Medicare Private Plan Overpayments:
An Anti-Competitive Practice That Hurts Medicare

A Report by Medicare Rights Center
October 24, 2003


Introduction

With Congress struggling to reach agreement on a Medicare prescription drug benefit, one of the most contentious issues remains a proposal to turn Medicare into a voucher system in 2010, effectively ending Medicare as a guaranteed benefit insurance program. This voucher proposal poses grave dangers to older and sicker Americans who many analysts predict would be priced out of medically necessary health care. Contrary to routine press descriptions, this proposal does not require Medicare to compete on a level playing field with private plans; it is anything but competitive.

None of the provisions to promote private plans in the legislation the Congressional conference committee is considering allows Medicare to compete with private plans in any meaningful way. Instead, the bills under consideration provide substantial financial incentives to the private plans to induce them to remain in or enter the Medicare program at the expense of the overwhelming majority of people with Medicare and the American taxpayer. New information from the Centers for Medicare and Medicaid Services (“CMS”), the federal agency that administers Medicare, shows the extent of the give-aways to private plans: the Bush administration projects that, in 2004, the government will pay private plans 19.3 percent in excess of traditional Medicare for providing coverage to their Medicare enrollees. Proposed legislation only adds further multi-billion dollar sweeteners to the private plans. These subsidies to private plans can only take away resources from the Medicare drug benefit thereby contributing to the meagerness of the benefit that Congress seeks to craft within the Administration’s $400 billion 10-year allocation.

Unless Congress changes its payment formulas, the federal government will pay private plans almost 20 percent of the $400 billion allocation as an enticement to offer Medicare benefits. These $75 billion in plan overpayments is money that Congress could be spending on enhancing Medicare benefits and reducing out-of-pocket costs, if it were paying private plans on a par with traditional Medicare. This misallocation of taxpayer dollars hurts everyone enrolled in traditional Medicare and impedes access to care for the most vulnerable individuals with the costliest health care needs. As a direct result of these overpayments, the 36 million men and women enrolled in traditional Medicare will have to pay a higher deductible for their medical services; the millions who need home care or qualify for low-income assistance will be forced to pay more for their health care or go without.

Since passage of the Balanced Budget Act of 1997, the federal government has been giving financial incentives to private plans to lure them into the Medicare marketplace. With each passing year, reports from the United States General Accounting Office (“GAO”), the Office of the Inspector General (“OIG”), CMS, the Medicare Payment Advisory Commission (“MedPac”) and virtually all nonpartisan nongovernmental organizations have definitively established that it costs the federal government far more to provide health care services to people with Medicare through private plans than through traditional Medicare. And, these substantial overpayments to private plans never seem to be enough. The plans have asked for and received additional subsidies to continue offering benefits, even as their market share has shrunk to only 11 percent of people with Medicare.

Recently, CMS decided to continue to pay large subsidies to private plans, notwithstanding a Congressional mandate to adjust payments to plans based on the health care needs of their members. New CMS data show that private health plans enroll members who are 16.3 percent less costly to treat than people in traditional Medicare. Private plans (most of which are operated by profit-making corporations) market to enroll healthier and less costly members. Although Medicare law requires CMS to recapture some of this overpayment from the private insurers, CMS decided to redistribute the money to these plans—some $2.1 billion in 2004—to entice them to continue to offer Medicare benefits.

Private plans may benefit Medicare in the future. But the evidence of any benefit they can offer has not yet been identified. Unless private plans compete on a level playing field with traditional Medicare, private plans will only sap health care resources from people in need. Either the American taxpayer or older and disabled Americans with Medicare will pay the bill. If Congress continues to favor private plans with undue largesse, it is inevitable that people with Medicare will go without health care that would otherwise be affordable.


