It's not an argument I've seen before, but also not one I've had refuted when I put it out there.
There are plenty of ways to align the incentives of insurance companies with those of the insured. But a static max ratio between medical expenses and overhead is not one of them. Because then there is literally no upside to reigning in medical expenses, as every effect of doing so is negative to the insurer.
So instead of trying to make their medical spending more effective, they focus on
1) Making their operations as lean as possible (so they can squeeze as much profit out of that allowable overhead percentage as possible), and
2) Vertically integrate so they're on the other side of that medical spending where that cap doesn't apply any more.
I guess the main countervailing force against this would be pricing pressure from employers looking for better deals. I don't really know what the power balance looks like in those negotiations, but employers banding together would certainly tip the scales
It is my underatanding however that a lot of providers have payers under their thumb. A great example of this is the UCLA vs blue shield (or blue cross?) of CA a few years back. Another commenter here mentioned UPMC, another example of a mammoth local provider dictating what payers do. Sutter health in the Bay Area is a similar Goliath, and the publicly traded hospital systems (community health, HCA, etc) have made a business model out of exploiting local hospital monopolies to extract money from payers.
Payers definitely don't like this, and if they start getting squeezed on the other side from employers, it could really squeeze some payers
There are plenty of ways to align the incentives of insurance companies with those of the insured. But a static max ratio between medical expenses and overhead is not one of them. Because then there is literally no upside to reigning in medical expenses, as every effect of doing so is negative to the insurer.
So instead of trying to make their medical spending more effective, they focus on
1) Making their operations as lean as possible (so they can squeeze as much profit out of that allowable overhead percentage as possible), and
2) Vertically integrate so they're on the other side of that medical spending where that cap doesn't apply any more.