compensation model where the PBM charges the health plan (insurer or employer) a negotiated price for a drug but pays the dispensing pharmacy a lower price, retaining the difference, or “spread,” as profit. Audits of state Medicaid programs have revealed massive margins derived from spread pricing, in some cases amounting to hundreds of millions annually.   

The primary concern is that this model creates an incentive for PBMs to promote higher-cost medications if the spread margin is larger on those products. The goal becomes maximizing the spread, rather than prioritizing the lowest net cost alternative for the patient or the plan sponsor. This structure structurally divorces the cost paid by the patient or payer from the actual net price of the drug, allowing the integrated entity to optimize profit based on internal transfer prices, leading to higher external premiums and cost-sharing.   

2.2.3. Rebate Retention and Opacity

PBMs negotiate significant rebates from pharmaceutical manufacturers. However, the lack of transparency is systemic: PBMs are not required to publicly disclose how much of the manufacturer rebate they retain. Although a portion of rebates is passed through to the commercial insurer, many small insurers and employers report they do not receive the same share of savings that large integrated insurers receive.   

The vertically integrated PBM leverages control over formularies and specialty drug negotiations to extract revenue at multiple points in the supply chain. Without clear disclosure of rebate retention and spread pricing practices, regulators and plan sponsors cannot accurately determine whether PBM cost-containment strategies are achieving true efficiency or are merely redistributing profit internally to the corporate parent. This systemic opacity guarantees that a substantial portion of potential drug cost savings never reaches the consumer.   

III. Engineered Friction: The Operationalization of Profit Extraction (Focus Area C)

Beyond financial engineering and market concentration, for-profit insurers have developed highly efficient operational mechanisms to minimize benefit payouts. This strategy, known as administrative friction, relies on complexity, delay, and patient/provider exhaustion to avoid paying valid claims.

3.1. Systemic Claim Denial and Utilization Review

The process of utilization review—requiring prior authorization (PA) and reviewing claims for medical necessity—is intended to ensure appropriate spending, but in practice, it functions as a critical profit center. The data reveals highly aggressive claim denial rates across the industry.

In 2023, insurers offering qualified health plans on the federal HealthCare.gov marketplace denied, on average, 19% of submitted in-network claims. This figure is an industry average, masking extreme variation; denial rates across different states and insurers ranged from as low as 1% to as high as 54%. High-volume insurers have contributed disproportionately to this trend, with UnitedHealth Group reporting denial rates as high as 33% and Elevance Health at 23% in certain states.   

3.1.1. Administrative Justification, Not Clinical Assessment

A close examination of the reasons cited for denial indicates that the primary purpose is administrative reduction, not clinical appropriateness. Of the limited information available, the most common reason for in-network denial was a general “other” reason (34%), followed by administrative issues (18%) and excluded services (16%). Critically, only 6% of denials were explicitly based on a lack of medical necessity. This overwhelmingly low percentage of clinically-based denials suggests that the goal of the review process is primarily to impose hurdles that delay or halt payment, regardless of the patient’s clinical need.   

3.1.2. The Automation of Refusal

Insurers have invested heavily in technology to scale this administrative friction. The increasing adoption of algorithms and Artificial Intelligence (AI) for utilization review and prior authorization has led to significant increases in claim denials. These systems are employed to issue rapid-fire denials, sometimes reviewing large bundles of claims without human consultation or review of the patient’s medical chart. For example, a Senate investigation found that UnitedHealthcare’s denial rate for post-hospital care more than doubled between 2020 and 2022 following the implementation of algorithms to automate its review process. Physicians frequently report significant administrative burden from prior authorization, citing high denial burdens across major payers including Humana (64%), Elevance (59%), and Cigna (55%).   

3.2. Administrative Burden as a Cost-Shifting Mechanism

The core evidence of systematic improper denial lies in the high rate at which these rejections are overturned upon challenge. Industry data shows that up to 70% of initial denials are ultimately overturned and paid after multiple rounds of appeal or rework. If a majority of rejected claims are eventually deemed valid, the initial denial was, by definition, improper or unnecessary.   

This “deny first, pay later” strategy serves as a highly profitable mechanism of cost avoidance achieved through attrition. The insurer incurs minimal cost on the initial denial, especially if automated. The true profit is derived from the large percentage of valid claims (estimated at 30% of initially denied claims) that are never successfully appealed because the provider or the patient is exhausted by the complex, time-consuming process.   