Executive Summary


Current Overpayments to Private Plans

Historically HMOs in the Medicare program have attracted healthier – and less costly – members. While 13.8 percent of individuals enrolled in traditional Medicare in 1997 had both cognitive and physical difficulties, only 6.6 percent of Medicare HMO enrollees reported such problems. 9 Health care spending for enrollees with both physical and cognitive difficulties was more than four times what it was for those with neither of these problems ($20,332 vs. $5,037) in 1997. Moreover, people with both types of problems account for only 12 percent of the Medicare population but over 30 percent of total Medicare spending. 10 In contrast, the healthiest 40 percent of people with Medicare will account for only 1 percent of the program’s costs in 2003. 11Consequently, managed care plans do not actively market their treatment programs for people with costly health care needs in order to avoid these sicker enrollees. In turn, the sick often hesitate to join these plans, which limit their provider choice and restrict their provider access.

In an effort to get the care they need, people with high health costs often leave private plans for traditional Medicare. In general, Medicare pays private plans a set amount for each person that they enroll, and then private plans must cover the cost of treating patients from the “capitated” payments they receive. From 1991 to 1996 the U.S. Department of Health and Human Services found that Medicare paid hospitals $224 million for inpatient services provided to people with Medicare within three months of their disenrollment, $204 million more than it would have paid the private plans if those same people had not disenrolled. 12 So long as Medicare private plans receive capitated payments that are based on the cost of treating the Medicare population overall and not on the cost of treating people with less costly needs, plans will have a powerful financial incentive to have members who need costly services switch to traditional Medicare. They will continue to avoid developing and marketing their treatment programs for people with cancer, multiple sclerosis and other complex conditions. People who are sick will not enroll in them or will leave when they become ill. And government, in turn, will continue to overpay Medicare private plans.

Private plans are overpaid because their payment rate is based on what it would cost to treat the typical person with Medicare even though their enrollees are healthier. MedPac estimates that plans will be overpaid by more than 19 percent in 2004. 13 Sixteen percent of the overpayment results from their receiving a per member rate based on what it costs to treat the typical person with Medicare even though it is now well established that the private plans consistently enroll less costly members. An additional three percent overpayment results from current payment formulas. 14

These overpayments have been growing for the last several years. From 1998 to 2000, federal payments to Medicare HMOs exceeded the costs the program would have incurred for treating patients directly by an annual average of 13.2 percent, according to the GAO. 15 In one year, 1998, HMOs were paid $5.2 billion more than it would have cost Medicare to cover members’ health care costs through the traditional program. Not only were payments greater, but HMOs received cumulative rate increases that were larger than the growth in per capita spending in the fee-for-service system from 1999 to 2000.


Additional Payments on Top of Current Overpayments Contemplated in Pending Legislation

Today Congress is considering legislation that would increase overpayments even beyond the 19.3 percent the Administration intends to pay in 2004. The Congressional Budget Office reports that the House legislation, H.R. 1, would increase payments to private plans by $8 billion over 10 years and that Senate legislation, S. 1, would increase payments by $12 billion over the same period. 16 The $8 billion increase in H.R. 1 stems from a combination of short-term additional plan payments ($1.9 billion) and projected new enrollees in PPOs in areas of the country where these plans would be paid more than traditional Medicare ($6 billion). In short, the government is giving PPOs upfront additional money to move into new markets on top of overpayments stemming from their enrolling a less costly group of members. PPOs are expected to attract enough new members to cost the government $6 billion more than it would spend had these members remained in traditional Medicare.

The $12 billion increase in S.1 stems from an increase in plan payments of $6 billion and the $6 billion additional cost of a demonstration program in which payments to PPOs would be based on plans’ bids. Under this demonstration program, plans would bid against one another to win government contracts to deliver Medicare benefits. However this bidding process allows the bids to exceed the cost of offering benefits under traditional Medicare—another giveaway to the private plans, rather than an opportunity to have the plans compete on a level playing field with traditional Medicare.


Relying on Private Plans Discriminates Against Americans with Medicare Living in Rural Areas

In a level-playing-field competition with traditional Medicare—in which there were no plan overpayments—evidence suggests that private plans would lose. Unless these plans have extra money to offer additional benefits, few people would enroll. 17 People cannot count on their private plan doctors remaining in the plan throughout the year nor can they rely on plans to cover particular drugs from one month to the next. Recognizing the limited appeal of private plans relative to traditional Medicare, Congress has paid private plans more than traditional Medicare to offer Medicare coverage with additional benefits such as some prescription drug coverage. However, this policy allocates taxpayer dollars for benefits that are not part of the Medicare package and discriminates against those who cannot or do not choose to enroll in a private plan.

