Algorithmic Price-Fixing in Health Insurance, Explained

Does every industry have a centralized price-rigging scheme?

Photo credit: SanDiegoPersonalInjuryAttorney

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Arizona Attorney General Kris Mayes this week sued a corporation called MultiPlan — a sort of tech middleman between medical providers and health insurance companies — as well as most of the biggest health insurers in the country (Aetna, Cigna, Blue Cross Blue Shield, United HealthGroup, etc.) for allegedly engaging in algorithmic price-fixing that had the double effect of lowering compensation for health care practitioners and raising costs for patients.

This case is important not just in the particulars — which I’ll get into below — but for what it reveals about the proliferation of centralized, price-rigging schemes, which are cropping across the economy, while price-fixing law and the judiciary are simply not keeping up.

According to the complaint, MultiPlan is a system health insurers use to determine what they should pay for out-of-network care, i.e., care from physicians who don’t contract with your insurer. Depending on your health insurance plan, your insurer will cover payments to medical practitioners not in their network up to a certain amount, with the patient responsible for the rest.

Instead of independently determining what they will each pay for out-of-network medical procedure, the dominant health insurers are allegedly handing their individual, competitive, pricing information regarding out-of-network payments over to MultiPlan, which feeds it all into an algorithm that spits out recommend out-of-network payments across the market.

So when an out-of-network doctor treats an out-of-network patient for, say, a knee replacement, and applies for payment from an insurer (or when a patient pays and applies to the insurer for reimbursement), it’s MultiPlan setting the compensation they’ll receive, based not on the individual insurers assessment of what it should cost, but the private data of all the big insurers that has been fed through a common algorithm overseen by Multiplan.

As the Arizona attorney general’s complaint put it, insurers “agree to share their proprietary claims and pricing data with their competitors to achieve the collective purpose of setting the prices they pay for out-of-network goods and services at artificially and unreasonably low rates.” Indeed, there’d be no reason to share this competitive, confidential pricing information with a third-party that is also working with other competitors in the market were it not to facilitate some sort of price-fixing scheme! The insurers, via MultiPlan, have gone from competitors to collaborators on price.

And it works. MultiPlan allegedly consistently sets payment rates below their historical rates, and thus “healthcare provider compensation for out-of-network services has decreased every year since MultiPlan implemented its scheme, while MultiPlan’s profits have concomitantly skyrocketed.” And then MultiPlan continually trains its algorithm with those lower rates, driving them even lower over time:

MultiPlan continually drives healthcare provider compensation lower by recycling the adjusted compensation amounts generated by Data iSight and feeding them back into its algorithms to calculate median compensation levels for new claims moving forward, feeding new, artificially suppressed data into the algorithm that drives median compensation further down.

Since medical practitioners are receiving lower compensation, they’re turning around and charging the rest to patients, even though those patients have already paid for insurance.

Crucially, the algorithm works the same regardless of which insurer is using it at a given moment, according to Sean Crandell, MultiPlan’s Vice President of Health Economics:

As part of the same testimony, Crandell was asked: “[I]f the Data iSight tool is used among various different companies in the industry, do the recommended payment rates generated by Data iSight tool vary depending on which client you’re running that calculation for?” Crandell answered: “No.” When asked whether the tool could even factor in who the client is, he answered: “No, it can’t. The system that generates the methodology cannot even factor in [who] the client [is].”

So all of the market participants — ostensible competitors — are being told by the algorithm to charge the same prices, by design.

“By using a shared algorithm to set payments, these companies harmed doctors and patients alike — driving up patients’ risk of paying more out‑of‑pocket costs, depriving providers of fair payment and sometimes forcing them to accept payment below the costs incurred for treatment, and making it harder for Arizonans to get the care they needed. This case is another example of old-fashioned price-fixing using new technology, but it’s against the law all the same,” Mayes said in a release.

In addition to the Arizona case, there is also a private lawsuit against Multiplan focused on the same allegations, in which the Department of Justice has filed a statement of interest. In that case, the judge “noted that the plaintiffs had plausibly alleged a ‘horizontal hub-and-spokes price-fixing agreement,’ facilitated by MultiPlan’s role as a central coordinating entity. ​He emphasized that MultiPlan’s communication of competitively sensitive pricing information among insurers supported the allegations of collusion.”

If astute readers are thinking this all sounds very familiar, that’s because it is. RealPage, a corporation I’ve written about in this newsletter before, serves the same function in rental housing. AgriStats does it in agriculture markets. A corporation called Cendyn has a platform called Rainmaker that does the same thing for hotels. It also seems like nursing home operators have their own version.

In industry after industry, there are third-party price setters who all have the same business model: Collect data from ostensible competitors in a market, run them through a common algorithm, and feed back market-wide recommended prices that ensure that “competitors” won’t undercut each other and cause a drop in price or profit.

There are pending legal cases against most of the corporations listed above, but antitrust cases take a notoriously long time to make their way through the courts. There have also been legislative efforts to rein this model in, most specifically in housing: New York State, along with more than a dozen cities, have banned algorithmic collusion in rental housing markets, and Providence, Rhode Island, recently took the first enforcement action under such a law, while California adopted a wider-ranging law against algorithmic price coercion.

But it seems that all the action isn’t keeping up with the proliferation of tools and industries adopting them, which is aided by the general fog under which online pricing occurs. And while some judges have allowed cases to proceed under current law, others have been hesitant to see indirect collusion via a third-party central planner as akin to good old-fashioned, smoke-filled-room price fixing — even though it clearly is just that, wrapped in “tech” and “AI.” Therefore, some legislative efforts making that abundantly clear may be required.

For now, the best thing to do is push your state attorney general and state legislators to take this problem seriously, because they’re not keeping up.

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SHAMELESS SELF-PROMOTION: For Economic Populist (subscribe!), I wrote about the failings of Washington, D.C.’s utility regulators, and what the next mayor and city council need to do to make it all better. Read it here.

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SIMPLY STATED: Here are links to a few stories that caught my eye this week.

• Colorado Gov. Jared Polis vetoed a ban on surveillance pricing that had passed the legislature, while the New York State legislature approved its own version, sending it to Gov. Kathy Hochul. (Background on this issue here and here.)

• Tennessee State Rep. Aftyn Behn wrote a fantastic piece about why the Super Bowl is an economic dud and what it means for Nashville.

• Ohio Gov. Mike DeWine announced a “pause” on data center tax breaks (sort of).

• The New York and New Jersey attorneys general are investigating FIFA — world soccer’s governing body — for its World Cup ticket pricing practices.

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— Pat Garofalo