This tactic intentionally shifts massive labor and financial burdens onto healthcare providers. The annual cost for providers to fight and rework these denials amounted to over $25.7 billion in 2023, representing a 23% increase from the prior year. Nearly $18 billion of this cost is potentially wasted expenditure on arguing over claims that should have been paid immediately. The average administrative cost to rework a denial reached $57.23 per claim in 2023.   

By forcing multiple, costly rounds of review, which can result in payment delays of up to six months, the insurer effectively uses the provider’s cash reserves as zero-interest working capital. This compounds financial pressure on the delivery side, hindering providers’ ability to invest in patient care and proving that the administrative complexity is a crucial profit center achieved by capitalizing on the vulnerability and resource constraints of the delivery system.   

3.3. The Complex Appeals Treadmill

The effectiveness of administrative friction is validated by the low rate of consumer appeal. Despite the high success rate for appeals (70% overturn rate), consumers in the marketplace rarely pursue internal appeals—fewer than 1% of denied claims are appealed. When consumers do appeal, the insurer typically upholds the initial denial 56% of the time, forcing the claimant to potentially seek external review. The appeals process is intentionally arduous, characterized by stringent, payer-specific deadlines and variable policies. This complexity ensures that the structural barrier to payment remains highly effective, filtering out claims that would otherwise be paid.   

IV. Regulatory Capture and the Erosion of Accountability (Focus Area D)

The ability of the for-profit insurance industry to employ these capital extraction strategies without meaningful consequences is sustained by a fragmented regulatory environment, dominated by the statutory limitations of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA creates a sweeping legal protection that shields large insurers and self-insured plans from the accountability mechanisms that govern most other consumer and financial products.

4.1. The ERISA Preemption Vacuum

ERISA was originally designed to protect employee pensions but was interpreted to broadly preempt state laws that “relate to” employee benefit plans. While states can generally regulate fully-insured plans (those that purchase insurance from a third party), ERISA contains a crucial provision known as the “Deemer Clause.”   

The Deemer Clause prohibits state insurance laws from regulating or applying mandates to self-insured employer plans. Since these self-insured plans, which are typically managed by major commercial payers acting as administrators (Third-Party Administrators or TPAs), cover the majority of privately insured Americans (over 60% of those under 65) , the clause creates a massive regulatory vacuum. State governments are unable to impose comprehensive consumer protection rules, mandated benefits, or effective mechanisms to control the administrative practices of the entities that govern most private health coverage.   

Courts have interpreted ERISA preemption broadly, finding that state laws are impermissible if they govern “a central matter of plan administration” or interfere with the goal of “nationally uniform administration”. This broad judicial deference effectively handcuffs states’ ability to impose necessary accountability on administrative practices, such as rigorous claims handling standards.   

4.2. The Limited Civil Remedy and the Moral Hazard

The most significant consequence of ERISA is the creation of a profound moral hazard regarding claim denial. For plans governed by ERISA, the federal statute provides the exclusive civil remedy for beneficiaries seeking to challenge a denial.   

4.2.1. Lack of Deterrence

If a beneficiary successfully sues an insurer for wrongful denial of benefits under ERISA, the remedy is severely limited. The claimant can typically only recover the monetary value of the benefit due under the plan, along with discretionary attorney’s fees.   

Crucially, ERISA does not permit the recovery of consequential damages (damages resulting from the delay or denial of care, such as accumulated debt or ensuing health complications) or punitive damages.   

This lack of punitive mechanism establishes the structural integrity of the “deny and defend” strategy. The worst financial outcome for the insurer that wrongfully denies care is being ordered by a court to pay the benefit they were legally obligated to pay in the first place, often years later. Since the insurer faces no additional financial penalty for bad faith, systematic improper denial becomes a rational, profit-maximizing business strategy. It is financially cheaper to systematically deny claims, delay payment through appeals and litigation, and capitalize on patient attrition than it is to process valid claims promptly and fairly.   

4.3. Systemic Bias in the Legal Arena

The legal framework further stacks the deck in favor of the insurer. In many ERISA cases, the burden of proof rests on the claimant to demonstrate that the denial was improper. Furthermore, if the claim is adjudicated under the “arbitrary and capricious” or “abuse of discretion” standard—often granted to insurers that retain discretion over claim determinations—the claimant must prove not only that the denial was wrong but that it lacked “reasonable support”. This grants significant judicial deference to the insurer’s internal administrative process and decisions.   

