Medicare Legislation: $250 Billion Plus to Private Industry
April 28, 2004
Instead of ensuring that limited Medicare dollars deliver maximum benefits for older and disabled Americans with Medicare, the legislation Congress passed at the end of 2003 would give away billions to the drug industry and insurance companies. Taken together, the corporate overpayments will total as much as $269 billion over 10 years, almost half the Medicare actuary’s estimate of the legislation’s total cost of $549 billion.1 The legislation misdirects money that could have been spent to offset costs and increase benefits for everyone with Medicare. Congress should scale back the corporate overpayments, redirect available resources to improve the drug benefit and eliminate increases in out-of-pocket costs for people with Medicare.
Overpayments to the Pharmaceutical Industry2:
- $139 billion in additional profits over eight years. The legislation will increase the drug industry’s sales volume and profits dramatically. It prohibits Medicare from using the market power of its 41 million enrollees to negotiate lower prices—even though Medicare traditionally uses its market power to establish payment rates and to contain costs. Consequently, many people who sign up for the drug benefit will be forced to pay higher prices for their drugs than they would if they bought them in Canada.
- Drug company profits will increase more than 37 percent: The $17 billion in additional profits a year translate into more than a 37 percent increase in profits for the industry, which is already the most profitable in the nation.3
Overpayments to Private Health Plans:
- Private plans overpaid by as much as $130 billion over 10 years. The law gives health plans as much as $130 billion more to provide care to people with Medicare than it would cost to cover the same people under Original Medicare. These overpayments contribute to insurance company profits. While these overpayments also enable plans to make additional benefits available to their members, only people who live in areas served by a plan offering additional benefits and who determine the plan will best meet their needs will be helped. If the overpayments were invested in Original Medicare, which is available to all people with Medicare throughout the country, additional benefits could be provided more equitably.
- Plans will get as much as $46 billion in overpayments from increases in the per- enrollee payment rate and the number of people enrolled in plans. The Centers for Medicare and Medicaid Services (CMS) and the Congressional Budget Office (CBO) agree that private plans are paid more than it would cost to cover the same people under Original Medicare. Therefore, each person who transfers from Original Medicare to a private plan increases Medicare’s costs. CMS and CBO believe that the size of the overpayments per person enrolled is of similar magnitude. CMS estimates $46 billion in overpayments to plans—$32 billion more that the CBO—because CMS assumes that a larger percentage of people with Medicare will enroll in private plans.4
- As much as $84.5 billion in additional overpayments reward plans for attracting healthier people with Medicare. Private plans attract people who are healthier, on average, than those in Original Medicare. But CMS is not requiring Medicare’s total private plan payments to reflect the lower cost of delivering care to healthier people. The CMS actuary has estimated that the government’s failure to adjust what it pays plans based on the health of their enrollees will lead to an 8 percent5 ($3 billion) overpayment in 2004. While Congress passed legislation in 1997 requiring payments to plans to be adjusted (“risk adjusted”) based on the health of their enrollees,6 with a phase-in period from 2004 to 2007, for 2004 and 2005 CMS interpreted the law to allow it to risk adjust payments in a “budget neutral” manner—redistributing plan overpayments among all plans. If CMS continues to pay plans based on a budget neutral formula, it will overpay them by anywhere from $48 billion to $84.5 billion over the next 10 years, depending on the number of people who enroll in these plans.7
1 The Centers for Medicare and Medicaid Services (CMS), Office of the Actuary, January 14, 2004. The Congressional Budget Office (CBO) estimates the 10-year cost of the bill to be $394 billion. CBO, Cost Estimate of H.R. 1, November 20, 2003.
2 Alan Sager & Deborah Socolar, “61 Percent of Medicare’s New Prescription Drug Subsidy Is Windfall Profit to Drug Makers,” October 31, 2003.
3 Fortune magazine, April 17, 2003.
4 CBO, 2003. CMS, 2004. MedPAC estimates the overpayments to plans at 7 percent in 2004. Scott Harrison, “M+C payment rates compared with county Medicare per capita fee-for-service spending (revised),” April 8, 2004.
5 Solomon Mussey, “Note to Medicare Advantage Organizations and Other Interested Parties, Revised Medicare Advantage Payment Rates for Calendar Year 2004,” January 16, 2004.
6 The 1997 Balanced Budget Act.
7 The CMS Office of the Actuary estimates that private plans will be paid a total of $88 billion in 2004 and 2005. Of that figure, $6.5 billion represents an overpayment for failing to adjust for the health of plan enrollees. The CMS actuary assumes that beginning in 2006, it will no longer use a budget neutral formula to implement risk adjustment. However, if budget neutrality is continued, plans will be overpaid by an additional $78 billion from 2006 to 2014 (8 percent of the $972 billion in payments to plans between 2006 and 2014). If we assume that CMS is correct about the proportion of people with Medicare who will enroll in private plans, the total cost of overpayments to the plans from failing to adjust their payments for the health of their enrollees will be $84.5 billion, the sum of $6.5 and $78 billion. If we assume that CBO is correct and that many fewer people will enroll in managed care plans, then the cost of failing to adjust payments to plans will be approximately $48 billion (8 percent of CBO’s estimate of the total payments to plans from 2004 to 2014, $605.4 billion). These overpayment figures are approximate, because both agencies assume that the mix of healthy to unhealthy enrollees in private plans will not change over the period discussed. Office of the Actuary Medicare Part A and B Tables for FY 2005 President’s Budget, January 8 and January 5, 2004. Congressional Budget Office, March 2004 Baseline: Medicare.
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