Putting a cap on insurance company profits actually makes your prescriptions more expensive.
April 15, 2026
Original Paper
Profit Regulation and Strategic Transfer Pricing by Vertically Integrated Firms: Evidence from Health Care
SSRN · 6566838
The Takeaway
We usually assume profit caps protect consumers, but vertically integrated firms have found a loophole called 'tunneling.' By hiking prices at their own pharmacies by 9.5%, these companies effectively 'cost' themselves money to bypass Medicare Part D regulations while actually just moving cash to an unregulated subsidiary. The government and taxpayers end up footing the bill for this internal shell game. For regular people, this means that even when the law says a company can't make 'too much' profit, they are still finding ways to squeeze you by inflating the prices of services they buy from themselves. It turns a consumer protection rule into a hidden incentive for price hikes.
From the abstract
We provide evidence of strategic transfer pricing by vertically integrated health care firms in response to insurer profit regulations. Insurers increased prices at vertically integrated pharmacies by 9.5% following the introduction of caps on insurer profits in Medicare Part D. We detect larger price increases by insurers that were at greatest risk of exceeding the allowable profit level. More than one-fifth of these higher prices were borne by the federal government. Our analysis illustrates t