Since insurers control the administrative record used for judicial review, and courts often limit discovery outside this record, the claimant faces an uphill battle against a structure designed to minimize their chances of successfully recovering compensation beyond the initial denied benefit amount. ERISA effectively privatizes the enforcement of health benefits by relying entirely on the individual beneficiary to engage in expensive litigation against corporate entities with unlimited legal resources, ensuring that regulatory accountability is severely diminished.   

4.4. PBM Transparency Gaps

Despite the growing scrutiny surrounding PBM vertical integration, regulatory transparency remains inadequate. Although recent federal acts like the Consolidated Appropriations Act of 2021 (CAA) have granted plan sponsors the right to access detailed drug-pricing and rebate data , this is insufficient. A persistent lack of clear disclosure regarding spread pricing and rebate retention means that neither regulators nor plan sponsors can fully evaluate whether PBM cost-containment efforts are genuine or merely mechanisms for internal profit redistribution. Without mandated, full cost disclosure and the separation of PBMs from insurers, the financial opacity that drives high prescription costs will persist.   

V. Policy Prescriptions and Recommendations for Structural Reform

The evidence overwhelmingly indicates that making healthcare affordable requires not incremental adjustments but the dismantling of the structural profit drivers inherent to the current commercial insurance model. The following policy prescriptions are designed to realign the financial incentives of payers with the public health mandate.

5.1. Realigning Fiduciary Duties and Capital Allocation

The analysis established that capital diversion is the definitive result of shareholder primacy. To counteract this, policy must directly interrupt the flow of profit from premiums to shareholders.

5.1.1. Restructuring Fiduciary Duty

The legal framework must be modified to establish a clear, primary fiduciary duty for healthcare organizations to prioritize patient health outcomes, affordability, and reinvestment in the healthcare system over maximizing returns for shareholders.

5.1.2. Taxing Capital Extraction

The government should implement a steep, progressive excise tax on capital returned to shareholders (including stock buybacks and dividends) that exceeds a pre-defined threshold, such as 50% of net income. This tax would function as a punitive measure against excessive extraction, incentivizing large payers to utilize net income for premium reduction, expansion of coverage, or reduction of patient cost-sharing, rather than immediate financialization.

5.2. Market Structure Intervention and Antitrust Enforcement

The inflationary effects of market dominance require aggressive regulatory intervention to restore competitive pressure and eliminate structural conflicts of interest.

5.2.1. Structural Separation of PBMs

Regulators must mandate the complete structural divestiture of Pharmacy Benefit Managers (such as OptumRx, CVS Caremark, and Express Scripts) from their parent insurance companies. This separation is necessary to restore transparency, eliminate anti-competitive input foreclosure, and ensure that PBMs’ incentives are aligned toward securing the lowest net cost for the payer, rather than optimizing internal corporate profit.

5.2.2. Mandatory Pass-Through Pricing

All PBMs must be required to operate under a mandatory 100% pass-through pricing model. This eliminates spread pricing by requiring the PBM to invoice the plan sponsor for the exact amount paid to the pharmacy plus a transparent, fixed administrative fee. Furthermore, 100% of all manufacturer rebates must be passed directly back to the plan sponsor and applied to reduce patient cost-sharing.

5.3. Eliminating Administrative Friction and Mandating Transparency

To combat the systematic use of improper claim denials as a profit mechanism, policy must introduce immediate and financially significant consequences for administrative malpractice.

5.3.1. Financial Penalties for Overturned Denials

Given the 70% rate at which initial denials are overturned, a federal mandate must be established to impose an automatic, substantial financial penalty on insurers for any claim denial that is subsequently overturned by internal or external review. This penalty must significantly exceed the original cost of the claim to serve as a genuine deterrent against systematic improper denial.

5.3.2. Cost Recapture and Auditing

Insurers must be legally required to bear the full administrative cost imposed on providers by their denial and appeal processes. Mechanisms should be implemented to allow providers to accurately quantify and recapture the approximately $25.7 billion annual labor cost generated by unnecessary adjudication processes. Furthermore, utilization review algorithms and AI systems must be subject to rigorous, independent regulatory oversight and public disclosure to ensure their criteria are based on medical evidence, not arbitrary cost-avoidance targets.