Private plans do not offer coverage in many parts of the country, particularly in rural areas. In 2003, only 58 percent of people with Medicare could enroll in an HMO, according to MedPac, down from 1998 when 74 percent of them had access to an HMO. 18 Although one of the stated goals of the 1997 Medicare+Choice program reforms was to make HMOs available to more people, certain areas of the country have proved inhospitable to HMOs, particularly rural areas where there may be few health care providers and providers have little incentive to contract with an HMO to offer services for a cut-rate fee. In rural areas, less than 20 percent of people with Medicare have the option of enrolling in a Medicare HMO. 19 Some states, such as Maine, Montana and Wyoming, have no Medicare HMOs. 20

The federal government’s newest attempt to increase the availability of private plans to people in Medicare appears to be failing. PPOs participating in the Administration’s newest private plan demonstration project also appear unwilling to offer coverage in rural areas. In 2003, CMS began a demonstration program to encourage PPOs to offer coverage under Medicare. To date, these PPOs have not elected to move into the areas that are not served by HMOs. The likely reality is that PPOs will not provide access to private plans for the millions of people with Medicare who do not now have access. MedPac projects that the PPO demonstration program will lead to 500,000 people—less than two percent of people with Medicare—gaining access to an M+C program. This estimate includes 150,000 people in rural areas and 350,000 in non-rural areas. 21


Relying on Private Plans Relegates People With Medicare to Unreliable Coverage and Unpredictable Costs

Private plans do not and cannot offer the same reliable access to doctors that traditional Medicare offers. Both HMOs and PPOs restrict full coverage to a limited number of doctors and hospitals. And even if Medicare enrollees are careful in choosing a private plan that includes their doctors, doctors and other health care providers move in and out of private plan networks frequently. One study found that in 23 states at least one in 10 HMO doctors left the plan they were contracting with each year, and in six states the figure was one in five or more. 22 Key reasons cited for doctors ending their contracts with HMOs were inadequate and untimely payments and the instability of market-based provider networks. 23

Because doctors do not have stable relationships with plans, plans cannot offer people a stable relationship with a health care provider–an important element of high quality care. Research suggests that long-term relationships between patients and their doctors lead to “increased patient satisfaction, lower health care costs, and lessen the need for hospitalization.” 24 The instability in doctor-patient relationships that private plans create makes it less likely that patients will be able to form beneficial long-term relationships with their doctors, which is especially important to older Americans who often need a lot of health care.

People with Medicare have unpredictable costs in private plans. People with Medicare enrolled in private plans are seeing their out-of-pocket costs escalate and are often not able to budget for them. By 2002, 69 percent of plans, enrolling 51 percent of people in the M+C program, had annual caps of $500 or less on the drug benefits they offered, up from 23 percent in 1999. Also in 2002, 70 percent of HMOs’ basic plans either offered no coverage for prescription drugs or offered coverage for generic drugs only. This was up from 48 percent the year before. 25 Each reduction in private plan benefits shifts more costs to their enrollees. Plans with high copays for hospitalizations and medical equipment require members with the costliest needs to bear a substantial financial burden for which they are hard-pressed to budget.


Plan Overpayments Would Be Better Spent Through Traditional Medicare

Unlike most private plans, traditional Medicare offers reliable coverage to people throughout the country, regardless of whether they live in urban or rural areas, and access to the doctors of their choice. Traditional Medicare would offer still better benefits if Congress redirected to it the projected $75 to $79 billion in overpayments to private plans ($67 billion as result of current law overpayments plus $8 billion in H.R. 1 or plus $12 billion as a result of S. 1).

What could be bought for $75 billion? 26

  • Lower health care costs for 36 million people with Medicare. Congress is contemplating increasing the $100 Medicare Part B annual deductible in order to generate some of the revenue necessary to fund its proposed drug benefit. Congress would not have to impose additional deductible costs on people with Medicare ($11.2 billion in the House bill and $10.7 billion in the Senate bill), if plan overpayments were reduced.

