Who’s Getting the Advantage from Medicare Advantage?

Conservatives in the Senate Finance Committee are fighting hard to protect the current payment structure that gives private insurance plans in Medicare up to 19 percent more [1] (pdf) than it would cost to care for the same people in the public Medicare program. It is... shall we say puzzling?... to hear so-called fiscal conservatives trying to defend a program that overpays. But perhaps it is not so inscrutable when you realize that they are not so much interested in saving taxpayer money as they are in shifting that money into private pockets [2].

First, a little background. Medicare—the federal health insurance program for people over the age of 65 and those with severe disabilities—contracts with private health insurance plans that compete with the public Medicare program for membership.

The Kaiser Family Foundation gives the following quick overview of the history of private plans in Medicare [3] (PDF):

"As the private market for health insurance has evolved, Medicare has been modified so that beneficiaries can elect to get their Medicare benefits through a qualified private plan rather than the traditional fee-for-service Medicare program. Authorized in 1982, the Medicare risk-contracting program provided for enrollment in health maintenance organizations (HMOs). In 1997, Congress expanded private plan authority to include preferred provider organizations (PPOs), provider-sponsored organizations (PSOs), and private fee-for-service (PFFS) plans as the Medicare risk-contracting program was absorbed into Medicare+Choice (M+C). The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) replaced M+C with the Medicare Advantage (MA) program in 2004, raising payment rates and making other changes in anticipation of the Medicare drug benefit in 2006."

Notice the change in names for the private health plans that contracted with Medicare? "Medicare risk-contracting program"—not very appealing. "Medicare+Choice"—more choice, that's more appealing. "Medicare Advantage," now that's really appealing—who doesn't want to have an advantage?

But just who is getting the advantage when it comes to private plans in the Medicare program? I’ll give you a hint: Just this past July, UnitedHealthcare reported its profits had soared 155 percent [4]:

“Despite a continued drop in commercial members in the recession, UnitedHealth reported Tuesday better-than-expected earnings for the second quarter because of lower administrative costs and strong growth in its public-sector businesses, Medicare and Medicaid.” [Emphasis added]

How are private plans making such high profits off Medicare? As Families USA reported [5] (PDF):

"Overpayments to Medicare Advantage plans and regional PPOs could easily cost more than $60 billion over the next 10 years...

"As part of the 2003 Medicare Modernization Act, Congress substantially increased payments to Medicare Advantage plans. Medicare Advantage plans are overpaid compared to traditional Medicare.

In 2005, Medicare overpaid private plans by at least seven percent per beneficiary. Taxpayers lost $2.7 billion in 2005 to private Medicare Advantage plans and their parent insurance companies.

In 2006, under a new payment formula, overpayments to plans are 11 percent per beneficiary (after accounting for health care status). With growth in Medicare Advantage enrollment, this amounts to at least $4.6 billion in overpayments this year alone."

As the Medicare Rights Center put it [6]:

"Private plans came into the Medicare program with the claim that they could save taxpayers money. Instead, they cost between 12 percent and 19 percent more per person than the public Medicare program, amounting to $5 billion per year in unnecessary cost to taxpayers."

But what of the claims that people will suffer if they lose their Medicare Advantage plans? The fact is Medicare Advantage plans can be quite disadvantageous for people with Medicare. Two separate studies found that people could end up with higher out-of-pocket costs in a private plan than in Medicare, or in one private plan over another.

A study [7] (PDF) by MedPAC found that some Medicare private health plans have high cost-sharing for "nondiscretionary" services such as chemotherapy. For example, looking at the cost of a year of care for a 70-year-old male with advanced colon cancer, the study found out-of-pocket charges of $7,100 for one plan, $6,550 for the second plan and $1,990 for the third plan.

Similarly, a study [8] (PDF) by the non-partisan Commonwealth Fund found that out-of-pocket costs for private health plan members vary widely by health status and plan benefit package. The report shows that costs for plan members in poor health would actually have been higher than Original Medicare in 19 of the 88 MA plans examined: "Despite the high payments, relative to fee-for service [public Medicare] costs, that MA plans receive from Medicare to enrich enrollee benefits, these plans may not always be a good deal for sicker beneficiaries who use more health services."

It’s time to put the advantage back where it belongs—in the hands of people with Medicare, not in the pockets of insurance companies. Let Medicare Advantage plans compete on a level playing field with public Medicare!