5.4. Comprehensive ERISA Reform to Restore Accountability

The federal shield provided by ERISA is the single greatest enabler of systematic bad-faith practices in the employer-sponsored insurance market. Reform must restore fundamental consumer protections and accountability.

5.4.1. Amending Civil Remedies

Congress must amend 29 U.S.C. § 1132 (ERISA § 502) to permit the recovery of consequential damages (damages stemming from denial or delay of care) and, crucially, significant punitive damages in cases where a court finds the insurer engaged in bad faith, flagrant disregard, or intentional misconduct regarding benefit denial. This is the only measure that will eliminate the moral hazard currently incentivizing improper denial.

5.4.2. Repealing the Deemer Clause

The Deemer Clause must be amended or repealed to allow state consumer protection laws, including mechanisms for external review, guaranteed benefits, and financial conduct regulation, to apply to self-insured ERISA plans. This would establish a foundational level of regulatory oversight for the majority of privately insured Americans, allowing states to serve their traditional role as laboratories of effective consumer protection.

Health Insurance

1. Profit Distribution & Corporate Behavior

• Health Care Company Payouts Favor Shareholders, New Research Shows – Yale Medicine
• Large Healthcare Companies Redistribute Most of Their Profits to Shareholders – HealthCare Dive
• Top Healthcare Companies Spend 95% of Profits on Shareholders – Healthcare Brew
• Health Care Profits Increasingly Support Shareholder Payouts – Penn LDI
• Healthcare Corporations Spent Trillions on Shareholder Payouts – Lown Institute
• UnitedHealth Group Dividend History – Koyfin
• UnitedHealth Group Reports 2024 Results – UHG

2. Market Consolidation & Systemic Impact

• Trends and Consequences in Health Insurer Consolidation – Center for American Progress
• Health Insurance Costs Increasing as Markets Consolidate – GAO
• Environmental Scan on Consolidation Trends and Impacts in Health Care Markets – PMC
• Evaluating the Impact of Health Insurance Industry Consolidation – Commonwealth Fund

3. Pharmacy Benefit Managers (PBMs)

• What Pharmacy Benefit Managers Do – Commonwealth Fund
• The Role of PBMs and the Rising Cost of Medications – PMC
• 5 Things to Know About PBMs – Center for American Progress
• Understanding Spread Pricing and Its Impact on Plan Costs – Navitus
• Regulating Vertical Relationships in Prescription Drug Markets – AEA
• 10 Steps to Getting Maximum Value from Your PBM – Segal Group
• The PBM Effect: Regulatory and Market Implications – Buchanan Ingersoll & Rooney

4. Claim Denials, AI, and Patient Impact

• Claims Denials and Appeals in ACA Marketplace Plans (2023) – KFF
• HealthCare.gov Insurers Denied Nearly 1 in 5 Claims – KFF
• Algorithms Deny Humans Health Care – The Regulatory Review
• Health Insurance Claim Denials Are on the Rise – PBS
• Physicians Concerned AI Increases Prior Authorization Denials – AMA
• Claims Adjudication Costs Providers $25.7 Billion – Premier Inc.
• Private Payers Retain Profits by Delaying Legitimate Claims – Premier Inc.
• Claims Denials: A Step-by-Step Approach to Resolution – AHIMA
• Mastering the Complexities of Claim Appeals – Emerald Health
• Strengthening Appeals Rights for Privately Insured Patients – PMC

5. ERISA, Preemption & Legal Remedies

• Federal Preemption: A Legal Primer – Congress.gov
• A Case for Brandeisian Federalism: The ERISA Preemption Clause – DePaul Law
• The Regulation of Private Health Insurance – KFF
• Issue Brief: ERISA Preemption and Health Plan Challenges – AMA
• ERISA Preemption Primer – NASHP
• Health Plan Liability and ERISA – PMC
• Damages Available for ERISA Benefits Lawsuits – DeBofsky Law
• ERISA Violations: Penalties and Punishments – FindLaw
• ERISA Remedies for Denial of Employer Benefits – Patterson Law Firm
• ERISA Remedies and Bad Faith – Hofstra Law Review
• How ERISA Denies Due Process in Disability Claims – Disability Denials
• Who Has the Burden of Proof When an ERISA Claim Is Denied? – DeBofsky Law