  • Better low-income coverage. The additional cost of bringing assistance to low-income individuals from the level of the House bill up to the level of the Senate bill would be $31 billion over 10 years according to the Congressional Budget Office. If plan overpayments were reduced by $31 billion, the 27 percent (10.8 million) of individuals with incomes at 150 percent or less of the federal poverty level would have substantially enhanced health care coverage.

  • Better assistance for the states. It costs $47 billion to make the Medicare drug benefit available to all people with Medicare including those also covered by Medicaid as provided for in HR 1. This money would reduce the burden that high drug costs are imposing on cash-strapped states and their Medicaid programs.

  • Eliminate the need to increase costs imposed on people with Medicare. H.R. 1 raises additional revenue by creating a new copay for home health care services. This provision and a reduction in payments to home health providers will raise $7 billion over 10 years and will impose an additional burden on some of the oldest and poorest people with Medicare. The need for these additional charges could easily be eliminated if private plans were not overpaid.

Conclusion

Current policies of funneling scarce resources into private plans is contrary to the interests of older and disabled Americans whom Medicare is supposed to help and American taxpayers. Overwhelmingly, people with Medicare have voted with their feet against private plans. They do not like the unstable nature of private plan coverage and the limitations they place on their ability to see their doctors. Even though 58 percent had access to private plans in 2003 27 only about 11 percent enrolled, 28 notwithstanding plan overpayments. Congress should limit, and eventually eliminate, the subsidies to private plans and instead devote the $75 billion in plan overpayments over the next decade to the traditional Medicare program, so people with Medicare can receive better benefits while counting on reliable coverage from the doctors they know and trust.

1 Scott Harrison, MedPac Meeting October 9, 2003.
2 Harrison 2003.
3 Congressional Budget Office Cost Estimate, HR 1 and S. 1 July 22, 2003.
4 CBO 2003.;Harrison 2003.
5 Cristina Boccuti and Marilyn Moon, “Comparing Medicare and Private Insurers: Growth Rates in Spending Over Three Decades,” Health Affairs March/April 2003.
6 Inspector General, Department of Health and Human Services, “Adequacy of Medicare's Managed Care Payments After the Balanced Budget Act of 1997,” September 2000. 2002 Annual Report of the Board of Trustees of the Federal Hospital Insurance and Federal Supplemental Medical Insurance Trust Funds.
7 Zachary Dyckman, “Survey of Health Plans Concerning Physician Fees and Payment Methodology,” Presentation to MedPac December 12, 2002.
8 Public Citizen, Medicare Privatization February 2003
9 Marilyn Moon and Matthew Storeygard, “One-Third at Risk: The Special Circumstances of Medicare Beneficiaries with Health Problems,” The Commonwealth Fund, September 2001
10 Moon and Storeygard 2001.
11 Anne Mutti “Context for Medicare Spending” MedPac September 11, 2003
12 Inspector General, Department of Health and Human Services, “Adequacy of Medicare's Managed Care Payments After the Balanced Budget Act of 1997,” September 2000.
13 Harrison, 2003.
14 Harrison, 2003.
15 U.S. General Accounting Office, “Medicare+Choice Plan Withdrawals Indicate Difficulty of Providing Choice While Achieving Savings,” September 2000.
16 CBO 2003.
17 MedPac, “Report to Congress,” March 2003.
18 MedPac, “Report to Congress,” March 2003.
19 MedPac, “Report to Congress,” March 2003.
20 www.Medicare.gov
21 MedPac , Report to Congress,” March 2003.
22 Geraldine Dallek and Andrew Dennington, “Physician Withdrawals: A Major Source of Instability in the Medicare+Choice Program,” Commonwealth Fund, January 2002
23 Dallek and Dennington, January 2002.
24 Dallek and Dennington, January 2002
25 Lori Achman and Marsha Gold, “Trends in Medicare+Choice Benefits and Premiums, 1999-2002,” Mathematica, November 2002, p. 5-6.
26 CBO Cost Estimate 2003
27 MedPac March 2003
28 U.S. Department of Health and Human Services, FY 2004 Budget in Brief.

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